INTERVIEW: F&C’s brand New World

Barry McInerneyBarry McInerney, co-chief executive at BMO Global Asset Management, which bought F&C earlier this year, tells Nick Fitzpatrick in Chicago how the beleaguered F&C can benefit from new access to North America. F&C Asset Management, the London-based fund manager that has struggled with shareholder activists at the same time as seeing assets from long-standing clients flow out, has been “fixed”, claims Barry McInerney, the co-head of the Canadian asset manager that now runs F&C. McInerney is chief executive responsible for US and international business at BMO Global Asset Management (BMO GAM), the asset management division of Bank of Montreal, better known as BMO. BMO bought F&C Asset Management on May 7 for £708 million (about €855 million), and McInerney became a non-executive director at F&C the same day.  The deal saw F&C delist from the London Stock Exchange. After its recent experience with shareholders, F&C probably does not miss them. F&C is itself an activist investor that considers it important to vote against boards over issues it does not agree with rather than just abstain. Shareholders did not like where management were taking F&C and ousted its chairman, Nick MacAndrew, in 2011 and replaced him with hedge fund boss Edward Bramson. This is only part of the well-documented story. With Bramson in charge, in December 2012 F&C appointed Richard Wilson as chief executive. Formerly F&C’s head of investment and distribution activities, Wilson and his staff have worked hard to expand other distribution channels as contracts with “strategic partners” expired. Strategic partners is, at 47%, the largest part of F&C’s £83.4 billion of assets (as of June 2014), so if F&C’s wider product offering cannot retain them, expanding other channels is vital. To do this McInerney says the European distribution staff at F&C will be doubled in the next 12 to 18 months, similar to what BMO GAM did in North America.  “F&C, in the last couple of years, redirected its strategy to focus on the consumer/institutional segment and we found that attractive. Net inflows were £1 billion in the last report,” says McInerney. “Their manufacturing is strong, but their distribution needs to be ramped up. We intend to add some sales resources immediately. Over the next 12 to 18 months we will double [headcount], like we did in North America. F&C is light on the continent so we will revamp that.” This recruitment not withstanding, McInerney paints a picture of a re-engineered F&C that has delivered BMO GAM with a fund manager ready to drive its growth overseas. “[Strategic partners] were legacy assets based on long-standing contracts with insurance companies, such as BCP [Banco Comercial Portugues] in Portugal, Friends Life in UK and Achmea in the Netherlands. The contracts expired; it was not a surprise,” says McInerney, speaking at BMO GAM’s Chicago office. LOWER MARGIN
“We are having dialogue with strategic partners outside of these legacy assets, though we still expect their proportion of assets to continue to be smaller.  “They are lower margin. What Richard Wilson and his team have done is focus more on other external channels.” Of F&C, he adds: “There is nothing to be fixed. The dialogue lasted a year until the deal closed and we saw a strong manufacturing capability there. Now we know them better, we are pleasantly surprised. “There were quite a few costs taken out by the time we arrived, so we saw a strong and attractive business. They had turned it around and the timing was right.” F&C is now BMO GAM’s European distribution hub as the North American manager expands its business. BMO GAM has operations in Asia, and owns London-based Lloyd George Management and Pyrford International, which will remain distinct businesses. But BMO GAM offers F&C a route into North America, too. This is a prize that many European asset managers would covert – for example, large French players who have a tough domestic funds market. BMO Financial Group is listed in Toronto and New York. It is one of Canada’s top five banks. From Chicago, it has substantial business in the US.  Of F&C’s product set, McInerney highlights liability-driven investment (LDI). “We are going to take F&C’s thinking and processes in LDI and apply it here (in North America). The best principles of LDI can be applied to other regions and so we are going to up our game in North America.” An independent consultant, who did not want to be named, says that LDI is one of the best components of F&C’s business, with people in it doing “smart stuff”. GENERATIONS X AND Y
McInerney also points to F&C’s enironmental, social and governance (ESG) operation that centres on its Reo engine.He says: “F&C is a world leader in ESG. We’ll take some of the best principles at F&C and apply them to the fullest extent in all our portfolios. “We think generations X and Y will really embrace investing in companies with social and environmental principles.” He says BMO GAM recently signed the UN Principles for Responsible Investment, working hard for two years to get the processes right. The consultant acknowledged the efficacy of the ESG unit, but regards LDI as the more valuable part of F&C’s business. McInerney says F&C’s real estate business will also target ultra-high-net-worth investors and large institutions who may have an interest in allocating to regional real estate.  And he adds that US investors have shown “heightened interest” in European equities and credit lately, though it is Canadian investors that are more likely to make the largest allocations. GLOBAL PERSPECTIVE
“US investors to a lesser extent might invest more in Europe from a global perspective rather than a regional one, but in Canada we have a European equity mutual fund with a billion dollars in it. There is interest there.” Perhaps the internationalism of Canada and the UK is partly what McInerney points to when he says the cultural fit between F&C and BMO GAM is a good one.  The cultural fit of the European fund management industry’s second most notable M&A deal of the year is a little less obvious than that in the largest deal between the two Scots, Aberdeen Asset Management and Scottish Widows Investment Partnership. But perhaps it is relevant that the 140-year-old F&C went to a Canadian rather than a pure US manager, let alone a UK rival.  Whatever the case, McInerney expects F&C staff are happy with the deal after several years of uncertainty.  “People feel good about it. They know this is a plug-and-play [acquisition]. Richard Wilson is a fantastic leader and his whole management group are.  He concludes: “Let’s lock arms and get going.” ©2014 funds europe

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