June 2011

US FUND MANAGERS: The Atlantic crossing

Crossing_the_AtlanticA number of fund managers that are less well known outside their American homeland have embarked on a push into the European institutional and wholesale funds business. Nick Fitzpatrick and Angele Spiteri Paris speak to some of them about their timing
Did you know that Dodge & Cox, a San Francisco-based fund manager which has invested mutual funds in the United States since 1931, has been selling mutual funds into Europe since 2009? Probably not, because the firm, which has around $200bn (€138.8bn) under management globally and is distinguished in America for its “no-load” approach to fund fees, does not advertise or heavily market itself. “We let people find us,” says Charles Pohl, co-president and chief investment officer. When Dodge & Cox registered its three mutual funds under the Ucits laws in Ireland, it also opened a London office in the same year to seek growth outside the US. As a US fund manager looking to either launch or expand existing business in Europe, it is not alone.  Calamos Investments, a diversified investment manager based near Chicago with $38bn under management, has increased its effort to raise assets in the UK and Europe, while Matthews Asia, a San Francisco-based investor, has started to look for European clients to use its Asian equities expertise. On top of this, Boston-based Loomis Sayles with $165bn under management, is about to open a London office and begin to install people there, while William Blair Asset Management, based in Chicago, plans to hire another person also for its London office. Until three years ago, American Century Investments, which is based in Kansas City, had no presence outside the US but has since accrued more than $5bn in European assets under management. These firms obviously follow in the footsteps of large US-based managers such as BlackRock and Fidelity International in growing their business outside their home country. But why now? And will these firms, whose domestic industry operates in a tougher fee environment, try to attract Europeans with structures such as no-loads? The time is right
Opportunities in Europe for smaller US managers were signalled clearly when – as reported in Funds Europe (“The American Way”, September 2008) – Lombard Odier Darier Hentsch & Cie, the Swiss private bank, turned to the American investment houses Brandes Investment Partners and Pzena Investment Management for partnerships when launching two value equity funds which, interestingly, included a fund investing in European stocks. The bank felt it could not find adequate European managers and so appointed California-based Brandes for a European equities value fund and Pzena for a global brief. “Fourteen years ago, an active equity manager like Brandes did not have the opportunities in the UK that it does now,”
says James Diack, director of Emea portfolio management at Brandes. “It was the tail end of the balanced system. But pension funds in continental Europe had a different mindset and we started building business there. Soon there was a rapid and meaningful change in the UK, too. “The openness to US managers has increased over the past couple of years and they are more aware of the opportunities within Europe.” Just as fund managers from nouveau riche emerging markets such as China and the Gulf seek to gather international clients through European-based Ucits funds – and do so at a time when the foreign competition has been caught in a financial crisis – the US managers seem to be kicking back, as though they are trying to slow the pendulum of power and wealth that is swinging away from them towards the East. But they tell Funds Europe that conditions in their home markets post-crisis are nothing to do with this sudden focus on expansion that has come about since 2008’s financial crash – and nor do they think opportunities back home are stifled. Jonathan Schuman, head of global business development at Matthews Asia, says: “The initiative to reach out to new markets and the timing of it is specific to each firm. For Matthews, the financial crisis did not have anything to do with the timing.” He notes that the firm was “fortunately in an asset class that recovered quite quickly after the crisis”, but says the launch into Europe is more to do with the company reaching a stage in its life cycle ($18bn under management) where it can properly service clients in multiple jurisdictions and has the resources to manage a Ucits business. Schuman’s role was newly created last year. He says: “We have certain existing US clients who are investment advisers with some clients overseas. Some of them asked if we had offshore funds, and these were also a catalyst.” Logical moves
It is a similar story at Dodge & Cox where Pohl says: “We did not have clientele overseas [in 2008] but some US clients had foreign operations with employees overseas and they were interested in investing in Dodge & Cox abroad. We were travelling a lot overseas anyway so it seemed logical to open to overseas investors.” Consequently, the initial investors that have put money into Dodge & Cox Ucits funds are offshore entities linked to its US clients. The firm’s two people in London have recently been travelling in Switzerland and Scandinavia, as well as in the Middle East, says Pohl. In October 2009, Calamos Investments awarded the new role of director of international institutional sales based in London to a Briton, Terry O’Malley, who was previously head of institutional business at Credit Suisse’s asset management arm.
The brief in Europe is to build on an existing client base in the region. The firm won its first client here in 1997, but launched a Dublin Ucits fund range in 2007 as part of an overseas expansion drive. “Calamos evolved from a US domestic investment manager into an investor in global markets. As it extended the range of stocks it invests in, it has expanded also in terms of the markets it is present in,” says O’Malley. Calamos also has two other people in London covering retail and wholesale channels. ’Malley says important targets for institutional business are the UK, Nordics, Holland and Switzerland. Other centres, such as France and Germany, will be responded to as opportunities arise. A low-volatility equities strategy sits among the product offering, and he says: “We think our investment strategies will be attractive… The strategies fit well with current thinking in European pension funds about de-risking since the credit crunch. People want core funds with low volatility and then alpha from emerging markets and perhaps small and mid-cap equities around the edges.” Flagship equivalents
In Autumn, Loomis Sayles will open an office in London, initially with seven people providing client services and investment research. The firm runs the Loomis Sayles Bond Fund, a flagship US vehicle that also has an Irish Ucits equivalent. Loomis is different from its peers in that it is owned by Natixis Global Asset Management, a holding company of Natixis, the French investment bank. The firm, which was originally a partnership, was bought by Natixis in 2000 but has sought to keep its identity. This is why Loomis is not sharing London office space with its owner. “We were going to sub-let in London from Natixis, but the consultants said no, that we’d just look like an investment bank if we did,” says Dan Fuss, chairman of the firm’s global investment committee and manager of the bond fund. He says that Natixis has facilitated Loomis Sayles European business in the past and Loomis will use Natixis’ Stockholm office which opens this month. Fuss says the London office could expand to 20 people. But he points out that its decision to put people in London has been driven by the need for more credit research. Europe has become more important to William Blair Asset Management since a large European institution provided seed capital for the firm’s global growth fund in 2007. “European clients have proven to be important in helping us build new products that are relevant to their needs,” says Tom Ross, head of European institutional distribution. The firm has an office in London and another in Zurich, Switzerland. Currently, there is one person in each office but Ross says the firm is planning to hire an additional executive in the London office. Ross says William Blair’s first priority is its existing clients, but adds: “As we get to know Europe better, we think we offer strategies that are relevant to institutional investors in Europe and we want to do our best to promote them.” Countries in which William Blair liaises directly with institutions include Austria, France, the Netherlands and in Scandinavia. To a lesser degree, the firm works with wholesale distributors, namely financial institutions. It has a relationship with SEB in Scandinavia and is in discussions with financial institutions in Switzerland. Competitive advantage
US managers face an unfamiliar mutual funds environment when they arrive in Europe, with fragmentation, fewer advisers, and sometimes a lack of brand awareness challenging them. And then there is the issue of price. Schuman, at Matthews Asia, says total expense ratios and, therefore, management fees tend to be lower
in the US.  Like Dodge & Cox, Matthews is a no-load provider. Schuman says: “While our funds in the United States are no-load funds, our Ucits funds provide distributors with the option for front-end loads.” He notes that trailer fees and platform fees tend to be more expensive in the Ucits market too, and says that to offer the best proposition to investors “we need to work with partners who share our commitment to shareholder value”. The firm offers retail, institutional share classes and multiple currency share classes in an attempt to get the correct structure.  Similarly, Dodge & Cox has one share class for both retail and institutional investors in its Ucits fund, a model it also employs back in the US. “People like our comparatively lower fees which result from the fact that we do not pay for distribution or take out advertising,” says Pohl. “In the rest of world, people have higher costs structures and we think it disadvantages end investors. People realise that an extra 50 bps does not look like a lot, but it compounds over the years. In the US, the industry has moved away from load funds and distribution commissions and instead towards lower fees. “You look at Europe and think people there will become sensitive to this and start thinking about it, too.” Dodge & Cox’s come-and-find-us, no-load strategy might seem risky, but with the UK set to effectively ban commissions following the retail distribution review, the firm and its US peers might soon find Europe a very hospitable place. ©2011 funds europe

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