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Supplements » Global Industry 2015

GLOBALISATION: Following the money

GlobalisationPortfolio internationalisation by clients in home markets has been a major spur for asset management firms to globalise – and as Nick Fitzpatrick discovers, they are now ready for emerging market investors to do the same.

Sponsoring the ryder cup has boosted Standard Life Investments’ brand recognition in countries where it had never been heard of, the firm says. Not just in the US (where the asset manager has been expanding) and Europe (close to its UK bastion), but in Asia too, where the golf tournament is less relevant to TV audiences.

The sponsorship forms part of the Scottish firm’s quest to become recognised as a global investment management firm, not only investing in global markets, but adding new clients from them.

Colin Clark, director, global client group at Standard Life Investments (SLI), says the firm is perhaps one of the most actively globalising of all asset management businesses. In the past two years, it has opened offices in about ten countries, including in New York, Los Angeles, Toronto and – through the acquisition of Ignis Asset Management – in Brussels, Milan and Madrid.

SLI, with about £250 billion (€344 billion) of assets under management, is the asset management arm of Standard Life, an insurer. It was rolled out as a third-party manager in 1998. At time, the firm had mainly UK clients and a UK and European fund offering – not much, in other words, for a global audience. 

Yet recent results show 70% of net inflows from external clients are from outside the UK.

To reach this point, the firm had to create global products across a range of asset classes.

“When you have good, high-quality and relevant global products, then you can take them to the rest of the world. You wouldn’t have so much to sell in Asia if you only had UK and European products,” says Clark.

SLI has come to practically dominate the wider Standard Life group, an insurance company listed on the London Stock Exchange. Keith Skeoch, chief executive of SLI, was also made group chief executive in August.

Like other investment managers from the UK, wider Europe and North America, the firm started out largely with domestic funds and local clients, but has since assumed a global profile. 

Investors seeking greater overseas exposure have given asset management businesses the ultimate reason to globalise, as Barry McInerney, co-chief of BMO Global Asset Management, attests. “It is the demand for global products which ultimately justifies being more global or not,” he says.

European asset managers, especially in the UK, have seen some of the strongest levels of globalisation over the past two decades, driven by their clients’ appetite for overseas stocks and bonds. So just as European investors have sought globally diversified portfolios for higher returns, asset managers have globally diversified their businesses, too.

Over time, managers have set up foreign sales offices and added clients from the countries whose markets the firms were investing in.

The success of the European Ucits project, which is effectively a European funds ‘brand’, stimulated the process of asset management globalisation from the 1980s onwards. Ucits created a single funds market within Europe and helped European investment firms expand into other EU countries. Then, fortune shone on the industry as Asian investors took to Ucits funds and asset managers expanded into Asia. 

For US fund managers, the potential for growth in Europe and Asia would make Ucits worth a trip across the Atlantic. JP Morgan Asset Management (JPMAM), for instance, grew in Europe with the help of former UK manager Robert Fleming & Co, which JP Morgan gained through its merger in 2000 with Chase Manhattan Bank. JPMAM now has Ucits business in Luxembourg worth $134 billion (€123 billion).

By 2008, spearheaded by UK and US asset managers, the sector was really going global.

Not even the financial crisis could derail this expansion. If anything, it added greater impetus, as clients looked for growth assets further afield, particularly in emerging markets. In 2013, asset management was one of the most profitable industries, according to a Boston Consulting Group (BCG) report1

The £568 million on Aberdeen Asset Management’s balance sheet is a testament to the industry’s health today. Indeed, its cash pile has helped it to expand, with the recent purchase of asset managers in the US.

What the crisis has done is heighten the need for asset managers to gain overseas clients   – because asset management profits in 2013 came mainly on the back of rising asset prices, not new money.

That year, assets under management were above pre-crisis levels at $68.7 trillion (they were $54.7 trillion in 2007). But net new money flows were up just 1.6%, below pre-crisis gains, which ranged from 3%-6%, according to the BCG report. 

These relatively lacklustre sales provide an even greater spur for firms to seek out clients less burdened by debt in higher-growth economies.

As a Simcorp white paper on globalisation notes: “Globalisation’s impact on the industry is clear; any firm not thinking globally risks missing out on new revenue streams. Globalisation may not be a new trend or term, but its relevance to the investment management industry is now piquing the interest of many firms wanting to go global.”2

Globalisation is perhaps more complicated for asset management than many other industries. Like airlines, asset managers cut right through time zones.

Global investing needs and creates volumes of data. Market time zones overlap and global management firms never sleep. As an investment desk in one region stops, another one starts elsewhere. 

The upshot for the asset management middle office – which has to absorb, process and push back out all this data to clients, portfolio managers and regulators – is it’s always daytime.

Figuring out where to put the giant, restless database that is the middle office has transformed asset management into a highly outsourced industry, as it pursues a ‘follow-the-sun’ operating model.

There are some exceptions to large-scale outsourcing. Schroders, for example, has its own principal operations and IT centre in London, operations in Luxembourg, and operations and IT in Singapore. 

With investment and distribution centres in London and Singapore and a global wealth management hub in Switzerland, it’s a model that might be called ‘regionalised’.

But many managers do outsource to support this complicated, regionalised set-up, which has emerged as the model of choice.

Over the years, a few operating models sprang up as fund firms pursued globalisation. In the ‘hub-and-spoke’ arrangement, managers ran potentially everything – sales and marketing, operations and portfolio management – out of one headquarters and launched it into multiple countries.

Then, when time-zone fatigue set in, managers split into regions. This may be the prevailing model now – but another was tried and largely abandoned. Catherine Doherty, chief executive of Investit, a management consultancy specialising in the investment industry, calls it “global dispersed”.

“Full globalisation, or global dispersed, is where bits of the business are centralised, but in different places. It creates centres of excellence – but the trouble is, you can’t have a meeting because it’s always someone’s night-time!

“I think many companies are finding that model too complex and we are seeing firms moving back to a clearer regionalised model,” she says.

Outsourcing to asset service providers is crucial for many asset managers on the globalisation path. Aberdeen Asset Management has grown geographically at a similar rate to its main provider, BNP Paribas Securities Services, in a more or less synchronised expansion.

In SLI’s case, an operational outsourcing arrangement with Citi elevated its ability to globalise an array of global products the firm had created by 2010 to get into new markets.

“The period between 2005 and 2010 was focused on broadening the product platform, and also on the outsourcing with Citi. This gave us the ability to expand,” says Clark.

Brand build depends on the distribution channel. SLI is targeting retail and retail advisers, among other channels, so initiatives such as its golf sponsorship are an obvious help.

“Five years ago, we were not known at all in some parts of the world, but we are now. In North America – the US in particular – and in parts of continental Europe like France, Italy and Germany,” Clark says.

Though the Ryder Cup is for men’s teams from the US and Europe, Clark says it has helped to build brand in Asia. “The remarkable one is China and other parts of Asia, including Japan. There are golf nuts there who watch it, too!”

But for globalisation to make sense, it’s important for these populations to internationalise their investments. 

Researchers in 2014 studying more than 3 million individuals in US 401(k) plans3 found higher levels of foreign investment among younger members, but foreign allocations were also increasing among other groups.

OECD research4 of the world’s largest pension funds in 2013 found these institutions invested an average of 36.6% of total assets in foreign markets, with funds based in Europe and Canada leading the way. Regulatory policy and investment policy were the drivers.

The OECD report noted most funds in its survey had established allocations in emerging markets equities in 2013 and market volatility was not halting the trend, with allocations to equities and emerging market debt rising. 

This included allocations from large US plans, with the Massachusetts teachers’ fund, MassPRIM, completing a search for emerging markets small-cap equities and emerging markets local currency bonds.

Funds in South America, apart from Chile, invested almost purely in their home markets, however – but that appears to be changing. 

Banamex in Mexico, the 40th-largest pension fund in the OECD survey with $26.9 billion of assets, has already used European managers to make overseas allocations.

And in November 2015, a group of Brazilian pension funds arrived in London to explore diversification with UK asset managers, including Columbia Threadneedle Investments and Aberdeen.

Where might globalisation take asset managers next? The creation of ‘mutual fund recognition’ in China, and similar plans in Asia, might put more emphasis on asset managers having local product and no longer able to rely just on Ucits funds flung out from Europe. That’s one potential driver for moving overseas.

Remember too ‘alternative’ investments are looking less alternative as assets rise. If this trend takes off on a truly global level, globalisation for asset managers will mean more than just a suite of stocks and bonds with ‘global’ in the name.

1: Global asset management 2014: Steering the course to growth, Boston Consulting Group
2: Globalisation of investment management firms, Simcorp
3: Who Is Internationally Diversified? Evidence from 296 401(k) Plans, Geert Bekaert, Columbia Business School, and others
4: Annual survey of large pension funds and public pension reserve funds, 2014

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