Cross-border banks targeted by ‘big boutique’

erAndy Sowerby, the zealous distribution dynamo for Scotland-based fund management boutique, Martin Currie, has ambitious plans to grow both wholesale and institutional business. But he knows it is the wholesale side: deals emanating from private banks, fund selectors and other distributors, which has the better growth prospects. “Both sides are currently doing more research on the type of funds they are buying,” says Mr Sowerby, previously at Investec and Scottish Widows. “But the private wealth side has more of an absolute return mindset. If you come from a private banking background, foremost on your agenda is capital preservation and then returns.” This means portfolios constructed and products procured by private bankers are much more open to the influence of new strategies – such as alternatives – than the more traditional institutional sector. It is down to Mr Sowerby to decide which distribution markets the company should play in. “Andy makes it his business to know everybody, spends a lot of time on a plane and works pretty much 24 hours a day,” says one funds operator who has worked closely with Mr Sowerby. His 19-strong sales team is split between the US and Europe, with Edinburgh-based staff also servicing clients in Scandinavia, the Benelux countries, and Switzerland. Until now, the sales focus for the flagship Luxembourg, open-ended Sicav fund, has been on distribution houses active in several countries, with the private client arms of Merrill Lynch, Goldman Sachs, Citigroup and UBS believed to be advising clients to invest in Martin Currie funds. Take it to the limit But there is a belief across the group that new money should only be taken in if performance can be maintained, and that there is a capacity limit for every successful strategy, be it long-only or alternative. “Our policy is not to grow for the sake of growth,” states Mr Sowerby. “We want to build a profitable business, but to think about how much money we can run in a strategy before we become uncomfortable with generating future returns.” This said, Mr Sowerby believes there is enough capacity on the pooled funds side in global equities, North American large caps and Japan to increase assets to $50bn (E35bn). The irony is that good performance has sometimes backfired on Martin Currie, with top fund managers being poached by rivals, plus some large Swedish and Danish institutions deciding to diversify their Japanese equity exposure across several providers with different styles after enjoying a good run through their five-year contracts with Martin Currie. “We have been a victim of our own success in Japanese equity, where we are one of the leading players, but it is a sensible move for the institutions,” admits Mr Sowerby. While Martin Currie continues to sell successfully in the UK, where a third of its clients are based and where it enjoyed £150m in net inflows in the second quarter of 2008, making a £260m (E330m) first half total, the year has been a flat one so far across the board internationally. “We are not immune to outflows,” warns Mr Sowerby. Plans for international expansion include new staff on the ground in Australia and Hong Kong, but Mr Sowerby keeps a firmly grounded view of distribution prospects. “In scale terms, private clients and wholesale will not catch up [with the institutional side of our business], but it is the fastest growing segment in percentage terms. There is a structured shift from the state to the individual for pension provision, so the wealth management side will be very important. If the firm has changed in the last seven years, it is in its shift towards the needs of distributors.” This shift towards wholesale distribution has not been the only change. Martin Currie’s boutique structure ensures that all 260 employees own shares in the group. But a buy-in from high financier Lord Jacob Rothschild and US investment group Crestview Partners last year farmed out almost 25 per cent of the shares to external investors in order to gain liquidity. This is not the first time Martin Currie has followed this path. Almost 20 years ago in 1989, during another period of global uncertainty, 22 per cent of the company was sold to outside shareholders. The most recent deal was negotiated during the bull market, by Martin Currie’s chief executive Willie Watt, himself a former private equity boss at leading buyout group 3i. In addition to making it easier to transfer holdings to a younger generation of shareholders, there is another reason for the deal, and that is why the new part-owners are so carefully chosen. There is no doubt that Mr Watt is one of the key strategic brains behind the company. But even the best-qualified visionary can sometimes do with a bit of outside help. “This brings another level of strategic thinking to the company,” admits Mr Sowerby. Jacob Rothschild has been heavily involved in asset management for decades; also the Scots’ noses were not turned up at the enlisting of Crestview boss Richard DeMartini, who gathered much of his know-how running the asset management arm of Bank of America and the US wealth management business at Morgan Stanley. The third major change has probably been the pivotal restructure which gave Martin Currie the identity and group culture it boasts today. With just $25bn under management, but plans to double this in the near future, Mr Sowerby describes the organisational culture as a “big boutique,” mixing the best attributes of large and small companies. In the current uncertain climate, which has seen supposedly stable major investment banks and insurance companies go to the wall, Mr Sowerby says that for both shareholders and staff, it is crucial to maintain a “robust operating platform”. This goes well beyond the investment process of research and selection, and embraces support services, performance grading and risk management. “Private banks now pay as much attention to risk and operations as to the investment side,” he says. “If you are a private bank or institution, you need to align yourself to fund providers who you believe can not only deliver in the long term, but will still be here in the long term.” Due diligence processes conducted by distributors are now as detailed as those carried out by institutions. This has given Martin Currie the opportunity to position itself in its new “little big man” incarnation. “Eight or nine years ago, you had to be really big or really small,” remembers Mr Sowerby. “You had the choice between a monolithic asset gatherer trading on thin margins and high volumes, or a small boutique with not much infrastructure. “We thought it was wrong that you could not succeed as a medium-sized group.” Fitting in the middle Under the leadership of Mr Watt, Martin Currie began to slim down its investment scope in 2000, curtailing its fixed income business, selling its private equity and private client business and pulling out of the fund platform/wrapper business. This meant it was no longer a competitive threat to the private and retail banks, whom it was asking to distribute its mutual funds. “Private banks only want to deal with businesses not in conflict with them. We only do active equity management,” observes Mr Sowerby. That year, there was almost a religious conversion when chief investment officer James Fairweather decided to switch styles. “He came to the conclusion that top down was not the right way to manage money, that bottom up provides better investment returns from equities,” says Mr Sowerby. At the time, there were just 25 investment staff, a number which has since doubled as the company has built up its Edinburgh-based research team. The resource pumped into this team is demonstrated in the company numbers, showing a cost base of £5.6m for the investment team in 2001, compared with £22.6m today. Despite these investments, Martin Currie earned record profits of £27m last year. Boardroom pay is also rising fast, with Mr Watt having pocketed £1.6m last year. These figures show the attractions of working in a smaller group.

Andy Sowerby