Devil’s advocate

His words do not always mean what they seem, but State Street’s Boston-based boss, John Serhant, believes in a new ‘sensitive’ strategy for Europe rather than a one-size-fits-all approach. Yuri Bender reports.

John Serhant, overlord of high net worth business and vice-chairman of E700bn US investment powerhouse State Street Global Advisors (SSgA), was in the UK to meet key clients at the Ryder Cup golf tournament. Unfortunately for Mr Serhant – “I enjoy these events more when the Americans win” – the European team was victorious. And the Europeans are also beginning to gain some ground from their American masters within SSgA. Last year, State Street lost some key personnel in Europe who felt downtrodden by “an enforced Americanisation” of their local operations. Now, although Mr Serhant and his Boston-based lieutenants still control the engine room, more attention is being paid to local European sensibilities. In particular, State Street is marketing to investment houses and distributors in Europe, in contrast to its US strategy of selling directly to individual investors. “To be a global firm, you need to support local people with your platform and philosophy,” says Mr Serhant. “They can add their insight on how the local market might differ.” This statement falls short of rival Merrill Lynch’s new strategy of creating an international investment policy group, tailored for wealthy clients outside the US. But a review of private asset business conducted by Mr Serhant at SSgA has concluded that a one-size fits all US-led structure is no longer appropriate for this side of the Atlantic. “The wealth management business needed to be reviewed,” says Mr Serhant. “Some of us were unclear about what Nick Lopardo’s strategies were,” he says, referring to the blue-print laid down by former chairman Nick Lopardo, who retired last year. “I reviewed these businesses so that I could understand them. Mine is a devil’s advocate role.” Mr Serhant decided not to extend the Office of the Family Advisor, a business he established in the US, to European shores. This service allows wealthy individuals to diversify their assets by choosing from the institutional roster of 45 managers, including Pimco and Lazard, to add to core holdings held in State Street funds. Similarly, the successful Bel Air platform for ultra-high net worth individuals on the US west coast will not be reproduced here. “Bel Air operates as a select brokerage,” says Mr Serhant. “There is a very high minimum which they are willing to accept. In Europe, it is not our strength to aggressively seek out wealthy individuals in the same fashion.” Instead, high net worth investors will be dealt with directly if they have the size and outlook of an institution. “Very wealthy clients give us mandates in Europe and we take them, but they are treated like institutional clients,” says Mr Serhant. Wealthy European families requiring services including currency overlay typically approach SSgA through a consultant such as Ernst & Young. “We don’t see any reason why we should succeed in the in the high net worth business outside the US. Our institutional investment returns are not particularly leveragable for this type of clientele,” says Mr Serhant, once again playing the devil’s advocate. “Investment returns are not the most important thing you can deliver to the high net worth world,” says Mr Serhant. “They rank as only seventh or eighth, well below personal relationships, tax advice and the product structures you can deliver.” European countries are well served by high net worth money managers, which already enjoy personal connections to wealthy individuals, believes Mr Serhant. “Even in our own country, State Street is not a well-known brand among individual investors.” But this is not quite the flag of surrender it might at first seem. There are still targets for this type of business. He reveals that “between E22bn and E25bn” is currently actively managed for wealthy clients. Insiders say retail business should represent 30 per cent of assets under management in Europe within five years – that means adding an extra E25bn. The Boston blueprint predicts an octopus of distribution agreements spreading its tentacles across the continent. Roughly 75 per cent of net inflows are expected through private label arrangements and 25 per cent from distribution of State Street proprietary funds through intermediaries. These include Balzac Index Funds, State Street Active Funds, Street Tracks ETFs, Global Advantage Funds and SSgA Dublin money market funds. Mr Serhant’s fellow board member, Gus Fleites, has signed 110 third-party distribution agreements for State Street funds in the US, predominantly with financial consultants and registered advisers. “We have encouraged our people in Europe to get a similar number set up,” says Mr Serhant, who has drafted in Eric Michel – “a good leader and a dynamic individual who can get things done” – from the Japanese office to mastermind distribution sales. State Street is believed to have diverted some of its European institutional effort into Mr Michel’s team, although Mr Serhant plays down any re-deployment of resources. European products are manufactured in the Paris-based funds factory under Monique Bourven, marketed under the Balzac label, which boasts 41 sub funds in its range. State Street currently runs E6.5bn, predominantly in passive funds under the Balzac and State Street Active umbrellas. State Street’s largest competitors in Europe – BNP Gestion, CDC and Axa multi-managers – are also their biggest clients. Its funds are also available for selection on the menus of wealth houses such as Abbey National subsidiary Inscape, which runs a manager-of-managers model. Other UK intermediaries who have signed distribution agreements include M&G and National Mutual. The Balzac range has received regulatory clearance for marketing in Belgium and is already sold through Bank of Ireland branches. The Netherlands, Sweden and Italy are next on the agenda. A new hedge fund, which will be part of the Dublin-domiciled SSgA Market Neutral Funds umbrella, is also under construction. This will use input from State Street Absolute Return Strategies and external managers. “There are strategies which don’t correlate with each market, available to clients in Europe,” says Mr Serhant. The products are packaged according to client specifications: “We can provide customers with pooled services, separate accounts, life products, all in the correct vehicle set up for tax benefits. So we are not just multi-strategy, but also multi-vehicle. That’s what you’re required to do to play in the league we are in.”

The lasting type John Serhant entered the Boston-based State Street empire in 1993, initially running the currency management business. He still stresses the importance of currency appreciation for wealthy individuals as a separate consideration to fund performance. Mr Serhant is now chairman of the investment committee and is responsible for all of SSgA’s high net worth business efforts. “You need some grey hairs,” believes Mr Serhant. “If you last long enough in this business, you get an important title.” He has already notched up 34 years in the investment industry, but his enthusiasm has yet to wane: “I can’t wait to get into the office in the mornings. At State Street, we come in early, then make up for it by staying late.” He started running his own currency business in 1968 then joined Chemical Bank, which was eventually absorbed by State Street’s great rival, Chase Manhattan. And he is not too proud to hire former competitors. “People I had lost out to in my career were usually the external candidates I poached,” says Mr Serhant. “If they could beat me, I figured they were pretty good.”