First state says ok to specialist sales strategy

Following last year’s strategic review, First State Investments has cast off any pretensions to being a generalist fund manager. The international funds arm of the Common-wealth Bank of Australia has re-invented itself as an Asian and emerging markets specialist, with a renewed emphasis on sales and distribution.

This is the latest chapter in the story of an increasingly divided funds industry, split between groups who want to chase every type of mandate and client – whether managed internally or through use of sub-advisers – and those who wish to concentrate on niche areas.

First State, firmly in the latter camp, has exited European, UK, US and Japanese equities. Funds investing in technology and health products have also been terminated.

The new focus is on Asia, emerging markets, commodities, global equities and global bonds. The review followed on from a company restructure, which included amalgamating asset manage-ment teams of Colonial First State and Colonial Life in 1999, acquiring £2.8bn (E4.19bn) Scottish fund house Stewart Ivory in March 2000 and rebranding to First State in 2001. First State now runs £7bn out of the £41bn group total.

BUSINESS TURNAROUND

“We had an unsuccessful business three years ago, but have turned it round incredibly quickly,” admits Richard Jones, who became head of European retail sales when Phil Jefferson left for Henderson. Both received their fund sales schooling at JPMorgan Fleming.

“In 2000, we were very fragmented as the Colonial Life Company, but things changed once we acquired the Stewart Ivory business with Angus Tulloch, including new assets and we merged the three platforms.”

Mr Tulloch heads the key areas of emerging markets and Asian equities for the re-styled firm, reporting to chief investment officer Stuart Paul.

“We have had amazing support for our strategic review within the client community,” reveals Mr Jones. “We couldn’t be all things to all people any more. Everybody said: ‘What a brilliant idea, more people should do that’. You have to work out what you are good at and focus on that.

“I had joined a company that was not really selling anything,” he confesses, “although there were very high quality managers around the business.”

While examining its asset management skill-set, First State also examined the UK distribution landscape, with one eye on expansion into Europe. “Depolarisation was all the rage and everyone was talking about new models of distribution. Banks may not actually be happy with depolarisation, but they undoubtedly see the business logic. That’s the way the market is moving and a better-educated investor base will require it. The days of an individual business being distributor and manufacturer, all in one, are behind us. So we did not try and build an old-style model, but went straight into new-style platform distribution.”

While half of First State’s net sales in the UK go through independent advisers, distribution has moved increasingly in favour of life companies, fund platforms and discretionary wealth managers over the last three years.

The restructure has already achieved some success, with £1.4bn siphoned in from UK distributors since 2001, and £450m from Continental Europe, where Mr Jones sees most growth potential.

“Our UK sales came very early on in our life as a funds house,” he says. “Europe will be the dominant sales power in our business quite soon. But each country treats open architecture very differently, and we will treat each country very sensitively on its own merits. Banks in many countries are moving towards embracing external managers, but everyone is moving at a different speed.”

However, Mr Jones wants to target fund distributors selectively, rather than using the scattergun approach.

“We have to be very mindful of what some of the large distributors are looking for in their manufacturing partners. If number one on their list is the brand, then we are not for them,” he says. “But if they are looking for manufacturing excellence, we are in the game. Much of the process is done for us by their selection criteria.”

COMFORT FACTOR

All that investors in long-term savings products are really interested in is performance, believes Mr Jones. “It is a nice comfort factor when you sign up with familiar brands on the page, but if it doesn’t get you where you want to be, it serves no purpose.”

The First State sales push embraces both distribution and white-labelling of products. “The collective investment can be available through a bank’s platform or we can sub-advise third party products and we can reach a similar audience through that method. But the initial sales approach is much more complex for this type of segregated mandate.”

Although the distribution and institutional teams often work together, it was Mr Jones’s retail sales team which won a $200m (E165m) mandate as sole sub-adviser for the Skandia Pacific equity fund.

Multi-managers such as SEI and Northern Trust, both increasingly keen to be seen as distributors in the wealth management arena, are approached with joint visits from the two teams

This type of outsourcing mandate is clearly a boost, but the main target for Mr Jones will be European platforms. His funds have already secured berths with the German distribution platforms of Deutsche Bank and HVB, MeesPierson’s Swiss private banking arm, and a global agreement with UBS.

Funds sold are predominantly UK-domiciled open-ended investment companies (Oeics), rather than the Luxembourg or Dublin-based cross-border Ucits schemes preferred by most European distribution groups.

HUGE SALES IN ASIA

However, First State pushes funds from a Dublin-based equity range in Singapore and Hong Kong, where they have notched up huge sales of E690m, according to consultants Feri.

“We are exploring the possibilities of starting to distribute selective funds from that umbrella in Europe,” says Mr Jones.

Top of the pops among products sold have been the Asia-Pacific Leaders fund (£100m) and the Global Emerging Market Leaders fund (£20m).

Previous versions of these funds, investing in smaller cap companies, were “soft-closed” at £850m and £445m respectively. The new, more focused, funds invest in portfolios of around 50 stocks, with a much larger capitalisation.

“If you are taking products to a mass market like Europe, you need to make sure you can deliver a product which is scaleable in terms of liquidity for a pan-European distribution audience,” says Mr Jones.

The asset managers felt that increasing inflows would lead to excessively large positions in small company stocks, with a danger of diluting the investment process offered to existing clients. “We could have taken in more money and worried about the consequences later,” says Mr Jones. “But we chose the path of integrity. This was a huge source of debate internally, but the voice we listened to was that of Angus Tulloch. “This is very much a business that listens to the voice of integrity from the fund managers, rather than the sales and marketing staff who try and bully them.”

Getting down and dirty to the heart of the matter

Among the niche product areas, which First State hopes to exploit, is the booming commodities sector. Research for the E50m Global Resources fund, investing in equities in the natural resources sector, is carried out by a team of four analysts based in Australia, led by Dave Whitten.

Whitten: leads team in Australia

UNDER-RESEARCHED

“The team are grubby, as geologists should be,” says First State head of retail sales, Richard Jones. “They haven’t had manicures. You can see they have been down a hole in the last few days, digging for natural resources.

“It’s an under-researched sector. Sometimes you get to a mine in the back of beyond and we are the only people who have been down there for two years.

“If a geologist can get down to a seam and hit it, we can check the profitability of the seam through density and volume. This adds real value rather than taking third party broker research.”

AREAS FOR EXPLOITATION

Although First State has exited core UK equities, it sees European and British smaller companies as specialist areas, which can be exploited.

The latter, managed in a e34m fund, are analysed by Paul Jourdan, who previously worked for Angus Tulloch and Stuart Paul at the Stewart Ivory operation in Edinburgh, and Mickail Zverev, ex Schroder Salomon Smith Barney.

“Smaller companies have previously been put in certain sectors which are inappropriate,” says Mr Jones. “These guys have thrown away the traditional risk management manual.”

Richard Jones, First State