SLI looking to new horizons

Standard Life Investments (SLI), the £123bn (E137bn) funds arm of the famous Scottish insurance company, is slowly but surely spreading its tentacles through continental Europe, with Germany one of the key staging posts in the expansion drive. SLI has just celebrated its tenth anniversary as a separate entity to its insurance company parent, with a different building and its own staff and investment-led culture, despite sharing the same top management. In fact it has been the aim of Standard Life’s chief executive Sandy Crombie, who previously ran SLI, to inject some of the entrepreneurship, drive and openness to outside influences – which characterised the funds house – into the sometimes backward and old-fashioned parent insurance company. While Standard Life was suffering what Mr Crombie called a “near death experience” prior to its flotation in 2006, the SLI team, under Keith Skeoch, managed to rescue their parent company when it needed a swift yet stealthy disposal of €10bn worth of equities, using some less visible derivative instruments, to maintain solvency requirements. While Standard Life suffered low morale during a time of unprecedented restructuring, SLI, with a compliment of newly recruited faces, continued to pick up external mandates and remained the most profitable part of the group. The de-risking of the business pioneered by Mr Crombie now means much less of an insurance focus and a reshaping of the group as a wealth manager. Despite these problems, the Standard Life brand has remained a strong one in UK, German and Irish markets, predominantly due to excellent communication between the group and the eventual client. The group appears to have held off expanding outside the UK until it could correct its solvency and morale problems closer to home. With a stronger base, top management have sanctioned investment required to gain effective international distribution through platforms and third parties. This means SLI is now able to use the deep imprint of its parent company in the German market to slip its funds into Teutonic circulation. During 2008, SLI signed deals with the Frankfurter Fondsbank funds platform and the funds exchange of Metzler, one of the country’s leading private banks, while a distribution arrangement with Fidelity Funds Network has become all the sweeter as the UK supermarket expands Eastwards. “We work with the Standard Life brand, so the German adviser market can buy the funds through their existing relationship with the insurance network,” reveals Phil Barker, SLI’s European distribution boss. “This has recently proved to be a successful model in the UK.” He sees France, Scandinavia, Ireland, Germany, Switzerland and the Benelux region as his “key picks” for new business. Mr Barker has also recently appointed Will Pawson, a former distribution co-ordinator at Aviva Investors, to specifically cover Southern Europe, where SLI funds have registered on the Allfunds platform in Spain. Elsewhere, the focus is on creating deeper relationships with cross-border wealth management groups, whom SLI has already encountered in its home market. “We are definitely not into flag planting,” states Mr Barker. “Our approach is to intensify the work we have already been doing with those pan-European distributors known to us in the UK.” The end of the star manager UBS and Credit Suisse are typical of the global distribution houses in SLI’s sights. “There is a very robust screening process at these organisations,” believes Mr Barker. “Our starting point is that we have a very strong investment process at SLI, and it is the type of process which big groups like. They are looking for strong, responsible, respectable fund processes, not star managers, for big groups rather than boutiques – groups that can give client service.” The star manager culture has been publicised by a small coterie of fund groups in recent years; they have aggressively pushed a handful of named managers at distributors, with help from some parts of the media. But Mr Barker is among growing numbers who believe this self-serving celebrity culture should be consigned to the dustbin. “We have definitely seen a change from larger European banks and smaller fund of funds managers,” reveals Mr Barker. “They are now looking in particular at how risk and risk management fits into the [investment] process.” While they are clearly targeting these wholesale warehouses for big-ticket, third party business, SLI salesmen have a fairly limited portfolio of products in their suitcases. These comprise mainly fixed income, local and global property funds. “Corporate bonds is a strong area, where asset allocators are looking to increase their expertise,” says Mr Barker. He is backed up by SLI’s strong long-term performance in this asset class (see Figure 1). “A strong process, backed by straightforward funds is what they demand. As fund selectors look to increase exposure to credit in the latter half of this year, high yield will also become more attractive.” Distributors, believes Mr Barker, are also using the current crisis as an opportunity to replace those managers who have underperformed, particularly those relying on star status of investment professionals. “Two years ago, new ways of doing things looked attractive; now distributors are looking for a consistent process, over a number of years.” Information provision But there is more to the choice than just the quality of process and how long it has been in place. Selectors are paying more attention to the stability of a fund producer’s business, how different divisions of an investment firm interconnect, and the quality of information provision and client servicing. “We must be able to demonstrate the ability to provide ongoing data on funds. The days of sell something and then go away have long gone,” confesses Mr Barker. The process of managing money is effectively the same, whether it is conducted for a pension fund or retail investor, but Mr Barker appreciates that different channels need different levels of information provision. A typical distribution agreement which his team negotiates – the agreement for Nordea to sell SLI’s global real estate fund across Scandinavia, for instance – puts SLI funds in several channels, working towards his “classic” step-by-step distribution deal, which moves from open architecture, through preferred fund picks for off the shelf sales, to a berth in a fund of funds and finally to a segregated, sub-advisory mandate. “Our fund is shown as one of their preferred property picks,” explains Mr Barker, despite the fact that this particular fund has suffered extremely poor performance over the last year, according to Morningstar figures. “But the business comes from a variety of sources – from high net worth individuals choosing funds as part of Nordea’s inner circle or from the fund being part of their fund of funds. We need to understand how these sources fit together at the partner bank. It is not a one size fits all solution,” he adds. It is important, he says, to avoid the temptation for sales teams to just sit back and wait for business once they have won such a mandate. “It is then that you need to agree with the distributor how to work together,” he reveals. “A lot of effort goes into making sure you can work together on the first fund. But the processes we work on, such as global real estate, rely on equity and bond processes too. So when the group buys one fund, we like to think that consistency of approach in terms of investment, but also to services, will help broaden the offering.” Mr Barker’s ambition is to increase the proportion of assets which SLI sources from non-UK clients. His team pulled in more than £1bn of net new money in 2008, a year in which many competitors suffered strong outflows, reaching £5bn in total assets sourced from European clients.