First State takes aim at European heartlands

Few asset managers in the UK can feel as content as Australian group First State Investments, which has just moved into sparkling new offices in London’s Cannon Street and celebrated its 10-year anniversary with £24.2bn (€29bn) under management, 85 per cent of which is invested in the booming emerging markets. This growing funds franchise is part of the Colonial First State firm, backed by ultimate parent Commonwealth Bank of Australia.

Emea CEO Gary Withers, formerly top dog at the formidable funds franchise of Credit Suisse, now has his old stomping ground of Continental Europe in his sights, with the long-term aim of becoming one of the region’s top 10 product suppliers. “We are pretty well known in the UK and established in Asia Pacific and the emerging markets,” he ponders, with 65 per cent of these fast-sourced assets managed on behalf of UK clients such as pension schemes and multi-management groups. “But we are significantly under our natural market share in Europe’s heartlands.”

His team is currently talking to “the right people” in Europe, especially within family offices and private banks, where there is a greater appreciation of specialist funds investing in areas such as global resources, listed infrastructure projects and real estate securities. First State has managed to carve a significant niche here, particularly in global resources, an area traditionally dominated by heavyweight producers BlackRock and JP Morgan. In the listed infrastructure arena, First State already boasts the largest fund in the UK, also in Europe’s top three.

“There has been much more interest during the last six to 12 months,” says Mr Withers. “People are looking for a sustainable income and infrastructure will provide that.”

Often lumped among alternative assets, infrastructure is regularly misinterpreted. “There is a high risk, high return element to the infrastructure world,” he says. “But the majority of infrastructure is very boring, consisting of car parks, electricity and airports.”

These products tend to outperform in bad markets, while they can be slightly behind the pack in strong, liquidity-driven environments. “We have a significant emphasis on absolute return,” says Mr Withers, whose products often see cyclical performance patterns relating to resource-driven stocks and commodities.

“We feel very uncomfortable if we can’t see positive returns over a long-term period. That differentiates us substantially from benchmark operators, who go with liquidity and momentum flows, which we walk away from.”

The priority is talking to existing clients and enticing them into these new, slightly more obscure strategies, rather than to spread the word to a new set of disciples in difficult times. “Particularly at the moment, with volatile market conditions, you must look after existing investors,” he confirms.

RUNNING AT FULL CAPACITY

It is these investment classes in which First State hopes to increase assets rather than the emerging market funds it is more famous for. “Our Asia Pacific emerging market business is already running at full capacity,” says Mr Withers with a satisfied smile.

Preferred investors – and First State has long been one of the pioneers who believe fund houses must pay even more attention than fund selectors when deciding whom to do business with – often exclude the larger private banks, which tend to be “more aggressive” on fees. He is keen to work with those distributors who believe in his products rather than just sell them because they can get a good deal on price for bulk sales.

“If you are running a proper business and have good products, there is no reason to be providing a discount for a bigger brand name compared to the guy down the road,” he says.

First State also wishes to discourage so-called “fast flow” business coming in and out of its funds in favour of more stable, longer-term relationships with distributors. “It can be very disruptive for a fund if there are significant flows of assets moving in and out, in particular when conditions are volatile,” concedes Mr Withers.

Analysing these potential movements of client monies is a key decision made when searching for distribution partners. “We want five to 10-year investors,” he says. “Family office money is often better than private banking money, although some private banks do have long-term horizons. We want private banks who are experts in the areas we invest.”

Because wealth management institutions are increasingly expected to make bold asset allocations for clients, fluctuations in holdings come with the territory, admits Mr Withers. But these variations must be within reason.

For this reason he is happier to do business with the mid-size institutions with an investment heritage, the likes of Pictet and Lombard Odier, rather than the big global franchises. Similar private banking counterparties in France, Germany and Scandinavia are also among preferred business partners.

DEVELOPING PRODUCTS

While the smaller German private banks such as Berenberg are more likely to stock First State funds than the high street retailers, there are dealings with the private wealth management arms of groups such as Deutsche.

“The high net worth segments work with us more comfortably and are less price-sensitive than the big retailers,” reports Mr Withers.

Currently, the product range may not be wide enough to get onto the prized product slates of some of the national champions and cross-borders warehouses operating on a ‘guided architecture’ format. But First State’s history in developing asset classes suggests this may not always be the case.

Currently there is a drive to build fixed income capacity, with the investment case for emerging markets’ sovereign debt looking particularly attractive according to Mr Withers and his head of investing in this asset class, Helene Williamson, recently recruited from rival house F&C. Their belief is that emerging nations are much better placed to service the debt obligations than the world’s more advanced economies. First State’s Asia Pacific emerging markets business has multiplied from £130m 10 years ago to £14bn today, but the new expansion will come from bonds rather than equities.

“This is our first fixed income product set in Europe, but we want to look deeper into this asset class, focusing on niche areas rather than mainstream European bonds,” says Mr Withers. His feeling is that mainstream fixed income is currently vastly over-supplied by mediocre, bank-owned players, which have prospered through the economics of captive distribution, rather than investment expertise.

The sustainability theme is another driver underpinning First State’s investments in Asia, China, India and Latin America and will form a key plank of the business plan for the next 10 years.

“There are some family firms in Asia, where the ethos of how they operate is extraordinarily powerful and close to the sustainability agenda,” suggests Mr Withers. “These firms are a lot more likely to have those principles than the ex-government businesses. Our investment process has a significant emphasis on governance and management. How do they treat their suppliers? If they don’t treat their employees and suppliers well, how do you expect them to treat shareholders? This is a core principle of our investment approach.”

He is keen to explain this approach in detail to current and potential partners, rather than see them buy purely on performance or fund ratings. “When we appear at the top of a chart, somebody will buy our fund on that basis, with no understanding of how we do it. But for those who take the time to understand us, we are explicit about our investment approach. For people who want a conservative investment style in difficult conditions, we have a proven track record.”