Blending the institutional and retail space

Jamie McLeod, chief executive officer of multi-management firm Skandia Investment Group (SIG), has gone some way to creating a premier league of fund houses, befitting his origins as the son of a professional footballer. His Core Fund Range – which rates 275 products from 100 management groups, based on philosophy, people, process and performance – has led to a constant stream of asset management bosses advocating their stock selection skills at Skandia’s head offices in Southampton. It is an incongruous sight: so many of the great and good from the European and US investment communities making their way by train or hired car to the unglamorous coastal outpost for an audience with Mr McLeod. “Let’s face it,” says one employee. “They’re not coming here for the shopping or the weather.” It is hardly surprising that visiting CEOs are so keen to get in the good books of the intense, bright-eyed Scotsman. His employees can allocate $150m to $200m (E160m) per day to third party investment funds. On the front line SIG has been at the forefront of a democratisation in asset management. It has brought institutional strategies into the reach of the man in the street, through financial advisers. Wealthy individuals subscribing to the services of private banks have also stood to benefit from privileged access. Those institutions which are too small to enjoy the research facilities of Credit Suisse or UBS are more inclined to sub-contract SIG to do the selection legwork for them, employing the fire-power of 50 fund analysts and portfolio managers. When Mr McLeod joined Skandia in 2003, after eventful stints with Investec and Scottish Widows, the business was running just £1bn (E1.2bn). Today, it approaches $115bn (E92bn), having brought together four previously distinct Skandia businesses under the SIG banner, following the takeover by Old Mutual in 2006. One of his first deals was a tie-up with Goldman Sachs Asset Management to bring GSAM’s institutional mandates to a “rich retail” client base. “We launched a retail fund sub-advised to them. We stayed out of the institutional space and they stayed out of retail,” says Mr Mcleod. “That deal raised a lot of eyebrows. We were a start-up business and we did a deal like that, which had never been done before with the mighty Goldman, and then went on to do other such deals with the likes of T Rowe Price.” Mr Mcleod also claims the credit for bringing institutional managers including Gabelli and Wellington to the retail market place. “We don’t operate in large parts of the market deliberately,” says the operator once dubbed the most powerful man in UK fund management - a description he plays down. “We are hoping to try out in spaces where we can bring competencies. We go to a bank and say: ‘How about using these institutional managers we have blended together?’ Until we do it, these products don’t exist.” He gives the example of SIG’s Far East Allocator fund which combines the skills of six managers of both value and growth biases. “Our proposition is that no one manager is right all the time. Our blended solution is backed by rigorous research, purchased on an institutional basis on behalf of our clients.” But he admits that life is not always plain sailing in his Southampton headquarters. It is not easy to get the right performance balance in the multi-manager game, where how you mix third party offerings can be crucial to success. An aide of Mr McLeod admits that the UK version of his Best Ideas fund – where ten fund managers each pick ten stocks – is “performing pretty poorly”. The Strategic Best Ideas fund, which takes both long and short positions, is doing better, having surged 20 per cent above the sector average and opened up a 1.5 per cent gap ahead of its closest competitor, yet still lags the volatile market. As well as patchy performance, critics of multi-managers – including some of the groups who feel strong-armed onto platforms, yet complain about the fee cuts taken by selectors – cite double charging as eating into already sub-standard returns. “I don’t agree about [double] charges in our case,” says Mr McLeod. “We are buying underlying holdings at institutional rates. Therefore the TERs of our funds are 180 or 185 basis point, inclusive of two sets of fees.” However, some SIG funds, such as the flagship Best Ideas ranges charge as much as 240 basis points, although he claims this reflects the vehicles’ “more specialist” nature. “The criticism of multi-manager is that it is more expensive, and I accept that,” ventures Mr McLeod. “But the genesis of our model is driving down costs for the consumer.” There is also the problem of institutional managers – sensing their own importance and self-proclaimed propensity to create alpha – refusing to share portfolio experiences with private banks whom they are being paid to service. This is something which Mr McLeod can do little about. “Some managers won’t provide access to these banks,” he admits. “High end institutional boutiques don’t want to spend large amounts of time servicing predominantly retail investors.” On the positive side, the SIG portfolio service means that wealth managers and private banks – names such as Ansbacher and Rotshchild are typical users of Skandia products - don’t need to switch clients to new funds or monitor performance every time a fund house experiences personnel changes. “Distributors are spending a lot of time trying to change investment groups because fund managers move on, or a company is taken over,” says Mr McLeod. “Had you invested in us, and the manager left, we will find the next investment house for you.” Like the rest of the industry, SIG is not oblivious to the global financial crisis, but Mr McLeod maintains the he is still exploring new product launches, while trying to put current conditions into perspective. “We started the firm in very tough market conditions, when tanks were moving into Baghdad and the FTSE index stood at 3,500,” he says. “Over the years, we developed an innovative presence with distributors, thought about their requirements and tried to build and create solutions for their business.” One such development has been the creation of a fund investing in less obvious but popular assets such as water, timber, wheat, barley, grains and currency. Building relationships Such funds are developed through “massive communication” with distributors. SIG regularly surveys 10,000 intermediaries, with around 500 giving direct feedback. But the second, even more remarkable, leg of the research, pioneered last year when members of the public began to show concern over collapsing banks, was direct dialogue with potential end investors. “We began to gather consumers in numbers,” he recalls. “It can be really difficult to explain a product like a long-short fund to investors. How can you make money when markets are falling? We started gathering people in rooms for consumer testing, went to the advisers, and gave them the ideas that came from the consumers. That kind of thing really builds chemistry with distributors.” Mr McLeod now oversees SIG’s operations in 17 countries, with businesses developing fast in France, Sweden, Italy, Switzerland, Poland and Portugal. SIG competes with Russell Investments in many of these markets. Asia also accounts for a $15bn and growing chunk of assets, with Mr McLeod regularly visiting Beijing, where SIG’s owner, Old Mutual, recently bought a Chinese manager, Beijing State Asset Management. Distribution power there is phenomenal, with some banks on SIG’s radar boasting 20,000 strong branch networks. But there are limits to expansion. “We have not launched funds to transport to every market and distribution channel,” says Mr McLeod. “Europe and the world are big places and if we can bring a product to more than one market, we are achieving leverage.” One of his ambitions is to achieve greater portability of funds, taking UK vehicles, for example, and launching them into Continental European markets such as Sweden. “This has not been done too often,” laments Mr McLeod. “At some point the industry has to get this passporting sorted out.” Frustrated by often having to launch four versions of one fund for different markets, with separate corresponding operational infrastructures and settlement procedures, it is Mr McLeod’s aim to have a single, economically viable platform for cross-border distribution, which can bring down costs to investors. Rather than unbridled geographical expansion, it is this type of development that Mr McLeod believes can really kick the business into a new era. “I don’t want to be in any new markets,” he says. “We are in enough already; I want to invest in the markets we are in and make those successful.”