Legal & General branches out into European retail market

Legal & General Investment Management, the UK’s biggest asset manager with more than £1tn ($1.2) of AuM, is on a mission to shift its brand perception as a passive, institutional fund house, to that of a “comprehensive investment solution provider” for the retail space too. Drawing on its wide range of both active and passive strategies, in recent years it has focused its distribution efforts on wealth and asset managers, while also expanding its footprint in Europe.

“The retail part has been a very significant growth area of the business over the past few years,” says Honor Solomon, head of retail Emea, who joined LGIM in 2014 from BlackRock, where she led its retail business.

Since then, thanks in part to several “hidden gems” in the actively managed space, the retail business, which has been historically orientated towards independent financial advisers (IFAs), has grown by 15 per cent to £30bn. While it is still a small percentage of total assets, market share has greatly improved. The fund house, which is part of the British multinational financial services company, has “consistently featured” in the top three asset managers for retail net and gross sales in the UK in recent years, she says, climbing more than 20 positions compared to five years ago, according to the Pridham fund management industry report.

“Managing money is all about trust, and when you run more than £900bn in assets for institutions, when sophisticated investors and consultants have trusted you to manage their assets for a very long period of time, it definitely instils confidence in others that they can trust you too,” she adds.

But what is paramount is having the right products, longevity of management and excellent performance, she adds.

The acquisition of Canvas, the Ucits ETF platform from ETF Securities, in late 2017 has significantly supported LGIM’s aspirations to build a European retail business, adding $2.7bn in assets and, importantly, clients across 14 jurisdictions.

“The ETF business has given us the springboard into Europe, because it has enabled us to approach existing clients of that particular range,” explains Steve Gray, head of wealth management sales at LGIM, who joined from Axa Investment Managers three years ago.

But the low level of awareness on the continent was complicated by the asset manager’s unusual name. This dates back to 1836, when the life insurance society was founded by lawyers and restricted to those in the ‘legal’ profession, and subsequently opened to the ‘general’ public.

When two to three years ago, LGIM started approaching multi-managers and asset managers in Switzerland, puzzled prospects would ask why they were being sold legal services. “Clients had no idea of who we were,” smiles Mr Gray.

As awareness has grown, assets have slowly started flowing in. LGIM is managing to tell the story of its rise to become Europe’s second largest institutional investment manager after BlackRock and has now opened offices for retail distribution in Amsterdam and Frankfurt. At the end of last year, it also launched a retail business in Milan, while the decision to set up a Dublin office in 2018 was driven by the need to manage its EU-domiciled funds within Europe, post-Brexit. New launches of both Irish-domiciled funds, Icavs, and Luxembourg Ucits, both in the passive and active space, have facilitated the push into Europe.

The vast majority of retail assets are however still sourced from the UK, with multi-asset firms, multi-managers, wealth managers and selected family offices its key clients. These include fund platforms such as Hargreaves Lansdown and Standard Life, investment and wealth managers such as Brooks Macdonald, Rathbones, Charles Stanley, Seven Investment Management and Investec, as well as private banks LGT Vestra, Coutts and, more recently, Credit Suisse in Switzerland.

But with private banks increasingly partnering with a small, selected number of investment firms, competition is huge. “We would love to enter the space and become strategic partners, but it is still fairly early stages,” acknowledges Mr Gray, adding that some of the firm’s funds feature in the recommended list of smaller private banks.

Serving private banks and wealth managers is extremely demanding, especially with few people on the ground. “My team looks after 120 clients in London, and there are four of us. You could argue it is probably a little bit stretched, but there are certainly big companies out there that have less people.” In Europe, on the retail distribution side, the firm relies on three people covering Switzerland, Italy and Germany.

“It is a challenge,” acknowledges Mr Gray, “it is something we need to keep monitoring, making sure we have got a foothold, build on it and add quality people selectively.”

Unlike other major asset management firms, assets are “nicely spread” among clients, with the top 10 accounting for around 10 per cent of assets. This protects flows, but it may also render servicing more challenging.

The solution is to efficiently use existing resources to meet client needs and add value. “There is a vast array of quality individuals in the London office we can call upon,” he explains. These include product specialists and fund managers, who regularly take part in clients’ webinars or speak at their events.

Product platform

The firm has “re-invigorated” its actively managed business in recent years, hiring lead managers who have then built teams around them, in the areas of high yield, emerging market debt and multi-asset. These today are some of the firm’s key strengths.

“It is great to have a big spread of funds but, when meeting clients, you have got to focus on certain expertise you are really good at,” says Mr Gray, who shows unfaltering optimism despite headwinds.

Over the past couple of years, increased regulation has led to consolidation in the wealth and asset management sector, which has driven centralisation of buy-lists and longer decision making processes.  

Moreover, some of the firm’s areas of expertise, such as the multi-asset absolute return sector, have been badly hit by the inability of large multi-asset funds to protect investors in market downturns. Despite that, the firm’s multi-asset target return, run by the same team responsible for the multi-indexed fund range traditionally sold to IFAs, is beginning to “gain traction”.

“The multi-asset total return fund was flat last year, and if you think how bad the year was, it was a pretty good return,” says Mr Gray. A new Sicav version of the fund for cross-border distribution was launched in late 2018.

In the UK, as the Brexit drama continues, investors are heavily underweight in both UK equities and fixed income. “We have got a very good UK growth fund in an area where net sales for the last two to three years have been negative, but we continue to talk to people.”

Thinking outside the box

One area which is drawing client interest is that of thematics, offered mainly through LGIM’s ETF platform, which has increased by $700m to $3.4bn since acquisition. In the mature ETF space, dominated by giant providers, the firm is trying to carve a niche for itself, by partnering with specialist providers to create actively managed, forward looking indices, with a strong sustainability tilt. Its corporate governance team is very active, particularly in the areas of climate change and diversity on boards, leveraging on the firm’s big weight in UK and global indices.

Wealth and asset managers today tend to have the same views on markets and many, because of consolidation, hold similar funds, which tend to follow a geographical allocation, reports Mr Gray. “We are trying to help them think a little bit outside the box.” This means discussing global themes such as robotics, automation and AI, battery value chain technology, or cyber security, which have drawn clients’ “genuine interest”.

Following the launch of core equity ETFs late last year, the firm has recently introduced three new thematic ETFs, seeking to capture investment opportunities created by innovations in artificial intelligence, healthcare breakthroughs and clean water.

While being seen as a relative latecomer in the retail space can prove challenging, it may also offer benefits. “In Europe, we’ve almost got a blank canvas, which is great, because when you are in a market for a long time, people form perceptions of you, which you have to break down,” says Mr Gray, alluding to his firm’s leading position in the  UK.  “This means we can go clean and talk to clients about all sorts of things. We are here for the long-term, but it does require a lot of patience.”