F&C stepping out into brave new world

F&C, one of a dying breed of old-school European institutional managers, has made a brave leap into the private wealth product distribution space through its purchase of hedge funds specialist Thames River Capital.

“We will be cross-leveraging with each other in distribution,” reveals Alain Grisay, CEO of F&C Asset Management, whose purchase of the London-based alternatives boutique has boosted assets by £4bn to more than £100bn (€120bn) for a €62m purchase price. This swoop was something of a coup for F&C, long troubled by uncertainty over its own ownership and falling share price, itself now attracting interest from activist firm Sherborne Investors, backed by insurers Aviva and Aegon.

“Thames River have very good distribution in wealth networks, which we don’t have, through which F&C products can now be channeled,” says Mr Grisay, who calculates 90 per cent of his assets are currently managed for institutions.

“They are dealing with absolute return funds, targeted at private banks and wealth managers, whereas we are dealing with relative value products for institutional clients. This may really open a new world to us.”

There is also hope that modest, high-fee business from the new channels, where F&C has not been present, will help replace regular low-margin flows, which will eventually be restricted, from former group insurance companies Friends Provident in the UK, Achmea in the Netherlands and BCP in Portugal, once exclusivity contracts end in 2014.

“But we still have another four years of this,” Mr Grisay reminds us. “That is a lot of time with a lot of revenues and the market doesn’t fully appreciate this,” he says, referring to the bulk, low-risk balanced products currently managed on behalf of the fund house’s former owners.

An F&C spokesman insists much of the insurance money could stay with the firm. “Our relationships with these clients pre-date the current contracts and there is no reason to believe they would all choose to take all their business elsewhere given strong performance and competitive fees,” says F&C.

Mr Grisay’s medium-term strategy centres on this swift integration. F&C has had a hedge fund manager on the shopping list for some time. A proposed swoop for quant fund of funds manager C-Quadrat in Vienna, was curtailed because multiple listings made it too tricky to complete within deadlines specified by Austrian law. Earlier moves to set up a fund of hedge funds through a Limited Liability Partnership have led to complex legal proceedings.

“You can be specialised and well-performing in other asset classes, but if you have room for an absolute return platform, it can be attractive and is now in considerable fashion, for good reasons,” Mr Grisay reflects about the trend for long-only managers to diversify their limited offerings.

Despite recognising a polarisation between beta supplying, core exchange traded fund (ETF) providers and satellite, high alpha-seeking players, he sees the time of the active manager as very much in the present. “I do believe there are more opportunities than ever, with dislocations and discrepancies in the market, to produce value as an active manager. In this environment of low interest rates and cuts in people’s income, they are starved of investment returns.

“To offer them absolute returns, where the benchmark is protection of their capital – as that’s essentially what it is – makes eminent sense and should prove attractive.”

He says clients need to invest in ETFs for their core portfolio holdings to protect the bulk of assets from increased volatility generated by alpha-chasing strategies. “The bulk of assets do not produce efficiently,” he says. “You need wings on the sides of a portfolio, which are the absolute return funds.”

The distribution challenge now facing Mr Grisay makes a welcome change from the performance-led problems and other questions he faced in 2007, which he admits “lost” the group from the consultant community for a period of time. Ownership issues came to the fore in the second half of 2007, after then controlling shareholder Friends Provident entered a strategic review following a failed merger attempt with Resolution Plc. This became particular serious in 2008, when F&C was formally put up for sale by the insurance company. “Now that period is over,” he states confidently, with net inflows having returned over the last 12 months, since F&C became an independent, listed fund management group.

“Performance was a major worry three years ago – it was appalling. We had a very poor track record in our core business,” admits Mr Grisay. “In the last three years we have been rebuilding our fund management desks aggressively and successfully.”

Between 2004 and 2007, only 35 per cent of F&C’s equity products were hitting their benchmarks, while that number has breached the 70 per cent barrier in the last three years, with the emerging market equity business presented as a textbook example of this success.

“We had a huge emerging market business in the US, but virtually every dime of it had gone three years ago,” remembers Mr Grisay. “Now we have started seeing it grow once more.”

He puts part of the growth in his company’s emerging market assets down to F&C’s introduction of socially responsible investment criteria in developing economies, helping investors filter out undesirable corporate practices. F&C has 18 people focused on engaging companies on environmental as well as governance issues. Although only £2.5bn is managed under strict SRI mandates, F&C provides ethical overlays to more than £80bn of assets.

“SRI is becoming, if not mainstream, then a more important stream, driven by a combination of regulators, stakeholders and the consequences of the 2008 crash,” says Mr Grisay.

Dealing with distributors

Private banks and wealth managers are continuing to retreat from a full open architecture into a guided model, where advisers lead clients around a limited menu of preferred investment funds, says Mr Grisay, this conservatism being amplified by the recent crisis.

“They are more focused and there a fewer entry points. We can say that is very good news, as you can do a much better job with a smaller number of people.”

There is no danger of the private client being served with less of a selection of funds, he believes. “There is only so much information which people can absorb. Over-information is also a danger. If a client wants to invest in emerging markets and receives literature from 12 fund managers, then that is already a phenomenal amount of information. The key decision is in finding the right 12, so the client can make an educated choice.”

In the Spanish and Italian markets, where F&C works with Allfunds Bank, the group has narrowed distribution to products where it has a competitive advantage, with six to eight products earmarked for each market. “To do it with the whole waterfront of products just does not make any sense,” says Mr Grisay.

He has seen private banks take a more cautious stance in asset allocation. “What they sell must be what is in the can,” he says. “Many of these people have been burned by Madoff, so before they build something and distribute it to private clients, there needs to be a much deeper process of vetting. They also need to be much more cautious when opening accounts for individuals and having clients sign up to risk profiles, as there have been cases of private clients suing their advisers.”

Dateline

1968 Launch of the Foreign & Colonial Government Trust (FCIT)

1972 - Foreign & Colonial Management Ltd (F&C) created as separate entity to service FCIT

1985 F&C begins taking on third-party clients as well as serving the investment trusts

1989 FCIT sells 50 per cent of its stake in F&C to HypoBank (HBV)

1998 HBV lifts stake in F&C to 90 per cent

2001 F&C sold to Eureko

2004 F&C merges with ISIS AM becoming F&C Asset Management PLC - Friends Provident is majority shareholder

2006 Alain Grisay appointed Chief Executive of F&C

2008 F&C acquires property specialist REIT Asset Management

2009 Friends Provident de-merges F&C though distributing its 52 per cent stake to its own shareholders; F&C agrees to create a joint venture in China with Hua Xia Bank

2010 F&C acquires Thames River Capital group

Alain Grisay, F&C