BMO Global’s Barry McInerney believes F&C’s direct real estate capabilities play into clients’ rising interest in alternatives.

BMO filling European gap with F&C

Acquisition brings new manufacturing and distribution resources along with it By SOPHIE BAKER

Bank of Montreal's acquisition of F&C Asset Management will help build a link from its money management subsidiary in North America to the other side of the Atlantic, nearly 150 years after the firms' paths first crossed.

“F&C set up the first investment trust in 1868, and one of the first investments that the trust made was in Canada Pacific Railway — which linked the east coast to the west,” said Barry McInerney, co-CEO of BMO Global Asset Management (Europe) Ltd. The lead financier on that deal, he said, was BMO Group.

Now, F&C is the latest piece of BMO Global Asset Management's aggressive expansion plans, this time targeting European distribution. “Aside from specialized boutiques in London, we didn't really have any European presence, and no manufacturing or distribution capabilities in Europe or the U.K.,” said Mr. McInerney in an interview at one of F&C's offices in west London.

Gaining F&C's 83 billion ($139.4 billion) in assets doubled BMO's assets under management to about $269 billion. It is the latest in a series of deals that have seen AUM increase fivefold over the past five years.

F&C is known for its liability-driven investment, real estate and environmental, social and governance investment capabilities — three areas BMO executives had realized were in need of development.

“We have gone through a fairly transformational period over the last five years, and we have no plans to stop yet. We have done so fairly methodically, through organic growth and acquisitions, for which we have had an "acquisitions blueprint',” said Mr. McInerney.

The acquisition in 2008 of Pyrford International Ltd., London, added more international equities expertise; Taplin, Canida & Habacht LLC, fixed-income strategies. Hong Kong-based Lloyd George Management brought Asia and emerging markets management capabilities in 2011, and the same year BMO closed a deal to acquire more fixed-income, equities and cash management expertise with the purchase of Marshall & Ilsley Corp.

F&C was next on its radar. BMO was looking for a sizable business with European and regional manufacturing and distribution capabilities. “F&C popped up a lot and early on. You could say we had "dated' for many months before the acquisition,” Mr. McInerney said. As with other acquisitions, F&C will keep its name. The team also remains unchanged.

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An F&C spokesman said company officials were “out in the market looking for something like this.”

F&C has also been through a transformational period, beginning in 2011 when activist investor Edward Bramson staged a boardroom coup and took over as chairman. Before he resigned in mid-2013, Mr. Bramson cut costs and refocused F&C on its expertise — running investment trusts and managing fixed-income assets. The business returned to profitability in that time.

Recently, however, F&C has suffered outflows, as contracts with strategic partners end and are not being renewed. In its 2013 annual results statement, published in March, the firm reported 19 billion of net outflows. “The combined annualized revenue loss associated with these assets and related fee changes, including F&C REIT, is some 35.5 million,” Richard Wilson, CEO of F&C, said in the statement.

Chairman Kieran Poynter said in the same statement that the business remains “exposed to the future actions of our strategic partners, who collectively accounted for 51.5% of our year-end assets under management and 29% of our 2013 net revenue.”

Despite those outflows, F&C is still viewed as a solid brand.

“From where F&C stood, I think BMO arriving was a great thing for the shareholders, the employees and the business,” said Rae Maile, London-based general financials analyst at Cenkos Securities PLC. “The management team had done pretty much everything they could to try and sort the business out, but were against some pretty major structural headwinds in terms of the client base and the fact that many of those clients were looking to do other things. F&C was caught in the crossfire.”

He said investment performance - 90% of fixed income, 70% of equity and 77% of real estate portfolios outperformed their benchmarks or targets over three years through the end of 2013 - “had been perfectly good throughout; clients weren't leaving because they weren't happy,” said Mr. Maile.

Cross-selling

Executives at both firms are now working to identify cross-selling opportunities, such as exposing North America clients to F&C's direct real estate capabilities, and European clients to some of the nuances in BMO Global Asset Management's global equities funds.

Mr. McInerney said the addition of direct real estate plays to the increased interest in alternatives globally, and the firm already has started discussions in markets outside F&C's domain.

BMO also was lacking in emerging markets debt strategies, something the company's north American executives are “excited” to introduce to clients, while Mr. McInerney thinks the North America business could teach the U.K. in particular a thing or two about best practices in defined contribution plans.

When it comes to LDI, F&C is ranked sixth in the U.K. in terms of nominal amounts hedged in LDI programs. As of Dec. 31, it had 11.2 billion of liabilities in its programs, of a total 517 billion in the U.K., according to KPMG LLP's annual study.

“There is a lot of best practice and principles that we can take to use with the LDI teams that we already have in North America,” said Mr. McInerney. “While it is prominent in the U.S. and Canada, the U.K. is really the birthplace, and the use of derivatives (in these programs to hedge liabilities) is not present in the U.S. marketplace.”

However, F&C is perhaps best known for its engagement policies. It integrates ESG issues into its mainstream investment process; has an active engagement program, which is also available to third-party clients; and runs a range of responsible funds. It makes public its proxy voting decisions, and was a founding signatory to the United Nations-supported Principles for Responsible Investment Initiative — a set of six sustainable investment principles.

F&C's strong stance has prompted BMO officials to think further on their position.

“Engagement permeates the whole industry, and society too,” said Mr. McInerney. “BMO Group is a strong proponent of good governance in terms of how we manage our own company from the board downward.”

He said one of the first questions that BMO GAM executives hear from prospective clients is “are you a signatory” to the PRIs. It signed up in June after two years of ensuring “the process was embedded into the fabric” of its own processes.

BMO executives will be looking to F&C for how they can “take it to the next level by ensuring that internally we comply with best practice, and can also help to bring a stronger framework to ESG-specific funds and strategies.”

He wants to export the ESG story across the globe, starting in North America, where “more and more institutional investors are demanding it — as they should, quite frankly. We will probably need to elevate our game to F&C standards,” he said. n

This article originally appeared in the August 18, 2014 print issue as, "BMO filling European gap with F&C".