EDINBURGH, Scotland - Blairlogie Capital Management is a rare breed among Edinburgh money managers: a Scottish firm with no local clients.
Indeed, the firm has no U.K. clients, or even European ones.
Still, in less than three years, the firm manages $657 million, almost entirely from North American clients.
That reliance stems from Blairlogie's parentage: It is a 100% subsidiary of PIMCO Advisors L.P., Newport Beach, Calif., which has nearly $83 billion in assets under management. PIMCO's ownership has resulted in almost $400 million in PIMCO international mutual funds being handed over to the infant firm.
But Blairlogie's combination of U.S.-style disciplined investment process and knowledge of U.S. institutional investors is winning it outside clients as well: the Teachers' Retirement System of Illinois, Springfield; the Investment Fund for Foundations, Charlottesville, Va.; and Commonwealth Funds Management of Australia, Canberra, among others.
The Investment Fund for Foundations hired Blairlogie as one of five emerging markets specialists because the firm offered "an unusual combination of a team with extensive experience ..... coupled with a fairly small asset base because of the newness of the organization," said David Salem, president and chief executive officer.
The team forms
In 1992, executives at Pacific Financial Management Asset Management Corp., the former money management arm of Pacific Mutual Life Insurance Co., were looking to add an international money manager to their stable.
"In a strategic sense, we were looking for an international manager to fit the styles" the money management group already had, explained William Cvengros, PIMCO's chief executive officer.
Besides giant Newport Beach-based Pacific Investment Management Co., the company had spawned three U.S. shops: Cadence Capital Management, Boston; Parametric Portfolio Associates, Seattle; and NFJ Investment Group, Dallas. It also owns Columbus Circle Investors, Stamford, Conn.
"Long term, we would like to see more of our assets invested internationally and more of our clients based internationally," Mr. Cvengros added.
PFAMCO officials approached Mr. Dobson, a native Scot who was then president and chief operating officer of Murray Johnstone International in Chicago, about starting an international money management firm.
A veteran marketer with 12 years of experience in the United States, Mr. Dobson recruited James Smith, in charge of international investment management for Murray Johnstone's North American clients, to serve as chief investment officer.
Mr. Dobson also enlisted Robert Stephens, the original CIO of Murray Johnstone's now-disbanded joint venture with Kemper Financial Services and subsequent chief executive of Barr Rosenberg European Management, to act as chief financial officer.
To avoid attracting notice in Edinburgh's financial community, the troika secretly met in Mr. Dobson's home in Blairlogie, Scotland, which eventually provided the firm with a name.
They developed a systematic investment process that promised consistent performance with clear risk controls - a style that offers great appeal to U.S. pension executives. In addition, they put in place systems to ease communications with custodial banks, and immediately opened a marketing office in Atlanta.
Country allocation process
Blairlogie officials believe the country allocation decision provides 70% to 80% of value added. They developed a model for major international markets that uses 25 variables in determining in which countries to invest. Variables comprise a host of macroeconomic, monetary, earnings momentum, market valuation and technical factors.
Based on the country ranking, Blairlogie overweights the top third countries and underweights the bottom third, though no weighting can be more than either 10 percentage points below or 5 points above the relevant benchmark weighting.
For example, Blairlogie's international portfolios overweight French stocks by 3.3 percentage points and underweight Swiss stocks by 3.6 percentage points. A similar multifactor model is used for picking stocks.
The Illinois Teachers fund became Blairlogie's first outside client, hiring the firm in fall 1993 to run a $50 million international equity portfolio, which since has been increased to $130 million.
"We like what Gavin was doing. Secondly, they are involved with PIMCO, which is one of our largest money managers," explained Bob Daniels, the fund's executive director.
While the international product backtested well in major countries, the question remained whether it would work for emerging markets, given the poorer quality of market data. James Smith maintains the product does work in emerging markets, and the firm's products are tested every month to ensure their viability.
In addition, the firm in 1993 started offering a hybrid product based on a 70% international and 30% emerging markets benchmark. In all cases, currency is handled as a separate investment decision.
PIMCO put its resources behind the firm, having it manage both international and emerging markets fund mutual funds. Now, there are $65 million in the international equity fund and $83 million in the emerging markets fund.
In addition, PIMCO's reverse merger last year with Thomson Advisory Group L.P led to Blairlogie taking over management of a $250 million Thomson international equity portfolio that previously had been run by fellow Edinburgh firm Martin Currie Ltd.
The results so far are fairly strong. Blairlogie's international product has returned 5.4% in the first half of 1995, compared with 2.8% for the Morgan Stanley Capital International Europe Australasia Far East Index. Since inception in January 1993, the international product has returned 18.8% on an annualized basis, beating EAFE's 16.9% return.
The emerging markets product, which started running live money on June 2, 1993, has returned 34.3% a year compared with 30.6% for the IFC Investable Index during the 25-month period ended June 30. After fees, however, it underperformed the index, returning 29.5% a year.
Meanwhile, the hybrid product has chalked up an annualized 20.1% a year in the 30 months through June 1995, compared with 17.9% for its composite index.
But as much as the investment process, the experience of Blairlogie's team impresses clients. "They're really savvy guys," said Don Early, manager of investment services for the Sunday School Board of the Southern Baptist Convention, Nashville, which hired the firm in May 1994 to run a $5 million emerging markets portfolio.