In the metaphorical shadow of the famed Edinburgh Castle, Scottish Widows Investment Management has been turning in princely performances -- at least with its pan-European equities portfolios.
And that in turn has helped balloon its assets under management from U.S. pension funds. The manager of $49 billion saw U.S. pension funds' share jump to nearly $1.5 billion currently from $185 million at year-end 1996.
That big leap came from the addition of four new pension clients in 1997 -- including the World Bank's fund -- as well as market gains logged by existing clients. (The firm would not supply the names of its new clients.)
New clients signed on for SWIM's European equities portfolios, which are the only types the firm now actively markets in North America, said John L. Griffith Jr., investment director and head of the firm's North America office in Princeton, N.J.
SWIM's success came amid an overall dearth of interest in regional investing. In contrast to Scottish Widows' big leap in asset accumulation, U.S. tax-exempt institutions in 1997 overall posted literally a net cash flow of zero into non-U.S. regional equity portfolios, according to InterSec Research Corp., Stamford, Conn. (Net amounts reflect inflows minus terminations and withdrawals.) That zero net cash flow matched the amount in 1996.
Europe-only regional portfolios had a $400 million net asset outflow last year. As InterSec reported, $1.3 billion of inflows were offset by $1.7 billion of terminations or other withdrawals.
Thus, whether the money was from newly created portfolios or terminated managers, Scottish Widows captured the bulk of initial funding allocations to Europe-only portfolios last year.
Several reasons explain why many U.S. funds haven't invested regionally.
To InterSec's Senior Vice President Jim Waterman, factors include: a lessened need to control allocations to Japan's market now that its weighting in major indexes has shrunk; the tendency of managers with territorial restrictions to perform worse than those without such limits; and, the fact that some other European managers have had highly publicized difficulties.
Thus, while interest in regional investing "is not dead, enthusiasm for it has been dampened," Mr. Waterman said.
But Scottish Widows' pan-European portfolios have avoided such problems. For the one-, two- and three-year periods ended Dec. 31, Scottish Widows' European equities portfolios ranked in the top decile of the universe of Pensions & Investments' Performance Evaluation Report. For the five- and 10-year periods, it ranked in the second decile.
Those showings have appealed to clients.
"They are excellent," lauds Peter Gilbert, CIO of the $23 billion Pennsylvania State Employes' Retirement, System, Harrisburg.
The fund hired Scottish Widows in March 1996, giving it about a $150 million European equity portfolio. That portfolio is now about $280 million, even though the fund has not added money to it.
Not only is that because of European markets' strong showing, but because Scottish Widows has beaten the benchmark it manages against -- the Morgan Stanley Capital International Europe index -- by about three percentage points a year on an annualized basis, Mr. Gilbert said.
While the Pennsylvania fund has three Europe-only managers -- including two active ones -- Scottish Widows has been the group's best performer, he said.
Afsaneh Mashayekhi Beschloss, pension director of the $11 billion World Bank pension fund, Washington, is "very pleased" with Scottish Widows' "performance and approach to markets."
The World Bank fund hired the firm in early 1997 for a portfolio of undisclosed size. Ms. Beschloss touts the firm's "bottom-up approach to stock picking" in which the firm's European equities' director Albert "Morillo has a good track record," she said.
Clients in the U.K. evidently have had less reason to cheer. According to a recent article in The Scotsman newspaper published in Edinburgh, Scottish Widows has "implemented a top-level shakeup as a first step toward improving its long-term investment performance."
As part of the overhaul, Stan Pearson, co-head of U.K. equities, and Ken Robertson, head of bonds, have left. Leslie Robb, who had been co-head of U.K. equities, was reassigned to "facilitate the restructuring," Mr. Griffith said. The shakeup followed a review by Orie Dudley, who became the firm's CEO about five months ago.
However, Mr. Griffith said, the shakeup had no bearing on asset management for non-U.K. clients. The underperforming portfolios and their managers, he said, have been used only by U.K. clients.
In fact, the number of managers of pan-European equities portfolios -- used by U.S. clients -- have expanded over the years, Mr. Griffith said. In the past year, the seven-person team headed by Mr. Morillo added two people, Mr. Griffith said.
For its pan-European portfolios Scottish Widows uses a bottom-up stock and sector selection approach and runs concentrated portfolios averaging 30-35 stocks, Mr. Griffith said. The overall strategy involves picking stocks expected to outperform over the next 18 months, thus curbing portfolio turnover.
A key to success has been managers' eye for picking stocks at the "turning point" in the way the market views them, Mr. Griffith said. Thus, in Europe, SWIM would be looking for such situations as companies undergoing a restructuring, and they would have management poised to make significant changes.
Some of SWIM's stock holdings include those of Alcatel Alsthom and AXA-UAP SA, both in Paris, and Credit Suisse Group, Zurich, Switzerland. While, Alcatel and Credit Suisse both have new management, and Credit Suisse also potentially could become part of a consolidation, insurer AXA "is becoming a financial conglomerate" demonstrating "new energy," Mr. Griffith said.
In terms of marketing, the firm accepts only portfolios of $100 million or more from U.S. clients, and thus concentrates marketing on larger institutions. Overall, SWIM manages 94 separate portfolios for clients in the U.K. and America, 95% or more of which are for U.K. clients. In the U.S., SWIM has six institutional clients, including five pension funds.
The firm limits business to larger portfolios in order to justify the level of service it provides, Mr. Griffith said. Every month, "clients get a detailed review of their account. Reports include extensive quantitative and qualitative information on their portfolios," he said. Scottish Widows, which began marketing in the U.S. in 1994, has so far had no defections from American clients, Mr. Griffith said. But success has made him slightly nervous about the future. Although no clients have yet talked of redeeming some money from their Scottish Widows European portfolios, he has wondered if this could happen because good performance could push portfolios' sizes above their targeted allocations.
One question is whether interest in regional investing will pick up. In Mr. Griffith's view, "There is a small, but I sense growing, interest in Europe-only portfolios. But it's still relatively small."
Nonetheless, he's "talking to several (more) large funds" that seem likely to make regional allocations this year, he said. This year, he's hoping SWIM will attract at least another $500 million from North America.
Meanwhile, he said, glimmers of interest are surfacing for another Scottish Widows offering. Over the past six months, some clients have inquired about Scottish Widows' Japan-only management capability, he said. This is coming partly because of investors' disenchantment with the performances of their existing Japanese equities managers. As a result, Scottish Widows may soon broaden its marketing horizons in the U.S. But for the foreseeable future, Europe-only portfolios will remain Scottish Widows' premier offering in America, Mr. Griffith said.