Scottish money managers are on the comeback trail.
After seeing their collective investment performance tarnished through much of the 1990s, with the exception of Baillie, Gifford & Co., Edinburgh, the resurgence is being led by building society subsidiary Britannia Asset Management; life insurers Standard Life Investments, Scottish Equitable Asset Management and Scottish Mutual Assurance PLC; and boutique manager Glasgow Investment Managers.
Meanwhile, previously revered names such as Murray Johnstone Ltd., Martin Currie Investment Management Ltd. and Edinburgh Fund Managers PLC have lagged far behind as managers of U.K. pension accounts.
"There's been probably a 15-year desert in Scotland, apart from Baillie Gifford," said Nigel Russell, head of NJR Research, an Edinburgh consulting firm.
Superior performance by Scottish houses couldn't come at a more propitious time. The lock that the Big Four London-based managers -- Mercury Asset Management, Schroders Investment Management Ltd., Phillips & Drew, and Gartmore Investment Management PLC -- have held on the U.K. pension market has fallen apart.
Circle expands
Some of these firms reportedly lost more than L5 billion ($8 billion) in net business last year because of a combination of poor performance and a shift to more specialist management structures.
As a result, pension executives and consultants are looking at a much bigger circle of managers, although so far it's indexed managers such as Legal & General Investment Management Ltd. and Barclays Global Investors that have reaped most of the gain.
The challenge now for the "new breed" of Scottish managers -- beneficiaries of a century-old reputation of independence -- is to convert their strong track records in pooled funds into segregated pension business.
"We compete against the houses in London," said Nathan R. Parnaby, managing director, client funds, for Standard Life in Edinburgh.
Leading the pack is Glasgow-based Britannia, a unit of the Britannia Building Society. Assets under management have soared to L7.7 billion as of Dec. 31 from L300,000 in 1990 when the unit was formed. Strong short- and long-term returns have brought in external mandates, chiefly for its pooled pension vehicle.
Segregated accounts
Last year, Britannia started pulling in major segregated accounts. It snared L452 million from six clients, including U.K. equity mandates of L300 million and L70 million, respectively, from the London Electricity Board pension fund and the Kingfisher PLC pension fund.
Britannia officials attribute the performance to its team-oriented approach, the combination of manager and analyst roles, and its flexible investment approach.
That flexibility has paid off. Britannia overweighted small-cap and midcap stocks in the past 10 years -- except for 1997 and 1998 when the manager plowed into large-cap stocks because managers believed technical factors were driving the market, said Francis Ghiloni, head of business development for Britannia's pooled products.
Similarly, Britannia was three times overweight the Leeds, England-based Combined Actuarial Performance Services Ltd.'s median exposure to U.S. stocks in much of the 1990s until 1998, when it reduced exposure to slightly below the median, he said.
Meanwhile, Britannia has just named U.K. equity chief Peter Reid as chief investment officer, while the European and U.K. equity teams have been combined under Margaret McLaren, who was previously responsible for U.S. and European equities.
Chief Executive Danny O'Neil said he would consider forming a joint venture with a U.S. or European bank to create overseas distribution for Britannia's strategies. Alternatively, the parent company could buy a unit trust operation for its assets or could take on board assets and personnel as it did in 1997 when it picked up L800 million in accounts and about 20 staffers from Scottish Amicable Investment Managers.
But Mr. O'Neil is concerned about growing too fast or disrupting Britannia's existing clients through an acquisition. "It's important that we don't upset our franchise," he said.
Meanwhile, Scottish life insurers are hoping to parlay strong pooled fund performance into accounts in the segregated pension market.
Take Standard Life. In November, after four years of planning, the Edinburgh-based insurer spun off its investment management team into a separate unit.
Mr. Parnaby said the manager is showing up in consultants' beauty parades, which has resulted in six new clients during the past three months. Segregated clients include the pension funds of Vickers PLC, Taylor Woodrow PLC and Stagecoach Holdings PLC.
And Standard Life Investments has just named Keith Skeoch as chief investment officer of Standard Life Investments, filling an 18-month vacancy. Mr. Skeoch, now managing director, international equities, at HSBC Securities in London, is expected to enhance the manager's asset allocation process. Stock selection now accounts for 75% to 80% of the manager's performance, Mr. Parnaby said.
Changing image
Still, Standard Life Investments will have its work cut out to shed its image as an insurer. Only 10% of its L69 billion in assets under management comes from external mandates. The goal, he said, is to generate L20 billion in organic growth in the next five years.
Similarly, Scottish Equitable spun off its investment department into a separate unit at the end of last year. Scottish Equitable Asset Management is a major player in the pooled pension market, with L4.8 billion in its "B" pooled vehicle, and another L800 million in its higher risk "global fund."
Russell Hogan, managing director, said the insurer's 1994 acquisition by AEGON contributed greatly to the firm's improved performance.
Not only did AEGON instill focuses on shareholder returns and financial discipline, it also developed a strong management team, a flatter structure and awarded employees AEGON stock options, which were not available when Scottish Equitable was a mutual insurer, he said.
But the manager is just sniffing at the edges of the segregated business, winning one corporate client in the fourth quarter of 1998. "We anticipate we have to make more progress in the pooled fund market first, before we go after the segregated market," Mr. Hogan said.
However, the manager also is pitching for business in Italy, and is using its relationship with AEGON to pursue business in Spain and Hungary.
The recent recruitment of Colin McLatchie, formerly chief operating officer and chief investment officer of PanAgora Asset Management's London office, to the new post of chief operating officer should aid the manager's overseas efforts.
SEAM "is one to watch," NJR's Mr. Russell said.
Scottish Widows revamp
Meanwhile, Scottish Widows Investment Management, Edinburgh, has been revamped under new chief executive Orie Dudley.
Since he joined the firm in January 1998 from Barclays Global Investors in London, Mr. Dudley has shaken up Scottish Widows in what he terms "a managed revolution."
He has overhauled investment policy, adopted a sectoral approach to stock selection, overhauled the management structure and installed benchmarks and risk parameters, and aligned compensation with responsibilities.
U.K. equities were the firm's biggest weakness. "When I took it (the firm) over, there were 120 stocks and it looked a lot like an index fund," he said.
Mike Corless, the new head of U.K. equities brought in from Threadneedle Asset Management, trimmed the portfolio to 70 large-cap, active stock picks.
The new approach has passed its first test with flying colors, showing superior performance for the second half of 1998. The rate of client losses for the pooled fund have halved. Scottish Widows Managed Fund returned 2.3% in the second half of 1998, compared with 0.9% for the median pooled mixed CAPS fund.
Still, it will take more than six months' performance to persuade the market. But the improvements, as well as continued interest from U.S. pension funds for the manager's pan-European equities strategy, with $1.57 billion in new business last year, make Mr. Dudley optimistic.
The boutique
While the Scottish insurers have the challenge of turning around supertankers, Glasgow Investment Managers represents the success of the boutique manager.
"We've all chosen to work for a smaller firm," said Susan Murray, marketing director. "We do our own thing. We please ourselves. We all have equity in the business."
A specialist in U.K. equities, Glasgow has chalked up a stellar long-term return, returning 19.2% a year for the 10 years ended Dec. 31 -- six percentage points above the median pooled-fund return measured by CAPS.
The L175 million fund is ranked first for the five- and 10-year periods, and second for the three-year period. The source of Glasgow's powerful performance is its ability to build relatively small portfolios based on various investment trends.
