LONDON -- An inadequate internal structure combined with adverse market conditions have cost Schroder Investment Management Ltd. dearly in the past 12 months as it has lost important mandates and seen remaining mandates reduced or revamped.
SIM is one of the few remaining independent international investment advisers and has had at least six mandates cut or removed in the past 12 months.
Plan sponsors and consultants have become increasingly concerned over the U.K.-based money manager's performance and have been asking whether SIM is a victim of difficult investment markets or its own worst enemy.
In its midyear report, SIM's parent Schroders PLC, London, admitted it had lost assets under management in the United Kingdom, although new business from outside the country had offset some of these losses. It said "market movements" were responsible for the bulk of the L13.2 billion ($22 billion) increase in assets under management to L132 billion for the end of the six months ended June 30.
Bad news
Since the beginning of this year a number of SIMs clients have put the firm under review, cut back its mandates or simply dropped it as a manager.
The L2 billion Phillips Pension Fund, Croydon, last month announced it had dropped SIM in favor of Dresdner RCM Global Investors Ltd., London, to run a L225 million global equity portfolio. The fund picked Dresdner for its "more appropriate" and "aggressive" equity strategy, said Alan Stone group pensions manager.
Also last month the L400 million Compaq Computer Ltd. Digital Pension Plan dropped SIM as sole manager for a L90 million global equity mandate in favor of a multimanager approach from Frank Russell Co. Ltd.
Earlier this year the L375 million pound sterling Schlumberger PLC U.K. Pension Scheme, London, cut back its exposure to SIM and gave a L90 million U.K. equities mandate to Baring Asset Management.
Not just in the U.K.
But the asset losses are not limited to the United Kingdom. In February, Pensionskasse Schweizerischer Elekrizitatswerke, Zurich, Switzerland, dropped Schroder Capital Management, New York, from a roughly $40 million small-capitalization equity mandate due to underperformance, said portfolio manager Franz Winkler.
"We are not at all happy about losing mandates and we will do everything we can to win them back," said Nicola Ralston, chief investment officer at SIM.
Appointed in January to the newly created position of CIO in order to specifically address performance problems, Ms. Ralston is in the hot seat at SIM. A veteran of 20 years at Schroders, it is her responsibility to improve the money manager's performance record, which slumped during 1997 and 1998, and bring back new business.
Ms. Ralston attributes SIM's recent loss of business to a combination of extreme market volatility and internal difficulties that have prevented the money manager from taking advantage of global investment opportunities.
"It's partly the market environment and partly the way we have done things, or not done them," she said.
But she is quick to point out that roughly half of the assets lost in the past 12 months have been given to index managers. She said this reflects the current fashion for passive management among U.K. pension trustees rather than any direct slur on SIM's performance.
Indeed, the past two years have been tough for active managers as a whole.
Performance gap
In the United Kingdom in particular there has been extremely wide divergence in performance between a few blue-chip equities and the rest of the market. Valuations for this top tier of stocks rose to unprecedented heights during 1997 and 1998. These prices were a little too high for comfort for a money manager such as SIM, which focuses on equities with reasonable valuations.
"Our focus on growth at a reasonable price has obviously hurt us more than a manager that has been prepared to pay any price for growth," Ms. Ralston acknowledged.
Unfortunately, SIM's short-term weak performance came at a time when many U.K. funds were reviewing their mandates and asset allocations in order to meet minimum funding requirements imposed by law in 1997.
"Obviously that has contributed to some of our loss of assets, but we certainly don't feel that all of the mandates lost have been due to underperformance. Some mandates have gone from equities to bonds, balanced to specialist, or the trustees have decided to have a completely different style of management," she said.
But Ms. Ralston acknowledged SIM made internal mistakes that prevented it from taking full advantage of new investment trends, particularly in relation to technology stocks that have tended to move in line with global trends rather than domestic market factors.
Organizational shift
Historically the group has been organized along regional lines with specialists focusing on particular geographic markets.
"I think the benefits of being organized on such a regional basis are diminishing, and conversely, the benefits of being organized to take more account of global developments are increasing. We have had crucially important industry trends which have overwhelmed national economic cycles, particularly in the technology sector," she said.
The group recognized this trend four years ago and set up a research team to look at global sector analysis and bring more of an international focus to stock selection.
But the venture largely failed to translate into better performance because the global research team's analysis was not incorporated into day-to-day stock-picking decisions by individual managers.
So in the past nine months Ms. Ralston has merged the London research teams into one group, from three separate divisions split along regional lines, in order to bring a global focus into the heart of SIM's money management.
"It's no good having good ideas or even a good investment process if you don't deliver performance to the client at the end of the day. My job is to make sure organizational structure does not fall in the way of good decisions and is really designed to focus on end performance," she added.
'Formidable' boss
During her 20 years at Schroders, Ms. Ralston has worked as both fund manager and analyst and in 1995 was appointed managing director of SIM (U.K.).
Market sources who have worked with Ms. Ralston rate her highly as a fund manager. One described her as "formidable," a character trait that probably will be vital when trying to shake up procedures and structures at one of the bluest of Britain's blue-blooded investment banks.
"One of the key objectives of my role is to make sure we leverage our resource -- in other words, we make it work for us, and if something isn't working, we should change it or perhaps not do it," Ms. Ralston said.
"Just because we did something in a certain way in the past does not necessarily mean that is the way we should do it in the future," she said.
She also is in the process of setting up a dedicated portfolio risk analysis team based in London.
"You can't win back confidence without performance, but performance on its own is not enough either. You have to know how you achieved that performance and whether it is repeatable or not."
Despite these organizational changes, the firm will remain wedded to its focus on valuations.
"We don't believe in trying to pick the long-term winners and just shutting our eyes as regards the price. That is a recipe to lose money. We buy the ones we think justify the price we can buy them at."
Broader view
The dominance of index managers among U.K. pension funds might make it difficult for SIM to win back business. While focusing on maintaining the U.K. business, the group also hopes to build assets under management in the United States, Japan and continental Europe, where there is strong interest in the firm as a specialist manager, she said.
Market sources are aware of some of the organizational changes Ms. Ralston has implemented but said it could take time for these to filter through to better performance.
In the face of competition from much larger international investment banks, SIM's ability to maintain and win business in both balanced and specialist mandates will rely not only on making more efficient use of its existing resources but also knowing its limits.
"SIM should not try to replicate the megamanagers by being all things to all clients. Being medium sized is not a bad thing as long as you know your limits," said one observer.
