American invasion

LONDON — U.S. investment managers have muscled in on the U.K. market in an unprecedented drive to change the way pension assets are invested in Britain.

They have done this by providing an edge over domestic players with innovative strategies at the right place and the right time.

"While there are a number of excellent U.K. firms, our view is that the amount of investment talent out there in the U.S. is substantially greater than exists in the U.K.," said Roger Urwin, global head of investment consulting at Watson Wyatt Worldwide, Reigate, England. "We're increasingly focusing more manager research time on North American firms."

U.K. managers still have a strong hold on the market, but their U.S.-led rivals have managed to gain a bigger share of the market:

Boston-based State Street Global Advisors has £125 billion ($219 billion) in assets from the United Kingdom as of Sept. 30, compared with £18.7 billion five years ago.

Chicago-based Northern Trust Corp. increased its assets under management in the U.K. to $12.1 billion as of Sept. 30, from $1.2 billion in 2000.

Baltimore-based Legg Mason Inc.'s assets under management in the U.K. more than doubled in the past two years, to $5.9 billion as of Sept. 30. The company also stands to gain a substantial block of U.K. assets following its December acquisition of Citigroup Asset Management Ltd., which manages about $50 billion for clients in Europe, the Middle East and Africa.

Barclays Global Investors, the San Francisco-based manager acquired by London-based Barclays PLC in 1995, managed £33 billion for U.K. clients at the time of the takeover. As of Sept. 30, the company had £138 billion from U.K. clients.

As of Sept. 30, 90 of the 251 publicly announced new mandates from U.K. pension plans went to American-owned money managers. Those mandates totaled $10.6 billion, or 44%, of about $24 billion managed by U.S. firms for U.K. clients.

That's a far cry from 1995, when 24 of the 141 new mandates went to U.S. firms, according to statistics compiled by Holmes Research LLC, Louisville, Ky., which conducts marketing research for asset managers. With assets under management of about $1.6 billion, U.S.-based managers controlled about 8% of more than $20 billion in assets under consideration for the year.

Key to the growth were several factors that converged on the U.K. market, ultimately delivering a first-strike advantage to U.S. money managers who "outgunned their European counterparts," said Michael O'Brien, managing director and head of BGI's European relationship management.

"If you consider that 90% of modern finance theory was developed in the U.S, it's not at all surprising that (American-owned asset managers) are doing as well as they are," said Alan Brown, head of investment at the London-based Schroder Investment Management Ltd.

The turning point was when U.K. pension plans switched from balanced to specialized mandates in the late 1990s. U.S. players were offering more variety and complexity in investment strategies at a time when pension trustees were hungry for new ideas. With better-researched investment tools and business models, American-led asset managers were able to court consultants, who in turn had the trustees' ears.

Until the late 1990s, the U.K. had been dominated by four fund managers — Schroder, London-based Gartmore Investment Management PLC, Mercury Asset Management (acquired by New York's Merrill Lynch & Co. Inc. in 1997) and Phillips & Drew Fund Management (now part of UBS AG, Zurich).

When State Street opened its London office in 1990, the market was practically closed to foreign managers. It took the company until 1992 to gain just £900 million, or about $1.5 billion, in U.K. client assets. By 2000, assets under management grew to £18.7 billion and have since skyrocketed to £125 billion.

A turning point for SSgA was the 2001 acquisition of Gartmore's index fund business, which had about $25 billion in assets. The deal bolstered the firm's place in relation to rival BGI and provided the company with a wider platform for selling its enhanced indexing strategies.

Overall, U.S. players gained quite a few clients by offering more quantitative strategies, particularly in equities, analysts said.

The £25 billion Universities Superannuation Scheme Ltd., Liverpool, hired its first U.S. asset manager in 1999 to replace Phillips & Drew, said Peter Moon, chief investment officer of the scheme. The firm, Capital International Ltd., London, now runs an active global equities strategy totaling about 10% of its overall portfolio.

An asset allocation review the plan did two years ago led it to add two U.S.-based managers — Wellington Management International Ltd., Boston, now manages an active global equities strategy comprising 10% of total assets, and Goldman Sachs Asset Management, New York, runs a £1.25 billion active U.K. equities portfolio. At the same time, U.K. managers Schroder and Baillie Gifford & Co., Edinburgh, were dropped.

On the fixed-income front, American-imported investment strategies also gained a loyal following. At Payden & Rygel Global Ltd.'s London office, the team basically took its "global fixed-income warehouse of technology and expertise and parked it on the front doorsteps of consultants" in the late 1990s, said Robin Creswell, managing principal at the firm.

Los Angeles-based Payden & Rygel and other U.S. fixed-income managers revolutionized the way investors are able to extract more alpha from bonds and corporate debt by tactical hedges and other strategies that took into account the global market, consultants said.

"By the latter part of the 1990s, the old model was thrown away," Mr. Urwin said. "Trustees now recognize, and quite correctly, that successful investments require quite a lot of change. It's a fast-moving cycle of successful strategies adapted to new conditions from time to time."

Taking this a step further, enterprising U.S. managers have more recently incorporated a portable alpha methodology into either fixed-income or equities portfolios. Separating alpha and beta allows investors to allocate assets to the best alpha generators and transport alpha onto a readily available market exposure, or beta, often through the use of derivatives.

In this niche, U.S.-based firms "have done far better because they have a longer history of applying that strategy," Mr. Urwin said.