Hermes' latest boutique marks firm's push to gain U.S. clients

Hermes Fund Managers Ltd. has lifted out a six-member global equity team from Fortis Investments in Boston as part of a bid to attract U.S. institutional clients.

Hermes, the money management arm of the £31.3 billion ($52.3 billion) BT Pension Scheme, London, will create a Boston-based global equity boutique in which the partners and employees will have a stake in both long-term profitability and value of the business. Hermes will hold a majority stake in the boutique.

The move is part of a major revamp of the firm into a collection of specialist investment boutiques under the Hermes umbrella.

Hermes executives are recruiting four distribution staffers, including head of U.S. sales and head of consultant relations, to join what will become the London-based firm's hub for global equity investing and gathering U.S. assets. Staff will also market Hermes' other offerings to U.S. investors.

“The U.S. will be a key strategic market for Hermes, where we plan to build on our recognized position as a global leader in good governance and corporate engagement,” company officials said in an e-mailed statement to Pensions & Investments. “We have developed a number of alpha capabilities that would appeal to U.S. (pension) plans, both corporate and public, each of which is already backed by significant pension assets.”

Hermes now runs very little in the way of global equities, having outsourced passive equity to Legal & General Investment Management Holdings Ltd. in 2007. Assets now run for U.S. clients are also minimal.

The new Boston-based boutique, Hermes Global Equities Advisors, will be seeded with $500 million from the BT Pension Scheme, the manager's biggest client and owner.

The team was chosen for its ability to “clearly articulate and communicate risk to the investor,” Hermes CEO Rupert Clarke said in an interview. “As a sophisticated investor, BTPS needs to understand what factors of risk are being applied in the portfolio.”

The team had reported to Saker Nusseibeh, formerly global head of equities and chief investment officer of global equities at Fortis. Mr. Nusseibeh was appointed to a new role as head of investments in Hermes, but the fact that he and his team both landed at Hermes was a coincidence, Mr. Clarke said. The team was recruited well before Mr. Nusseibeh came aboard.

Leading the team at Hermes will be Lode Devlaminck, CIO for global equities, and John Chisholm, director of marketing and client services for global equities. Mr. Devlaminck previously was senior portfolio manager — while Mr. Chisholm was head of investment specialists for equities — at Fortis Investments in Boston.

A spokeswoman for Fortis said it has not been decided whether the team will be replaced.

Hermes officials also plan to extend distribution into Europe from its U.K. base, and will look to add deep-pocketed clients such as sovereign wealth funds and large pension funds worldwide.

The expansion is part of a restructuring in which Hermes will look to reduce its reliance on BTPS and boost third-party assets in areas such as emerging markets, hedge funds of funds and real estate, while jettisoning assets in areas in which company executives choose not to compete, such as direct private equity and passive stock and bond strategies.

The cost: Assets under management fell to £21.6 billion as of Sept. 30 from £51.8 billion as of Dec. 31, 2007, and with assets went profitability.

“In the short term, our profitability is dropping, but that was always anticipated in the plan,” Mr. Clarke said.

Key to the three-year restructuring plan was backing from BTPS trustees, Mr. Clarke said.

“(Support from BTPS) has given us the breathing space to allow us to reinvest in the business,” he said. “BTPS could always go and source investment product off the street, but they also want a manager that they can work alongside.”

In December 2007, Hermes separated management of BTPS from the money management business, allowing the firm to focus on growing third-party assets. Most back-office tasks have been outsourced to Northern Trust Co.

Much of the restructuring plan has been implemented. But the challenge ahead is to grow third-party assets to more than half of total assets. Now, third-party business accounts for less than 10% — not including legacy assets managed for the £23.7 billion Royal Mail Pension Plan.

Mr. Clarke said one of the biggest challenges will be forging a new commercial culture at what was once a quasi-governmental organization.

Hermes officials expect the strongest growth to come from its new global equity boutique, as well as Hermes Emerging Markets and hedge fund-of-funds boutique, Hermes BPK Partners LLP. Also, the firm has seen strong interest recently in Hermes Real Estate and in Hermes Commodities.

More mainstream capabilities will eventually be added, but are taking longer to develop, he said.