U.K. money managers look to regain prominence in U.S.

U.K.-based money managers are gearing up for a new British invasion of the U.S. institutional market.

U.K. managers more than a decade ago were among the first to offer international, global and emerging market equity and bond strategies to U.S. institutional investors. Since then, they've largely surrendered those early leads.

Now, U.K. managers are looking to — and seeing some success in — new areas in which they hold competitive advantages, such as alternative, passive, LDI and multiasset strategies. In recent years, U.K. institutional investors have made significant moves into these asset classes.

Managers making a push in the U.S. include: Aberdeen Asset Managers Ltd.; Newton Investment Management Ltd.; Schroder Investment Management Ltd.; and Legal & General Investment Management Ltd.

“We've got a very high-quality client base from the emerging markets” strategies that have been well received by U.S. institutional investors, said Gary Marshall, CEO of Aberdeen Asset Management Inc., the Philadelphia-based U.S. arm of Aberdeen. “If clients know us for that, we can talk about other strategies with them.”

Aberdeen hopes to have a hedge fund-of-funds strategy for U.S. clients by year end. It also plans to increase the number of specialist real estate funds of funds in North America.

Aberdeen's North American assets under management grew nearly 70% to $49.8 billion in the 18 months ended June 30, according to data provided by the company.

Newton's U.S. business doubled in 2009 to $4.1 billion as of Dec. 31, 2009, but has since slid to $3.3 billion as of June 30. And Schroders' assets in North America grew 57% to �22 billion ($35 billion) since Dec. 31, 2009.

U.S. investors have shifted interest from global equities to Newton's “real return” strategy, a multiasset dynamic asset allocation approach that delivered positive returns through 2008, said Helena Morrissey, CEO of Newton, London.

Newton recently won a $50 million real return mandate from the $5.3 billion Arkansas Public Employees Retirement System, Little Rock, which the fund is treating as a global tactical asset allocation strategy. Ms. Morrissey said the firm hopes be able to announce a larger win next month.

“It is small beginnings ... people are dipping their toe in,” she said. She said that follows the path U.K. investors took about three years ago, before making larger commitments to the real return strategy. Newton manages more than �5 billion in the strategy for both defined benefit and defined contribution U.K. clients.

LGIM's U.S. institutional assets also saw a big increase, to about $19 billion as of June 30 from zero at the end of 2009. Although LGIM, the largest institutional manager in the U.K., runs about 80% of its U.S. assets for the U.S. units of its insurer parent, the company is committed to adding third-party pension fund clients, said Mike Craston, London-based managing director and head of the global institutional business at LGIM.

So far, LGIM has been gaining U.S. clients for its “stand-alone U.S. dollar credit mandates and credit attached to” liability-driven investment programs, he said. “That appears to be getting significant traction.”

But, because LGIM is a passive powerhouse in the U.K, “absolutely we are looking at whether there is an appetite for our passive capabilities in the U.S.,” Mr. Craston said.

For Schroders, its recent growth is owed in part to its standby strengths in global, international and emerging markets equities as well as in commodities, multiasset and absolute-return strategies, said Jamie Dorrien-Smith, CEO of Schroder Investment Management North America Inc., the New York-based U.S. subsidiary. (In the U.K., the “absolute-return” moniker has come to refer to non-hedge fund strategies that may or may not be multiasset but have absolute performance benchmarks, usually over rolling three- to five-year periods. Like Newton's real-return strategy, they typically employ dynamic asset allocation to avoid drawdowns and make the most of beta exposures.)

Timothy F. McCusker, partner and director of traditional research at investment consultant NEPC LLC, Cambridge, Mass., said U.K. managers could have a lot of success attracting U.S. clients to the dynamic asset allocation strategies — but few have presented themselves to NEPC.

LDI is also set for explosive growth in the U.S., pending an increase in interest rates (Pension & Investments, Oct. 3). “I would imagine there's a lot of opportunity there” once rates rise, Mr. McCusker said. When that happens, things will move quickly, so managers need to get themselves in front of U.S. consultants now, he said. “They can't come aboard after that move happens.”

But one industry expert who asked for anonymity had some doubt about the ability of U.K. managers to bring multiasset or LDI expertise to the U.S. market. “The challenge is that it's not easy to transport (LDI skills because) it tends to be quite market specific,” the source said, adding that the real opportunity for multiasset in the U.S. is in defined contribution, which is dominated by record keepers.

U.K. managers are relatively small players in terms of global and U.S. assets under management. Mondrian Investment Partners Ltd., London, is the highest ranked U.K. manager in both categories; it held 73rd place in terms of global assets and 52nd place in terms of U.S. tax-exempt assets in Pensions & Investments' annual Largest Money Managers Directory.

That wasn't always the case, said Kevin P. Quirk, founding partner and principal at Casey, Quirk & Associates LLC, Darien, Conn., a consultant to money managers. British managers were once a mightier force in the U.S., a dominance that faded in the past 10 to 15 years.

“They were the first global managers,” Mr. Quirk said. U.K. firms took an early lead in offering global, international and emerging markets equity and bond strategies to U.S. investors but as those spaces became more crowded, the managers were generally slower to build bottom-up investment processes that investors sought. “They really started to see their core businesses get eroded,” Mr. Quirk said.

A look at a list of the top 25 managers of active international assets for U.S. tax-exempt clients as of Dec. 31, 1995, is telling: Schroders ranked third, the first of seven U.K.-based firms on the list. Those firms have since either stalled in the rankings or have been absorbed by larger firms.

In P&I's most recent survey, Schroders declined to break out its total U.S. tax-exempt institutional assets by asset class, but even if its total U.S. assets under management were run in active international equities and bonds, the firm wouldn't have ranked in the top 35 as of year-end 2010.

And now, U.K. managers are boutiques, Mr. Quirk said. “The ability of these organizations to mount a substantial and sustained campaign for U.S. investors is naturally limited by (resources),” he added.

Some experts say a growing U.S. appetite for emerging markets equity exposure should benefit U.K. managers, many of whom have a lot of experience in the space. But NEPC's Mr. McCasker noted that many of the managers have since closed their emerging markets strategies because of capacity constraints, so “there's a limit to how much they'll benefit” from higher allocations.

Some managers — including some U.K.-based firms — are building small-cap emerging markets strategies. These could be even more capacity-constrained, but still could offer some opportunities for U.S. institutional investors in the near future.

“Emerging markets small-cap is an asset class we're very much interested in, and we're advising clients to start new asset allocations in,” Mr. McCasker said.

Schroders and Aberdeen have been doing business in the U.S. for some time. But for newer entrants such as LGIM, attracting clients will only get easier as their business grows, Mr. Craston said. “But you have to keep on delivering, and that's never easy.”