Hermes prepared for new try in U.S.

Saker Nusseibeh, the man at the helm of Hermes Fund Managers Ltd., is preparing to take another crack at the U.S. money management market.

He is acutely aware of the dangers of a non-U.S. manager trying to break into the U.S, but says, “At some stage we have to be there — it is a major market.”

“Success in the U.S. for U.K.-based houses is usually based on a single product — those who attempted to enter the market with multiple products tended to fail. You have to understand the market.”

Mr. Nusseibeh, London-based CEO and head of investment, and his team of executives are talking to potential clients, competitors and distributors to get a feel for the market and a re-entry point. “It has been the graveyard of many U.K. fund managers that have tried to get into the States. We are rethinking how to do it now.”

As for the how and when this new attempt will take shape, it is too early to tell, a spokeswoman said.

But it will be a second coming for Hermes — which runs £26.9 billion ($44.8 billion) of assets as an active money manager — after its first U.S. boutique, Hermes Global Equities Advisors in Boston, closed this past April. In 2009, then-CEO Rupert Clarke told Pensions & Investments about plans for the boutique, seeded with $500 million from the £40 billion London-based BT Pension Scheme, the money manager's biggest client and its owner.

Hermes is focusing its large-cap global equity capabilities out of London, the spokeswoman said. The firm still has an office in New York with eight investment professionals, she said.

The boutique was formed from the liftout of a six-strong global equity team from Fortis Investments in Boston and was touted as part of a strategy to attract U.S. institutional clients. The team was led by Lode Devlaminck, chief investment officer for global equities, and John Chisholm, director of marketing and client services for global equities.

After about four years of trying, one source familiar with the situation said results were “mediocre,” and the team did not seem to be attracting the client and consultant support it needed.

The team leaders have since moved on. Mr. Chisholm joined Schroders PLC in the U.S., said a spokeswoman for Schroders. His role and Mr. Devlaminck's next step could not be learned by press time.

In 2012, Hermes Fund Managers brought in Melissa Whitney to head North American sales. She is based in London but spends a lot of time in the U.S. The firm is seeing interest from U.S. institutional investors in its specialist equity, global equity ESG and infrastructure strategies, the spokeswoman said.

And the manager has still picked up big-name allocations from around the world. In 2013 alone it won five new institutional mandates in North America, including the $183.8 billion California State Teachers' Retirement System, West Sacramento, Calif. A spokesman for CalSTRS said the fund made a $150 million commodities allocation to Hermes, and has funded $60 million so far.

The firm is also continuing to build in Asia. It has an office in Singapore, where it has been adding talent, and it is also committed to its established European presence. Big recent hires reinforce that —Mark Miller was named to the new title of head of U.K. and Middle East and North Africa institutional business, and Jennifer Stillman joined as director, consultant relations.

These steps are all helping Hermes in another quest — to continue to diversify its client base. Since 2012, Hermes has increased its total non-BTPS assets under management by 200%. Of its £26.9 billion as of March 31, 23.3% came from third parties not affiliated with the BT pension fund. Three or four years ago, Mr. Nusseibeh said revenue from third-party assets accounted for less than 8% of the total revenue. “By the end of this year, we expect 40% of our revenue to be non-BTPS.”

Hermes' structure is set up to continue to boost assets outside of its relationship with BT. The firm is built on a series of small teams, said Mr. Nusseibeh. “We don't have a house strategy, but we all communicate. We are a house of artisans. We build our business on people and talent rather than products.”

Mr. Nusseibeh came to Hermes in 2009 as head of investment from Fortis Investments and was appointed CEO in May 2012. He has strong views on the markets and the active vs. passive debate. “I believe in alpha — it is just a scarce resource right now,” he said. “We want to add value for all of our clients through performance.”

This year, he said, performance against benchmarks is in the 60% decile, “which is low of us, as we are usually around 80%. We tend to buy quality, which has underperformed recently.”

Mr. Nusseibeh turns pessimistic only when talking about the current markets.

“I'm really uncomfortable about the super-low interest rate environment. In my mind it should be seen as dangerous because it is so abnormal. The assumption that we will come out of it fine seems desperate — I can't pinpoint what is wrong, but it just feels wrong.”

There is an assumption, he said, that the U.K. and other markets will face a gradual tightening of interest rates, leading to a strengthened economy and it will be “a fairy tale. Well, the original Grimm's tales were quite scary. The markets tend to move in cycles — the major institutional investors are piling into index and smart beta strategies and just as that cycle seems to be coming to an end. And they are pulling out of alpha-based strategies just as it looks as if they have bottomed.”

But that is an opportunity and a challenge for the active manager. Returning to optimistic form, Mr. Nusseibeh said the “sweet spot” will be for Hermes to have up to £50 billion of assets under management.

No time frame on this ambition was disclosed.

“At the size we want to be, you cannot be a fund manager to everyone. We are looking to find between 10 and 20 major clients to form the cornerstones of what we are trying to do — BTPS is one. We have established a position that is strong in Europe, and we continue to strengthen that. My ambition is that, when someone who works at Hermes sits down in a pub and talks to journalists or someone else, they think this person must be at the top of their game.”