Ask virtually any leading fund management institution the world over what their outlook is over the next ten years and they’ll tell you that they are in a growth industry. Funds under management are booming and things are looking rosy in the years ahead. Governments in developed markets are waking up to the problem of ageing populations and developing new ways to encourage individuals to save for the future.
The biggest expansion is in equity funds under management. The latest figures from Technimetrics show that worldwide institutional equity holdings topped $10 trillion for the first time last year. That’s nearly a 13 percent increase over 1995 and it’s not all attributable to a bull run.
The value of equities in US mutual funds has more than doubled since 1994, when it stood at $709.6 bn, according to Technimetrics’ latest International Target Cities report. ‘Mutual fund growth both influenced and reflected the market performance. Record inflows of over $220 bn into equity funds helped push stock values higher, which in turn attracted more investment in mutual funds.’
But it is not just in the US that things are moving fast. European mutual funds rocketed last year by $202 bn and the biggest increase was in equity investment, according to figures from Lipper Analytical. Nor is it just mutual funds which are moving more prominently into equity in the region. Continental European pension funds are slowly becoming more adventurous in their levels of equity investment. Although, by their nature, pension funds will retain a healthy degree of conservatism in their risk profile, when they are starting from such a low base of equity investment, a relatively small percentage change in allocation can see massive swings into equity.
Some Asian countries are also opening up and expanding the freedom of institutional investors in their jurisdiction. For example, Singapore’s role as a fund management center was boosted last year with a 39 percent increase in total funds under management, according to figures from the US and Foreign Commercial Service. The number of fund management firms in Singapore grew correspondingly from 135 at the end of 1995 to 161 in December 1996 as the government released savings from the national pension fund into management by private investment firms.
Opportunity Knocks
As markets open up with such global trends in fund management, those institutions in a position to do so are leaping at the opportunities to expand. A Goldman Sachs report entitled The Coming Evolution of the Investment Management Industry points to various issues and strategies for competitive survival which several institutions seem to have already taken to heart. The report argues that over the next few years 20-25 institutions will come to dominate the global portfolio management industry. Goldman Sachs suggests that each fund management institution should carefully consider whether it wants to become one of the large companies which dominate the global industry or continue to compete over the long term as a niche player.
‘Companies which want to join the ranks of the large competitors must determine whether they have the resources and culture it takes to compete with some of the world’s largest financial institutions,’ notes the Goldman Sachs study. ‘Those that lack the necessary resources or culture may want to consider an alternative – finding a partner that can make the investments and provide the distribution facilities necessary to facilitate a massive growth in assets. Organizations that decide to compete as niche players must determine whether they have a competitive advantage that is sustainable over the long term and that will allow them to survive in an environment of increased competition from significantly larger companies.’
The last couple of years have seen a number of strategic moves by the world’s larger institutions seeking to consolidate their positions in the ranks of the big players. Some of the biggest moves include Dresdner Bank’s purchases of Kleinwort Benson in the UK and RCM in the US.
Dresdner continues to signal its intentions to acquire more investment management companies in the future. For the German mega-bank, the expansion of its fund management activities is key to its competitive position in the next century. Barclays has taken much the same tack with its acquisition of Wells Fargo.
Dresdner and Barclays are by no means alone among the large players, either in Europe or across the globe (see box, page 41). This year alone has seen mergers or takeovers between Axa and UAP; Morgan Stanley and Dean Witter Discover; and Bankers Trust and Alex Brown – all of which boosted fund management giants. Many of those not blazing the takeover trail are forging strategic alliances along the lines predicted by Goldman Sachs.
Who Goes Where?
Ian Sax, research director with The Carson Group in New York, which publishes the Who’s Who of Institutions and Mutual Funds, says that he has allocated one of his staff members solely to keeping track of new mergers and alliances in the fund management industry over the last six months. And he’s still having trouble keeping up.
Such activity can have significant implications for IROs because it can lead to rapid change of contacts – and centers – to be visited. Sax believes the takeover and merger mania will continue well into the future as the predators hunt down weaker targets which can significantly boost their own fund management capabilities.
Sax says it’s hard to say what all this consolidation means for IR professionals. ‘It is too soon. In many cases, the institutions themselves don’t know how they will be managing their assets in the future.’
But the indications seem to be that institutions are so intent on jumping into bed with each other – either to make bottomline asset gains on the buying front, or to make money on the selling front – that there is often too little regard for how the entities will synergize in the future. In the short term that may well mean that IROs are forced to visit portfolio managers at what is effectively the same institution in, say, London and California in order to realize the full investment potential of the assets under management.
Longer term, global consolidation could mean it will be possible to visit one institution in New York and tap into a wealth of funds from across the globe; or do a tour round Wall Street and achieve what is now only possible via a long global roadshow.
That’s a long way off, of course. In the meantime, companies wanting to diversify their shareholder base have much to gain from more careful targeting of roadshows.
For example, recent research by Edelman Financial in London indicates that few large UK companies are really making use of the expanding level of equity funds on their doorstep in continental Europe. One of the respondents even went so far as to claim that ‘there’s no money in Europe.’ Virtually all companies questioned said they regularly visited the US for one-on-one meetings but devoted relatively little time to the growing pool of funds across the Channel.
‘Continental Europe is not given the international IR priority by UK firms merited by its worldwide ranking in terms of investment in non-domestic European equities,’ argues the report. ‘In investment terms, UK plc’s international investor relations is overweight USA.’
The need for more careful consideration of what these developments in fund management mean for global IR is backed up by the findings in Technimetrics’ International Target Cities report. It points out that as ‘European equities under management continue to be concentrated in fewer hands, we can expect to see balances of funds shifting between the target cities in years to come.’
Veerle Berbers of Technimetrics notes the ‘big, big switch’ towards equities among continental European investors which is often not appreciated by those putting together roadshows. Certainly, the big centers are still worth visiting but there has also been tremendous growth in funds in cities like Stockholm which are rarely considered by international companies. Berbers adds that some of the huge Dutch pension funds have moved from investing around 5 percent in equities a few years back to around 20 percent today.
The lessons for investor relations professionals from these tales of shifting funds are clear:
Keep a constant check on what is happening over the next few years as consolidation in the fund management industry continues at a hectic pace;
Ensure you are up-to-date so that you save valuable time in maintaining contact with rapidly changing institutions;
Think and plan carefully when organizing roadshow schedules.
Equity fund management is a rapidly growing industry. Rapid growth implies rapid change – and that could mean that those who fail to keep up are left on the sidelines in the competition for capital.
Top Ten Fund Management Mergers/Acquisitions in 1997
Combined Assets Under Management
| 1. Axa and UAP | $500 bn |
| 2. Morgan Stanley and Dean Witter Discover & Co | $270 bn |
| 3. Bankers Trust and Alex Brown | $245.8 bn |
| 4. Zurich Group and Scudder Stevens & Clark | $200 bn-plus |
| 5. Prudential Corporation and Scottish Amicable | $175 bn |
| 6. Invesco and Aim Management Group | $155.1 bn |
| 7. Fortis Investments and MeesPierson Capital Management | $126 bn |
| 8. NationsBank and Boatmen’s Bancshares | $111 bn |
| 9. Royal Bank of Canada and London Insurance Group | $82.6 bn* |
| 10. First Bank System and US Bancorp | $49.5 bn** |
*Subject to regulatory approval
**Estimate of assets under management
Source: The Carson Group
Dining Out on Mutual Funds
There’s a whole lot of shaking up going on. In the fiercely competitive mutual fund jungle, predators have deep pockets and prey have little chance of going it alone. The latest to find its head on the auction block was New York’s Scudder Stevens & Clark, snapped up by the giant Swiss insurance conglomerate, Zurich Group, already the proud owner of Chicago’s Kemper funds.
Zurich’s latest meal has created a global money management shop of more than $200 bn under management, not to mention one of the top ten US mutual fund companies with at least $80 bn in assets. But what does it mean for IROs? Will they find themselves dealing with strange new faces investing in strange new ways at the new Scudder Kemper Investments, instead of their trusty old contacts?
The world’s portfolio companies have already been faced with a string of giants eating giants: the merger of Houston’s Aim Management Group with the UK’s Invesco plc; Michael Price’s sale of Heine Securities to huge Franklin Resources; and Morgan Stanley’s purchase of Van Kampen/American Capital.
But according to Peter Di Teresa, an equity fund analyst with Chicago’s Morningstar Inc, so far there hasn’t been much change in investment practices as a consequence of these acquisitions.
‘When Zurich took over Kemper, there was no real effect on how things were done there,’ he says. ‘Typically, if a firm’s style is doing okay, it makes sense to leave them autonomous. In the Invesco/Aim merger, for example, there’s been no effect and each firm remains independent. The only real change has been moving a couple of Invesco funds under Aim because their style was very similar to what Aim was doing.’
What about when the style isn’t doing so great? Scudder, for example, has come under fire for its old-school, academic culture in a business where aggressive genius is readily rewarded. So change may be in the cards. Di Teresa points out Kemper wasn’t doing so well when Zurich took over, but the Swiss didn’t go in and clean house. ‘I would not expect a radical difference with Scudder.’
Di Teresa notes that a measure of consolidation in the fund industry is outstripped by the large number of smaller investing shops popping up in recent years. ‘We are not seeing anything approaching a monolithic fund industry.’
And even if new fund money starts to slow down, consolidation does not necessarily follow. ‘A lot of the boutiques get major advantages from the fund supermarkets,’ he notes. ‘Without the supermarkets, they would have to partner or merge with other fund companies to get in the public eye.’
On the other hand, Di Teresa adds, a slow-down in the industry could make fund companies good, cheap acquisition targets – just like in any other business.
Under the UAM Umbrella
No public company will see United Asset Management on its shareholder rolls, even though the fund management group has over $180 bn under management. That’s because NYSE-listed UAM is actually a federation of 45 wholly-owned operating companies, or ‘affiliates’, which each invest independently.
‘Unlike virtually every other firm in the industry, UAM has a very strong culture of investment and operating autonomy,’ says Jonathan Hubbard, director of financial communications.
Hubbard explains that the core value of UAM is independence, with the affiliates even competing with each other for business. And, invariably, they stick firmly to their own investment philosophies.
‘Rather than trying to consolidate or regulate investment styles when firms join UAM, we feel it’s tremendously important to nurture them and let them retain their own cultures,’ Hubbard says. ‘Money managers like to work in an atmosphere where they have control over what they’re doing, where they feel they can make a difference.’
UAM believes that for most types of investing, there are no economies of scale to be found in consolidating the investment process. On the other hand, the firm maintains collective systems of distribution and client service. But even those are used on a voluntary basis.
‘We have always felt the investment process to be a small-group activity,’ says Hubbard. ‘It’s more efficient to do it in a small setting than in a large, bureaucratic, top-down setting.’
Over the years, about two thirds of UAM’s growth has come through acquisitions as well as its own start-ups. The rest of its growth in assets under management has been internal.
Most of UAM’s business is institutional, with large pools of capital managed by affiliates like $20 bn Provident Investment Counsel in Pasadena, California. Dallas-based Barrow Hanley Mewhinney & Strauss, also running around $20 bn of investments, manages most of the equity in Vanguard’s Windsor II fund, and its equity portfolios emphasize low price-to-earnings and low price-to-book ratios as well as high current yields.
Hubbard says UAM’s mission is to manage all classes of assets in all parts of the world. So the company has been focusing on expanding its international arms with purchases like last year’s acquisition of London-based Rogge Global Partners, a fixed-income manager. Now around 15 percent of its assets are invested overseas.
Investor relations officers might find some targeting ideas on UAM’s Web site at www.uam.com. It includes descriptions of all the companies’ fund management affiliates, including the names of key personnel.
Final Frontier
Defining a ‘smaller’ fund manager is a difficult task. Like fractals, the fund management industry is composed of ascending and descending orders of magnitude. The boundaries between these levels are fuzzier than ever.
Case in point: When an IRO meets someone at an investor conference wearing a Mutual of New York badge, they’ll soon find out MoNY runs about $15 bn – but mostly bonds. The MoNY operative may point them to a subsidiary, Atlanta-based Enterprise Group, a $4.2 bn family of retail mutual funds. As a manager of managers, Enterprise in turn will guide them to one of its sub-advisors which collectively manage over $250 bn.
A rare bird in the investment jungle, Enterprise sells institutional management expertise mainly to retail investors. It selects specialist institutional asset management firms, each with a unique style, to clone their institutional portfolios. ‘We are an institutional fund disguised as a retail fund,’ says Victor Ugolyn, chairman and CEO of Enterprise Group. ‘We retain sub-advisors with a disciplined buy and sell approach to manage portfolios for us as they would for big institutional clients.’
Ugolyn’s agenda for growth has been remarkably effective. Since taking the helm in 1991, when Enterprise had just $200 mn under management, Ugolyn has overseen fast asset growth. Strong performance and acquisitions have set the pace for the climb. A deep pocketed owner hasn’t hurt either. Enterprise’s latest offerings, set for a July 17 launch, are a small company growth fund and a growth and income fund, both acquired from Retirement Systems Group in New York.
In tandem with consulting firm Evaluation Associates, Enterprise continuously monitors managers. ‘We have a stable of sub-advisors we are very comfortable with,’ says Ugolyn. ‘We are the registered investment advisor but it is rare for us to micro-manage. That’s what we hire sub-advisors for.’ However, Enterprise does establish guidelines for managers to follow, meaning their ‘cloned’ portfolios are somewhat tweaked. Some investments considered risky are prohibited, while rogue managers, drifting from their assigned style, are occasionally reined in.
Ugolyn gets many calls from small companies seeking a new investor. ‘If they make sense, we are delighted to introduce them to a sub-advisor,’ says Ugolyn.
(See box, page 45: The Clones)
The Clones
Enterprise comprises 13 mutual funds, nine investing in equities. Each fund is managed as a separate mutual fund issuing its own shares. At least 65 percent of the net asset value of the equity portfolios is invested in common stock. Most portfolios invest in US exchange-listed or OTC securities. Each portfolio can invest up to 10 percent of assets in foreign securities and 10 percent in illiquid securities. Each Enterprise fund is a ‘clone’ of a larger institutional fund.
Growth: $234 mn. Montag & Caldwell, Atlanta. Controlled by Alleghney Corp. Ron Canakaris looks for low-risk growth stories. Income is incidental to decision-making. He targets global consumer, healthcare and technology sectors. Enterprise Growth is the only fund to post total returns that land in the top 10 percent of all stock funds for the past year, three years, and five years.
Growth & Income: Formerly known as the Retirement Systems Core Equity Fund before being acquired by Enterprise. Launched July 17, RSI will continue to manage the portfolio. James Coughlin considers a broad range of economic and financial indicators and invests in a diversified group of blue chips. More aggressive than the Equity Income Portfolio, but less than the Growth Portfolio. Looks for above average earnings growth and lower price earnings ratios on forward earnings versus the S&P 500.
Small Company Growth: $13 mn. Known as the Retirement Systems Emerging Growth Fund before being acquired by Enterprise. Launched July 17. Managed by Pilgrim Baxter & Associates, a subsidiary of United Asset Management. Gary Pilgrim looks for short-term gains. His sell bell sounds when appreciation has peaked, he sees something better, or he wants to avoid a market decline. Typically holds about 70 stocks, often in the healthcare and technology sectors. Pilgrim himself rarely meets with IROs.
Small Company Value: $22 mn. Gamco, Rye, NY. Gamco, a subsidiary of Gabelli Funds, became an Enterprise sub-manager last year. Usually buys smaller caps. Uses proprietary research techniques to find public companies selling at a discount to their private market value. Manager Mario Gabelli looks at long-term earnings trends and for a valuation catalyst such as increased investor attention, a takeover, or change in management. Focuses on free cashflow. Industry concentrations include media, aerospace and cellular phones.
Equity: OpCap Advisors, New York. A subsidiary of Oppenheimer Capital. Eileen Rominger looks at assets or earnings to pinpoint undervalued stocks. Seeks undervalued assets, valuable franchises, undervalued securities compared to peers, substantial and growing cashflow and/or a good price to book value. Invests in Big Board but also on the domestic listings and foreign securities, provided they have ADRs.
Capital Appreciation: $120 mn. Provident Investment Council, Pasadena. Subsidiary of United Asset Management. Jeffrey Miller is a bottom-up buyer of small companies with earnings momentum and strong financials mostly in healthcare, software and business services.
International Growth: $48 mn. Brinson Partners, Chicago. A subsidiary of Swiss Bank Corp. Managers use their research and proprietary valuation systems to spot value in cashflow, earnings assets and revenues. Currency strategy a vital factor. Only buys EAFE index securities. Long term outlook. Country concentrations emphasize Australia, France and the Netherlands. Invests in exchange-traded securities, but occasionally scans for opportunities on the OTC markets.
Managed: $239 mn. OpCap (Oppenheimer Capital), New York. Asset allocation vehicle. Richard Glasebrook does not use a theoretical model when determining asset mix. Seeks large cap value. Wants businesses with high regard for maximizing share value. Prefers a bottom up active dialogue with company management. Holdings include Citicorp, and McDonnell Douglas, now poised to merge with Boeing.
