Global investing with a reliance on regional expertise. That’s the crux of the message from Tristan Hillgarth, chief executive of Invesco Fund Managers as he waxes lyrical about his firm’s plans for the future.
Indeed, Hillgarth would certainly seem to be in the right place to know what he’s talking about. He sits at the head of the London-based division of a global investment management powerhouse. After Invesco’s merger with US-based mutual fund giant Aim in February of this year the combined group accounts for some $177.5 bn under management. Listed in London and New York, the renamed group – Amvescap – has stated its intention to be one of the major players in the investment management world in the next century.
Hillgarth’s side of the operation has clearly set out to establish its local presence over the past few years, basing Invesco’s investment expertise in offices from Tokyo to Paris, Hong Kong to Buenos Aires – and beyond. Each office sources and invests funds from its local region and manages those sourced from other branches of the group if they are destined for its particular area of expertise. So, while the Tokyo office is busy trying to pick up mandates from Japanese pension funds and investment trusts, it’s also managing the Japanese-oriented section of an international portfolio from, say, a UK-based client. ‘Likewise, they can draw on the resources of the group to service their own clients,’ he adds. ‘For example, a Japanese international portfolio can draw on the expertise of London, Atlanta, Hong Kong and so on.’
Hillgarth believes this reliance on local knowledge has been key to Invesco’s expansion. It’s just plain common sense, he maintains. Even in today’s global village, a native Chinese-speaking, Hong Kong-based fund manager is going to have easier access to that region’s market than someone in London. If nothing else, just for the sake of not having to sit on a plane for so long.
Up to the Top
It’s a two-way process, though. Local expertise is one thing, but regional isolation obviously is not desirable when you are managing global portfolios. Investment managers in each region feed their knowledge up to a global asset allocation committee that meets every two weeks by conference call. The call brings together the regional chief investment officers with the group’s strategists who between them hammer out decisions on bond/equity splits and consider any currency implications.
Tony Broccardo, the London-based chief operating officer, says that there’s always a danger that such committees can get bogged down in data. To help avoid this, a fairly detailed report on the current status of the investment process is circulated to all its members before they pick up the phone. ‘It’s so we’re not just reviewing lots of money supply or GDP numbers or divisions thereof. We’re actually looking at the result of our process with a lot of the grind taken out.’
The asset allocation committee debates and then makes recommendations which are circulated throughout the company. It’s then the job of the chief investment officers – who have taken part in the decision-making – to ensure that everyone within their region also understands the opinion of the committee.
‘It’s a collective approach and the information is disseminated virtually immediately,’ says Broccardo. ‘That’s important because if we do decide to sell, for instance, UK equities, each of the regional teams will be able to explain to their own clients how much UK equity is being sold and why.’
‘The decisions of the asset allocation committee are pretty much set in stone,’ continues Broccardo. ‘There’s an awful lot of debate which goes into the committee’s decisions. There’s a lot of work that goes into looking at the data and ensuring that we continue to have confidence in our past decisions. Once a decision is made it’s made.’ The chief investment officers are then responsible for ensuring their teams implement the decisions and that portfolios are moving towards the new targets.
Value Play
With asset allocation in place, it’s down to the nitty-gritty of stock-picking – searching for value in equity investments. ‘The investment managers are looking at the level of corporate earnings and the sustainability of those earnings compared to the price they have to pay for them,’ says Broccardo. ‘They’re looking for good sustainable earnings growth. Within each region the screening techniques used to isolate those companies may change fractionally. For instance, certain factors are better at doing that for Japan than elsewhere in Asia.’
The teams running large regional funds have a list of stocks appropriate for a global account and, basically, set out to buy from that list making choices according to their knowledge of those stocks. It’s back to that local expertise again, and in-house research is crucial. Indeed, Broccardo is so proud of the efforts of his fund managers that he believes anyone would be hard pressed to find another institution that does as much work in visiting companies.
‘If we’re taking money out of the UK, then the person who deals with the UK element will make a judgement as to which are the correct stocks to sell at that stage,’ says Broccardo. ‘Fund managers go out and talk to the companies that rank the best on their list and then deselect stocks for various reasons. They’ll end up with a core group of companies that they like. Each team is constantly doing this – reviewing their portfolio on the back of their own research.’
Secondary Sources
Aside from the reliance on primary research, Broccardo acknowledges that broker research is important and can be a ‘useful and efficient way of getting information.’ He and his colleagues are also increasingly turning to the Internet, although there is a feeling that it isn’t sufficiently developed enough yet for it to be a leading source of information. ‘I personally use the Internet for my job in terms of the asset allocation research,’ he adds. ‘There are many institutions, companies and universities around the world which I can now access in an afternoon. We get a lot of use out of it. Central bank data is becoming increasingly available from it, for example. It’s not a leading source as yet but as it becomes more reliable it may be so,’ Broccardo predicts.
Video broadcasts or conferences, as a means of conveying their message to Invesco’s fund managers, are used extensively. Broccardo believes that video can be incredibly useful – providing a visual means of contact, particularly when you haven’t met people before. ‘If it can save people getting on a plane for the sake of a two hour meeting then I widely welcome it.’
Technology may well be crucial to much of Invesco’s asset allocation and stock-picking techniques, but Broccardo insists it is the fundamentals of the process which have stood its investments in good stead. ‘Our process has stood the test of time. It’s been in place for over a decade and has remained in place because it makes sense. There’s a lot of technology behind it to improve it but the basics remain the same.’
That process relies on a fine balance between the use of historical data and the contemporary research described above. ‘It weighs up the longer-run ability to work out extreme valuations with the current dynamics of the market,’ says Broccardo. ‘What’s happening to earnings momentum? What are the drivers behind inflationary pressures and interest rates? We continually weigh these things up. While the valuation side is backward looking – unashamedly backward-looking – the current dynamic complements that very well.’
Earnings Confirmed
Broccardo gives the example that equity markets currently look highly valued in the historical context. ‘But the earnings indicators are confirmed by our bottom-up stock pickers. They’re making some 2,000 corporate visits a year and are highly sensitive to what we’re looking at and can refine those numbers very easily. They’re confirming that Europe is enjoying 20 percent earnings growth; the UK, less, maybe 5 percent after taking into account sterling strength; Japan 10 percent plus; the US, still 10 percent plus. So, earnings remain strong and compensate for high valuations. Finally we believe that the inflationary environment and interest rates still remain favorable factors. So, while valuations are stretched, the two contemporaneous drives remain and we are fairly fully invested in equity markets. Our strategy within those differs – we’re overweight continental Europe, parts of Asia and Japan, neutral US, underweight UK. The overall thrust of our view is that – while we will continue to watch markets very carefully – we remain fairly confident of equity market returns.’
Standing Out
That’s good news for investor relations officers, but what can they do to make themselves stand out from the crowd for Invesco’s stock-pickers?
Broccardo says that the quality of financial reporting is key to getting noticed – it’s the data which the investment community pores over, so providing the best possible data is par for the course. ‘There’s no better way to increase that confidence than to adopt internationally recognized standards. It certainly helps the international investor and hopefully makes things a lot simpler. A lot of the international standards tend to be a simplification of a lot of things which are quite technical and that can only help the individual investor as well.’
Hillgarth sums it all up by arguing that you can’t beat those two old favorites – transparency and openness – if you want to win friends and get your stock noticed by the investment community. ‘A well-managed company will understand the need not to produce surprises for the investment community and will devote time and effort to its investor relations.’
What’s in a Name?
Invesco’s link-up with Aim in March of this year to form Amvescap caused a bit of a stir in the investment management world. Previously formidable players in their own rights, by joining at the hip the two firms are hoping to play off their complementary talents. Analysts and leading press commentators widely praised the deal at the time it was announced for the neat fit between the two firms. Aim is strongly positioned in the US retail market, while Invesco struts its stuff on more of a global scale with institutional clients. With some $177.5 bn under management, the new company is split into three divisions: US retail, US institutional and Invesco global.
‘Fundamental to our philosophy is that we want to be three things: global, independent and investment management focused,’ says Tristan Hillgarth. ‘Independence is enhanced by our merger with Aim because 45 percent of the stock is held by employees. Aim was largely owned by its employees. It is a pure fund management group but gives us a different distribution in the US. In fact, the beauty of the Aim deal is that there is virtually no overlap. All senior managers are committed to being global, too – we’ve recently opened offices in, for example, Germany, Italy and Holland.’
Hillgarth doesn’t rule out the possibility of the company making further acquisitions in order to boost its standing, but notes it is content to wait until the right candidates come along. He points out that making investment management acquisitions in the States is one thing, it’s a completely different ball game in, say, continental Europe, because of the different way and rate at which the industry had developed. For example, most sizeable asset managers on the Continent are linked with banks and, as stressed earlier, getting into another type of business in order to expand investment management capabilities isn’t part of Amvescap’s plan – although Hillgarth is careful not to rule out the possibility altogether. ‘If there was an Aim business in Europe or the Far East then, no doubt, we would like to acquire that too – but there aren’t any or not that we know of anyway.’
Whatever happens on the acquisition front, Hillgarth remains extremely upbeat about the future of the investment management industry and believes Amvescap has positioned itself to be among the leading few players predicted to dominate in the next century.
He points to ageing populations across the developed world and the desperation of governments to offload their state pension responsibilities onto the private sector. It’s happening everywhere, he notes. Amvescap recently picked up a mandate from the Bolivian government to manage part of the state pension fund. That would have been unheard of just a few years back, but now many parts of South America are following suit. And that’s to say nothing of the opportunities in continental Europe.
Despite the positive vibes, Hillgarth warns that the development of equity cultures in countries which have previously relied heavily on fixed-income won’t necessarily be a completely smooth ride in the years ahead. ‘There are opportunities for us in these markets but we also need to develop local talent. I think there’s a trend towards development of an equity culture in continental Europe but it won’t necessarily go in a straight line. I think there may be some hiccups along the way.’
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