Scots have traditionally had a reputation as prudent savers and shrewd handlers of money. The concept of putting a wee bit aside for a rainy day (and there many of those in Scotland) has developed into a $440 bn (£310 bn) fund management industry. Today, financial services is one of Scotland’s oldest and best-known industries, alongside fine malt whiskey, of course.
The Scottish capital of Edinburgh in particular has been a magnet for funds, and has become even more so in the last few years, benefiting from a number of mergers and spin-offs in the UK insurance sector. Lloyds TSB, for example, the UK clearing bank, moved its investment management arm up north when it bought Edinburgh-based Scottish Widows in 2000, bringing the total value of funds under management for the company to $120 bn (£84 bn). Edinburgh-based Aegon UK’s merger with Scottish Equitable and Guardian Royal Exchange has also served to boost the Scottish capital’s status as a leading financial center in Europe.
‘These independent arms are now rather chunky in size, aggressive and anxious to grow,’ observes Ray Perman, chief executive of Scottish Financial Enterprise (SFE), a private body representing the financial community in Scotland. ‘This inflow of funds and managers has cemented Edinburgh’s reputation as a prudent and long-term investment management center.’
Today there are more than 20 medium to large investment management houses based in Edinburgh, along with a good number of smaller niche players, handling a large bulk of the funds under management in Scotland, roughly $285 bn (£200 bn) of which are invested in equities.
Natural assets
Visitors to Edinburgh are in for a treat. As the famous Scots writer, Robert Louis Stevenson, once boasted of Edinburgh, ‘No situation could be more commanding for the head of a kingdom; none better chosen for noble prospects.’ Perched on picturesque volcanic rocks and crags, the city’s collection of historic castles and green parks lends an air of old world splendor and style to the modern capital.
It is precisely this blend that has drawn not only tourists but also a substantial pool of financial talent, much of it escaping from the fumes and congestion of London. ‘The lifestyle here is better than in some of the other big financial centers,’ confirms Ken Forman, global strategist for Standard Life in Edinburgh. ‘This has a bearing on attitudes and affects job performance. It’s why Edinburgh attracts the talent and the money.’
This relatively relaxed lifestyle has also had some influence on the style of investment management. ‘Ten years ago I would have said yes, there is a dominant style of investment here. There used to be a definite longer-term view on investment markets, with little interest or worry about market swings,’ recalls Forman, who has been working in the Edinburgh fund management industry for 30 years. ‘But now there is global pressure to take shorter-term views and Scotland will have to pay attention as well.’
Still, the prevailing style remains long-term growth management. ‘The fund managers here are looking for long-term value, they are stock pickers and they don’t follow trends or charts,’ says SFE’s Perman. ‘For example, during the dot-com craze, it seemed that Scottish funds were missing out as they weren’t buying into them. But in the crash, their longer-term views proved to be prudent.’ As a result, Perman recommends that senior management and IROs selling their equity stories communicate sound fundamentals, transparent accounts, good management and access to markets and products that have long-term potential.
Eclectic style
Standard Life, which boasts around $106 bn (£75 bn) under management worldwide and controls about 2 percent of the UK stock market, has an ‘eclectic’ style of investment, professes Forman. ‘We try not to lock into either growth or value [stocks]. We look for change. If a company’s performance is down but we can see there is a positive change ahead, we will invest, whether they are a value or growth company,’ he explains.
It is therefore important for companies to communicate these changes and potential influences on the company’s stock performance. The investment giant also combines both a ‘top-down’ and ‘bottom-up’ analysis of stocks, so companies are advised to have a thorough micro and macro picture of themselves before coming to the table.
‘We look at macroeconomic factors and investor behavior to identify opportunities in the market. How is the economy growing and what is changing? But a bottom-up analysis is also very important. We look on a country basis at the drivers of the market and sector, analyst expectations and so on.’
Forman is currently bullish about equity markets, though biased in favor of cyclical stocks because he believes the interaction between economic and monetary trends will see a recovery, and stocks sensitive to this upswing will benefit. According to amounts of money invested, Standard Life is keen on US, UK, continental European and Pacific basin stocks.
Mid-cap specialist fund Friends Ivory & Sime sticks to the more traditional growth investment philosophy prevailing in the Scottish capital. ‘We look for growth stocks – companies with the ability to sustain above average growth and dividends,’ says Rodger McNair, director and head of UK specialist funds. With around $5.7 bn (£4 bn) under management in the Edinburgh office and $50 bn (£35 bn) UK-wide, Friends Ivory & Sime has made mainly FTSE 350 investments. McNair says he zeroes in on companies that have strong balance sheets, are generating surplus cash, show market leadership, and are able to sustain pricing.
Tiny but shiny
Martin Currie, a small (‘We’re tiny but shiny!’) independent Edinburgh investment management company with mandates totaling $8.5 bn (£6 bn), is another growth specialist. ‘We are looking for growth at a reasonable price, or Garp,’ says Ross Leckie, communications director. ‘We will often deviate aggressively from the MSCI index if we see the right opportunity.’
Martin Currie managers make some 3,000 visits a year to companies around the world in a mix of top-down and bottom-up analysis, while as many as four or five companies a day come to its Edinburgh office. The firm’s fund managers like to see the CFO and CEO of a company, especially when non-Gaap financials need explaining. But don’t come with too much detail, he warns: ‘Information is no longer of value.
We don’t need to hear about your company history and past performance. We can find that out through our brokers and on the internet. We need a view on your prospects, what you are going to do next, and the effect of earnings.’
Forman from Standard Life agrees that his first preference is to meet with the CEO or CFO, although the position of the IRO within the structure of the company and his access to company management and information will have a bearing on his preference. ‘We want to understand as much as possible and test out ideas and different scenarios,’ he says, ‘Sometimes an IRO will be able to deal with it, sometimes they may not.’
The city’s sell-side community is very small and is probably not worth a visit if on a tight time schedule. ‘It’s not like New York and London where companies regularly meet with the sell side,’ observes Leckie. ‘The community here is really too small.’
Though sell-side firms like Deutsche Bank and State Street have an increasing presence in Edinburgh, their operations tend to be on the transactional and back office sides while their analysts and brokers are concentrated in London. So if a company is using the sell-side firm to target Edinburgh investors, London is the usual gateway.
Effective targeting
A good source of information for visiting companies is the SFE, a private body whose members represent all the financial services groups and their support services, including public relations. The SFE’s web site, www.financescotland.com, has good background information about who’s who within the financial community along with briefs about each of the investment management companies, banks and pension businesses in Edinburgh.
Although group presentations are a good way to quickly disseminate cohesive messages about your company, the compact size of the Edinburgh investment community – as well as the preference of most individual fund managers – means a company should make time for one-on-ones with all the medium to large funds they want to target.
Peter McGrail, director at PRM, a strategic design consultancy specializing in corporate communications, stresses the importance of targeting the right audience to sell the equity story through ‘excellent preparation and excellent follow-up.’ He notes that most companies forget to do the post-event follow-up. ‘It is important that they follow presentations with one-on-one meetings,’ he advises.
Although one-on-ones are crucial, McNair from Friends Ivory & Sime has this recommendation for companies spending only one day in Edinburgh: have a couple of one-on-ones in the morning for larger investors, host a group lunch for six to eight smaller investors, then finish off with a few more one-on-ones in the afternoon. ‘But don’t forget that smaller investors may have significant holdings in your company and they will expect private meetings,’ he cautions.
Homegrown help Edinburgh’s IR and financial PR service providers such as Tayburn Corporate, Penny Haywood PR and Citigate Smart are also on hand to provide guidance on who to target, how to approach the investment community and how to get in contact with the media.
The majority of media titles in Scotland are homegrown, though London-based publications are of course readily available. ‘Edinburgh is quite unusual in that investors here tend to read the Scottish newspapers rather than UK newspapers,’ observes Richard Neville, deputy editor of Scotland’s only homegrown business newspaper, Business a.m., which, according to Neville, has more readers in Scotland than the Financial Times. ‘The investment community here is looking for market movers. They may already have the numbers, but the media here can give the story behind the numbers.’
Neville recommends that companies coming to Edinburgh for the first time make the effort to meet and talk with local specialist financial reporters. ‘Even if there is no story, it means you get on their radar screens,’ he points out. Furthermore, Neville says that while media briefings are important, five minute one-on-ones after the briefing with individual reporters are crucial to getting that exclusive equity story into print.
With such a lot to do during a typical roadshow visit, it’s fortunate Edinburgh is such an easy city for visitors to navigate. The financial community is clustered around the city’s west end and Charlotte Square, and it’s easy to get around either by hailing one of the plentiful and affordable local taxicabs, or on foot. It is also advisable to avoid the city during the Edinburgh Festival when, for three weeks in August, the population swells to twice its normal size, despite the fact that many of the locals choose to get out of town for the duration of the festival for a bit of peace and quiet elsewhere.
