adapting to survive

The quote above, attributed to Dale Carnegie, author of seminal self-help book ‘How To Win Friends And Influence People’, neatly encapsulates the dilemma facing active fund managers. The benchmark-constrained, domestic stock strategies that served many European groups so well in the pre-crisis era continue to fall out of favour, as investors pile into fixed income vehicles in the search for yield. In addition, fund selectors are increasingly skewing their remaining equity allocations towards the emerging markets, and to low-cost passively-managed strategies for developed world exposure.

Groups which fail to adapt to the shifting landscape, and which continue to rely on the flagship products of the past, risk being usurped by nimbler and more innovative rivals. In a report published last year, Fitch urged fund firms to review their models with an eye to capitalising on their key areas of expertise, while scaling down non-core activities and expanding into certain sectors, such as international equities. Companies with “an active management style” would prosper in future, the ratings agency forecast, as well as those able to offer income-generating, global and moderate-volatility strategies.

Radical overhaul

None of which will have surprised Andy Sowerby, managing director of sales, marketing and client service at Scottish investment boutique Martin Currie. His company arrived at similar conclusions back in 2009 and embarked on a radical shake-up of its offering. By the end of 2010, it had, among other things: closed all of its domestic equity strategies, either by merging away products or converting them to global vehicles; acquired the European long/short business of hedge fund manager Sofaer Capital and unveiled an absolute return range; and poached an emerging markets team from one of its Edinburgh-based rivals.

Sowerby says Martin Currie’s decision last summer to mothball several planned additions to its Luxembourg-domiciled Global Funds (GF) range marked the final stage of the review process. By cutting the number of products it offers, the 130-year old firm aims to “do fewer things, better”, he explains, enabling it to ben¬efit from expected investment trends over the next five, ten and 15 years.

“The way to characterise Martin Currie is that we are an international equities business,” Sowerby says. “We are fundamental and driven by stock selection. We build international and regional portfolios, and within that we have a bias towards Asia and emerging markets. So we have strong credentials in Asia and the emerging markets, and we run long/ short strategies in European and Japanese equities.

“One of the things we did over the past few years was say: ‘If we are not going to be competitive at something, we will not do it’. So we handed money back to investors, we pulled out of strategies and we focused the firm down to a smaller range of products. And that is what the firm stands for – it stands for those products, because we have got the right skill-set behind them, to deliver the right outcomes for investors.”

Positive reaction

The company is already reaping the rewards of its decision to enter the absolute return arena. Investors have responded favourably to the long-term track record of Michael Browne and Steve Frost – the former Sofaer Capital managers now co-running Martin Currie’s European Absolute Alpha Fund. According to data from Martin Currie, Browne and Frost’s long/short strategy returned more than 100% (in dollar terms) from its launch in January 2001 to the end of 2012 – a performance which comfortably outstripped that of the MSCI Europe Index, and generated less than half of the MSCI benchmark’s annualised volatility.

Sowerby says that during the second half of 2012, assets in the strategy rose from $80m (€60m) to more than $200m – about $30m of which is managed in the Ucits fund. He adds: “We are seeing a lot of interest in both the [Europe and Japan absolute return strategies]. Both of those markets have had their own challenges, for their own reasons, so investors have tended to be substantially underweight in both Japanese and European equities in recent times. A long/short, absolute return approach is an attractive way to manage the opportunity set [in these markets] – it recognises that you need to manage market exposure actively, alongside your stock selection.”

Unconstrained success

While demand for Martin Currie’s long/short strategies is rising, its long-only emerging market and Asian offerings have experienced the biggest growth. More than $500m flowed into the firm’s Asian long-term unconstrained (ALTU) equity strategy during the past five years, for example, and a fund based on the approach has already garnered $100m since its addition to the GF range last May.

The 25-stock strategy is benchmarked against Asian GDP growth, and run with an absolute return mindset – an approach which lags markets when prices are rising strongly but outperforms when indices are trendless or falling, according to Sowerby. Over time, ALTU has achieved a return broadly in-line with Asian stock markets, with one-half to two-thirds of the volatility, he adds.

Meanwhile, the firm’s six-strong emerging markets team, headed by industry veteran Kim Catechis, has amassed assets of more than $600m since it defected en masse from Scottish Widows Investment Partnership in 2010. Sowerby expects the growth to continue.

“We have a proven team with a ten year-plus track record together,” he says. “They have a clear process, and strong risk management, portfolio construction skills. They integrate ESG [environmental, social and governance factors] into their investment process, which is an important differentiator. And they have a lot of capacity, because they came here with no assets. From a standing start, they have done a very good job on performance, and we have seen a lot of interest in them from institutional investors.”

Best of the best

Indeed, Sowerby says he is “delighted” at the way all of Martin Currie’s hires have bedded-in over the past three years or so (18 people joined the investment floor in 2010 alone). He singles-out John Pickard for particular praise.

Pickard arrived from UBS Global Asset Management in Zurich, where he served as European head of equities. As Martin Currie’s head of investment, he oversees the portfolio management and sector research teams, giving him responsibility for the firm’s entire investment approach.

“John has made a real difference to the company,” Sowerby adds. “Under his leadership, with the deep resources that we have in place, we are confident about the outlook for the firm – and very sure of what we are doing, in terms of driving alpha from stock selection.”

Foothold in Europe

Now that the right products and people are in place, Sowerby says the onus is on him, and his sales, marketing and client service colleagues, to raise awareness of Martin Currie’s offering – particularly in continental Europe, a region which accounted for just 12% of the company’s assets under management at the end of December 2012. The firm has gained traction in Switzerland, Germany and Austria since establishing a Zürich office in 2010, with German investors displaying a particular appetite for its Asian equity capabilities. Other core markets include the Nordic and Benelux countries, where it services clients in local languages from the UK, he adds.

Face-to-face contact is key to the brand-building process, and the company will rely mainly on educational investor events, as a means of getting its message across. “[Events are] efficient for us, but importantly they are efficient for the client – to spend a couple of days with them, to talk through what we are doing, why we are distinctive, and how we can add to what they are trying to do,” Sowerby says.

“So that requires a lot of shoe leather and it takes time – we have a long way to go for Martin Currie to become a well-known name across the continent. But we are becoming more recognised, particularly in the key areas of Asia, emerging markets, and European long/short. And those things will stand us in good stead.”

Eyes on the prize

With $8bn in assets under management, Martin Currie remains a relative minnow in the European fund industry. But the firm’s forward-thinking ethos and willingness to “do and dare” have positioned it for growth – precisely at a time when investor appetite for focused, actively-run equity strategies appears to be returning.

“The whole risk-on, risk-off trade led people to become more passive, rather than use active managers, and the bond market has been rewarding,” Sowerby adds. “But we have been patient – talking about what we do, how we do it. And increasingly investors have been interested in speaking to us about equity market valuations, and where they sit versus history and relative to other asset classes. That is refreshing. It has not been like that for some time.”