BGI wins the ETF round | Top marks for Goldman Sachs
UNTIL RECENT CHANGES of strategy, Barclays Global Investors and State Street Global Advisers seem to have followed a similar path. The world’s largest institutional fund managers, they have both built up about $1.4 trillion in assets under management, predominantly through their passive quantitative businesses. “It’s nearly impossible to say which one you would choose when they go head to head in a pitch for business for passive mandates,” says a consultant who prefers to remain anonymous. “They’re 10-ton gorillas that joust at the top.” Indeed, the power and size of BGI and SSgA is well illustrated by the refusal of any external consultant, not just this one, to comment on them on the record.
However, despite the similarities between BGI and SSgA, group decisions this year at both firms to reorganize senior management indicate that there are far greater differences in culture between the two than outsiders have generally identified. BGI has been aggressively building up its active and hedge fund business with an attitude more in keeping with investment banks. SSgA has taken a steadier and broader approach, with less focus on active management and more on geographical expansion.
For both firms, however, the pressure for profitability is on. Barclays plc president Bob Diamond has said he wants BGI to contribute more to group profits than its current 9%; State Street Corporation CEO Ron Logue has said he wants SSgA to double its contribution to group profits to 25%.
Higher-margin products will be an essential element if profits are to be increased, and BGI has a clear headstart with its significantly larger offering of actively managed funds. But SSgA’s broader global approach could have a longer lifespan. Will depth or breadth hold the key to profitability?
Changing the guard
When SSgA CEO Tim Harbert died last year, only one candidate seemed to be in the running to replace him – CIO Alan Brown. Brown was a firm favourite with clients, employees and consultants, and was credited with the success of SSgA’s European business, alongside Nigel Wightman, head of European operations. So it came as a surprise when Logue promoted SSgA’s largely unknown head of global relationship management, Bill Hunt, to fill the position at the end of January.
A series of senior departures ensued, including Brown and Wightman, leading consultants to question whether Logue had made the right decision. “Much of SSgA’s reputation in Europe had been built around Alan Brown and his team,” says one. “He was very personable and very visible, and it was regarded as a big risk choosing Hunt over him.”
Fund management market participants had another surprise in September, this time from BGI. Diamond reorganized BGI’s senior management from a joint-CEO structure to a single-CEO structure, choosing unassuming US-based Blake Grossman over UK-based Andrew Skirton. “Up to that point, BGI had looked extremely steady, and Andrew was a popular guy in the market,” says one UK fund manager. “The market regarded the news with a degree of concern.”
Both sets of changes at the top caused a stir initially, but consultants say that neither produced the turmoil that might have been expected. Staff were disgruntled temporarily, and clients, they say, barely batted an eyelid. At BGI, in particular, the reason for Diamond’s decision to appoint Grossman over Skirton was completely clear, and underlined where the firm’s priorities lie: firmly in active management.
“Co-head structures are notoriously difficult at fund management firms, and it’s likely that Diamond, in his new role overseeing Barclays Capital as well, didn’t have time to be managing two CEOs at BGI,” says a former Barclays employee. “That he chose Grossman over Skirton, however, was clearly a call on his part of where revenues are coming from. Skirton was considered to be on the indexing side, whereas Grossman was all about active.” Indeed, while the active business constitutes just 22 % of BGI’s assets under management, it accounts for 60% of profits.
Better performance
The shift into alpha-focused products has been well conducted. BGI had been dabbling with active strategies since the mid-1970s but began marketing itself as an active manager in earnest in 1979 with enhanced index products that aimed to produce 1% to 3% above a given benchmark. It wasn’t until 1993 that competitor SSgA began to offer enhanced strategies. It is a product that both firms battle head to head on in Europe. In the US, though, consultants say, SSgA has yet to make a mark. This partly explains the large differences in assets under management. BGI has $103 billion in enhanced index products, while SSgA has about $70 billion.
Performance in the enhanced index business at BGI has been good but where the product has perhaps paid off most is in its role in the development of BGI’s $12.5 billion hedge fund business. The quantitative models used to determine stock selection in enhanced indexing could be used in long/short hedge funds. The theory is that if your quantitative research tells you which firms you should not invest in, that information should not be wasted but instead used to select stocks that should be shorted.
BGI has aggressively pushed into the higher-margin hedge fund space since 1996, when its first long/short strategy was launched, significantly adding to the group’s bottom line, and altering market perception of BGI as a slumbering spiritless indexer. In 2000, BGI contributed just 1.7% to group profits, compared with 9% today.
It is clear that BGI is focusing heavily on leveraging its resources in any way possible to create more hedge funds. Executives at the firm cite Goldman Sachs Asset Management as inspiration. GSAM has been incredibly successful at building up hedge funds, and is the third-largest hedge fund manager globally [see Top marks for Goldman Sachs, this issue].