Ask SocGen Asset Management’s founders about how far they have come in their first three years in business and they all admit to sheer surprise.
In the white-hot competition of financial services it is unusual to see any trace of modesty or humility among players, yet such has been the speed with which SGAM has got into the game that everyone in the industry, both inside and outside the firm, has been taken aback.
“It’s phenomenal, I really didn’t think they could do it,” says one UK investment consultant.
Having set out in early 1998 looking to manage £5 billion within five years the firm hit that mark in its first two and until the markets fell last year was closing in on £7 billion within three. In fact its advertising at the time said, with a little bit of poetic licence, that it was already there.
“Each time we hit another £1 billion we would have a little glass of champagne in the office,” says Keith Percy, chief executive. “We obviously had drinks at £1 billion and then two, three, four, five and six but we didn’t quite get to seven. We were at about £6.8 billion at our peak but then we fell back a little with the markets and now we’re around £6.4 billion. We’ve had to put the champagne for number seven back on ice.”
If things continue for SGAM in the same manner in which they have gone so far the corks will not stay in those bottles for long. Against all the barriers to entry that the highly conservative UK pension fund market has in place, the firm was able to bypass the usual requirements of a three-year track record to leapfrog up the queue of fund managers and almost immediately start winning business.
Its first segregated mandate – a £100 million specialist UK equity brief with a target to outperform its index by 2% per year – came in from Devonport Royal Dockyard Pension Scheme just three months after the firm started managing money. Since then, it has secured 70 other mandates, from pension funds, insurance companies and retail investors and is now a firmly established player.
In fact SGAM has made enough of a splash to put other fund managers’ noses seriously out of joint. “It was quite annoying, to be honest, for us to have been talking to consultants, building up our track record and waiting to get on to the buy lists, only for them to come along and waltz straight into the party,” says a business development director from a rival London firm. “To an extent there seems to have been one rule for them and another for everyone else.”
At first glance it may seem that way, but that is to disregard the impact that Keith Percy and Nicola Horlick made on the market in their time at Morgan Grenfell, now Deutsche Asset Management.
“We underestimated how much kudos we’d earned, particularly me and Keith as a team, for what we’d achieved at Morgan Grenfell,” says Horlick, now joint managing director at SGAM. “They also knew it was continuing after we left and that reflected well on us – that we had built a good team which has stayed together and continued to produce the goods. I think that shows we did a good job there and I think that consultants think that too, which is why they’ve been prepared to back us at an early stage. They think we did a good job there, produced good figures and they reckon we can do it again.”
Great timing
Without necessarily planning it that way, SGAM in the UK could hardly have launched at a better time. By 1998 the vast majority of UK pension fund assets were polarized among five managers: the traditional big four of PDFM, Gartmore, Mercury and Schroder, with Deutsche a recent arrival among the group. PDFM’s performance problems under arch-bear Tony Dye were well known and Gartmore had also been struggling. Now Mercury and Schroder joined the list of weak performers. Most funds were using managers who were not producing the goods.
As a result there was a big swing towards index management, with Legal&General and Barclays Global Investors sweeping up huge sums of money from the active managers. Partly to offset this, funds were also switching some assets away from traditional balanced management to specialist. Where a typical fund might have previously had two balanced managers – almost certainly from the big four – managing half the fund each, now they were switching half the fund into passive management and handing the remainder over to a range of managers, each getting specialist briefs with high performance targets.
SocGen was able to capitalize dramatically on this and a significant part of its business has come in specialist UK equity accounts where it is being asked to outperform the index by up to 2% per year.
“The marketplace has changed dramatically,” says Horlick. “A lot of pension funds three or four years ago began to get very concerned about the fact that the big four were underperforming and they radically changed their structure. A lot of them have moved half their investments to index funds and the other half to take more risk. We appeared on the scene just at the moment when they were doing that and they equated us, being small and new, with high risk. This wasn’t necessarily true but we benefited from that trend.”
So arriving on the scene just at the point when notoriously cagey funds were preparing to take a flyer on new investment houses was serendipitous for SocGen.
John Richards, joint managing director with Horlick, left Mercury, now Merrill Lynch Investment Managers, in 1997 to help her take on the challenge of starting afresh. He could see then that the industry was about to change.
“As far as Mercury was concerned, it had become very big and in a way the market share of the big firms was unsustainable,” he says.
On top of this, the pioneering spirit that had sustained Mercury through its great charge to the top of the UK market was starting to wane, he says, partly because of outside pressure.
“There was a very strong trend in the industry towards more uniformity because the clients and their advisers wanted to see some form of house product,” he says. “With a firm as large as Mercury, with a background in entrepreneurial management where a large amount of discretion was being given to individual managers, that was a transitional thing which proved very difficult.”
Richards saw in Horlick and Percy’s new venture (though Percy was not yet allowed fully on board because of the Imro investigation into the Peter Young affair at Morgan Grenfell) an opportunity to get back to that pathfinding spirit. For Horlick, getting her old Mercury colleague Richards involved would lend extra ballast to the investment process, so crucial to winning over the all-important consultants, the gatekeepers of institutional business.
“Nicola and Keith had the advantage that they had gone into a business [Morgan Grenfell] themselves and turned it round,” says Richards. “So we had the best of both worlds.
We had people who clearly were investment people and we also had those with experience of taking an overall business lead.”
Three years down the line, he says, so far the plan has worked. “Gradually we’ve got our foot in the door, we’ve won some business and the consultants are now well versed in what we’re doing and how we’re doing it.”
What also undoubtedly helped the new firm was that, having brought in another Morgan Grenfell man in Rufus Warner as marketing director and Peter Seabrook from Flemings to run UK equities, it had a bulging contacts book.
“I should think between myself, Nicola, John, Rufus and Peter, we know a huge percentage of the market,” says Percy. “What helped us was that the team all had good track records elsewhere. We had recruited good people. Because we were a new company we were able to offer equity and attract them.”
So, despite some reticence from consultants, some of whom are still waiting for further proof of the firms pedigree, luck and timing added to the founders’ personal experience, had got the firm up and running.
“People were looking for new managers and we were able to convince them that what we had done in the past we could do here and part of the reason for that was the investment process wasn’t different,” says Percy. “We had done it before so it was a tried and tested method.”
Accentuating the positive
In looking to mark out SocGen’s investment philosophy, Horlick realized the importance of pushing active management, which had suffered against the high-flying indices of the preceding years. Active managers will struggle to beat the index in a bull market, but when things turn downwards it can play into their hands.
| Richard Branson | ||||||
“I am completely convinced, totally convinced, that active managers can outperform,” Horlick says. “Active managers went through a period when they didn’t do awfully well, which just reinforced the indexation camp, but people are going back to looking at active managers.”
When the markets fell, she adds, it brought it home to investors that index management was not necessarily the perfect answer. “Whenever you get a negative year in the market and you get negative returns, people realize that it isn’t quite what they thought it was,” she says. “They don’t seem to understand that it is not a guaranteed positive return, it’s a guaranteed return slightly below the market when you take into account the charges. When they see a negative return it brings it back to people that actually maybe active management does have something to offer.”
Here again, SGAM’s timing was good. As Richards points out: “The three years up to 1997 were completely different to the three years which followed.”
Huge volatility has characterized the markets over the past three years and it has been in this environment that Horlick, Richards and their team have been able to push their message.
Along the way they won the challenge thrown to them by Virgin’s Richard Branson, who was promoting his Virgin index-tracking funds.
SocGen, he wagered, would not be able to outperform the FTSE All-Share Index by 2%, after fees, over a three-year period. At the end of those three years, on March 17 this year, SGAM had won the bet. Meanwhile Branson’s funds over the same period had failed to track the index – the counter-bet that SGAM made to Branson.
Percy acknowledges that passive management does have a place. “By definition the average fund manager will perform averagely,” he says. “So if a consultant or client feels he can’t find an above-average manager he should use indexation, which is cheaper and less risky.”
However he contends that SocGen is more than capable of producing annual outperformance of 1% to 2%. “Certainly in UK equities, maybe slightly lower for the US and slightly more for Europe,” he says. “We’ve done it in the past and we can do it again in the future. It hasn’t been easy and we have had some difficult quarters, but the funds we started in March 1998 are all up against their benchmarks.”
Performance is everything
Although SocGen has suffered in individual quarters, over its three-year history nearly all its funds have hit performance targets.”I’m not saying it’s all been plain sailing but if you look at our retail funds or our pooled funds, which is the clearest way to look at it, I’m delighted with performance,” says Percy, who admits that not all SGAM’s clients will feel that way. “Is every single one of our clients overjoyed? One or two are not.”
Yet while the markets are so jittery Horlick is happy. “It makes life more interesting and I think that volatility is definitely here to stay.
“The reason markets have become so volatile is we have so much hedge fund activity these days, there’s so much shorting going on,” she says. “If you’re on the wrong side of that it can be very painful. A company that has a 10% profits downgrade can see its share price fall 50% because shorting a stock which is having problems is an easy thing for a hedge fund to do. If you’re a long fund that can be very painful.”
The other side of this, she argues, is that there are big opportunities to be had when stocks that should only have fallen perhaps 10% go down by 50%.
Richards adds that they are navigating through volatile markets successfully. “The challenge you have in institutional management is to try to shave off the peaks and troughs of that within the confines of what can be relatively risk-averse mandates,” he says.
“Your typical institutional mandate is looking for you to outperform the index by 1% or 2% per year and there are various ways you can try to achieve that,” says Richards, adding that there are some advantages that a new start-up firm has over established players, for starters they can be more nimble.
“You can try to make strong statements and assuming that if in three out of the five years you’re right you will meet that target.
Or you can try and manage your way through markets by trying to keep ahead of the curve each year,” he says. “With a small amount of money under management you have a much better chance of doing the latter than with large amounts where it’s very difficult to change your positions in the face of market volatility. The ability to change your mind or change your portfolio in these sorts of markets is a huge advantage.”
Horlick adds that in these volatile markets timing is more crucial than ever. “I think over time a good-quality company is basically a growth stock and will do what it’s always done, which is gradually to increase in value,” she says. “But around that line there is immense noise so you have to be terribly careful about the price you pay and the price you sell at because you can get moves of 20% in a week.”
As a recent example she cites Amvescap. “You have to be very careful about not panicking,” she says. “Amvescap has been up to £17 and down around £8.50 in the recent past and this week it’s moved from £10 to £12.50 in a week. Would I have paid £12.50? No. Did we pay £10? Yes. Did we pay below £10? Yes.”
With these sorts of ideas in mind SocGen is now getting ready for its next push. This will involve becoming more aggressive in its investment strategy. “If you set up a company from scratch as we did you can’t take massive risks,” says Horlick. “We’ve had to be reasonably conservative in order to ensure that we have a business. Now we have a business we intend to be more aggressive because the next goal is to build ourselves up from £6.5 billion to £20 billion. I’m happy to be more aggressive now that we have a clear base of funds, a clear vision of where we’re going, a clear identity, philosophy and culture.”
We’re not stars, honest
So far so good for SGAM yet possibly damaging to the extent of its future growth is the criticism constantly levelled at the firm that while there is no doubting Horlick, Richards and Percy’s abilities, there is not much below the top tier.
| SocGen Asset Management performance | |||
| Benchmark | Time Period | Relative Performance | |
| Europe Equity | FTSE WI Europe ex UK | 36 months to 31/3/01 | +8.6% p.a. |
| Balanced | CAPS Pooled Fund Median | 33 months to 31/3/01 | +2.8% p.a. |
| +2% Composite | FTSE All Share/FTSE350 | 33 months to 31/3/01 | +1.5/1.7% p.a. |
| Source: SocGen Asset Management/CAPS | |||
As one consultant says: “They have a star attached to each area but they don’t have a lot of depth in the team beyond that.”
This is an accusation at which the senior management bridles.
“The phrase star system is very emotive and you can’t avoid it,” says Percy. “People don’t believe this but it’s true that neither I, nor Nicola, nor any of the others believes in a star system. At Morgan Grenfell, as here, we very much operated a team system.”
As a general point about all firms he adds: “You cannot avoid the reality that some people are going to be better than others. So within reason you have to pay them more in terms of total remuneration.”
However, Percy says that at SGAM all fund managers, including Horlick and Richards, research stocks and each is responsible for one or two sectors. “So they are dependent on their colleagues for research ideas on all the sectors other than the one or two that they themselves research,” he says.
“The team is only as good as its weakest member. We don’t pay people on a formulaic basis that says if your fund has done better than the other you will get a bigger bonus because that encourages people to operate separately and not share ideas with other people.”
Richards takes up the argument. “One of the reasons why we also think we have an edge in our investment process is that, because we’re relatively small, we’re able to combine the research and fund management process,” he says. “A lot of the larger firms have now effectively divorced the two, which I think makes management to some extent a bit easier but you lose that creative spark in the investment discussion because the people running money here are researching companies day by day.”
Richards says nobody in the firm is too grand to get their hands dirty and this goes back to the theories being practised when he first joined SG Warburg nearly 20 years ago.
“Nicola and I both take an active part in the research process,” he says. “I cover the mining and oil sectors. It’s very unlikely that our opposite numbers in the other fund management firms are doing research. They are either supervising research or they are reading and discussing research. It’s quite tough in terms of time and effort but it really does keep you in the game.”
This is crucial for making the right decisions, according to Richards. “Investment is all about making judgements and in our business it’s also about making relative judgements,” he says. “Unless you’ve got something to start with you’ve got nothing to measure it against. So having all your senior people immersed in the investment process – in the game rather than watching it – is one of the ways we score.”
Richards freely agrees that consultants will take a view on the firm but says they should be impressed by what they see.
“If I put myself on the other side of the fence and I was looking at SG as a potential client or a consultant, first of all I would expect to see strong leadership in the investment process from the founding directors,” he says. “I would not expect to see John Richards and Nicola Horlick sitting in an office conducting an orchestra of bright hopefuls. I would expect to see them in there doing it.”
And sure enough Richards and Horlick sit in the heart of the open-plan office among their team. Only marketing head Warner and the administration heads have their own offices. “They keep me behind a door because I’m so noisy,” jokes Warner. Even Percy is easily accessible to the rest of the team.
Richards says this approach is helping the firm to attract new young talent and consultants can see this.
“Consultants are smart people, they soon work out whether you’ve got good people or not, they see them at meetings, they come in and quiz them, they ask them about shares and about how they involve themselves in the process,” he says.
Horlick says this open culture is crucial to the success of the business. “We run it in a very collegiate way, there are no secrets,” she says. “It is a very open culture and to give the impression that it’s all about stars is wrong. When it comes to selling the product, that’s what people are going to latch on to and so that’s an easy way to sell it which perhaps gives the wrong impression.” She says that consultants know that the firm does not have a star culture. “They know it’s not all about me.”
Nevertheless Horlick is still managing a large proportion of the firm’s assets and she recognizes that her next challenge is to raise the profile of the rest of her team.
“We’ve got to move away from ‘It’s got to be Nicola managing money’. There’s no way I could manage it all,” she says. “I was managing a high proportion of our money at one stage. I still manage a big chunk of our money but we do have an excellent team and I believe in giving them responsibility early and spreading the workload.”
To illustrate how this is starting to happen she proudly says that one of her younger fund managers just won a new account for the firm.
| Keith Percy | ||||||
Devon-sent client
If SGAM’s managers wanted to find someone to back up their argument that they are not running a star system they need only turn to their first-ever client.
Neil Skinner, pensions manager at Devonport’s pension scheme in Plymouth, could almost be quoting from the firm’s marketing brochure when he talks about them.
“We’ve got an excellent relationship with them and over the three years they have outperformed,” he says.
Skinner adds that when the firm pitched to them for the £100 million specialist UK equity mandate in 1998, it sent Seabrook, rather than Horlick, with John Richards to make the presentation.
“If it was a one-woman business it wouldn’t work,” says Skinner. “They sent a specialist UK manager for a specialist UK mandate in Peter Seabrook.”
Devonport’s changes in fund managers were highly illustrative of what was going on at the time. The £750 million fund decided to move money away from its balanced manager, Gartmore, following underperformance. It moved some assets to an index-tracking brief with Legal&General and then appointed two specialist managers: Capital International for overseas equities and SocGen for the UK.
Skinner says there were no concerns about the controversy surrounding Horlick, nor that the firm had no track record. “They had a clear vision and we weren’t bothered at all by all the stuff about Nicola and Morgan Grenfell,” he says.
“The trustees knew there was no background and no record to show but someone had to be first. We knew we were taking a chance but looking at the people we thought they could do it and we knew that, being the first client, we would get a very good service as a result.”
Three years down the line SocGen’s parents in Paris will also be delighted with the progress the firm has made.
SGAM’s group development strategy, which along with setting up the London operation included the acquisition of Yamaichi Capital Management in Japan, has now taken in the $1.23 billion purchase of US house TCW.
“We were largely European,” says Philippe Collas, chief executive of SG Asset Management, with regard to the TCW deal. “With the acquisition of TCW, obviously the geographic mix is completely changed.”
Despite SocGen’s forging ties with its European neighbour BSCH, the Spanish bank appears not to be involved in this deal.
However Collas says relations between the two are good and that BSCH was kept informed about the TCW negotiations. The Spanish bank is concentrating on Latin America and is more interested in retail than institutional fund management, says Collas.
| John Richards | ||||||
Globally SocGen can now claim assets under management of nearly $250 billion but rather than trying to bring all its disparate investment arms together under one tight regime the French bank is adopting a rather more laissez-faire approach to management.
Certainly Richards feels little pressure from Paris about how to run his company. “I feel very much that SGAM UK in a way is our baby because there was nothing here before,” he says. “There was nothing to turn around or add to. Literally nothing. SG doesn’t have a retail banking business in the UK. The SG brand name really wasn’t known in the retail market at all.”
Richards continues: “If you look at the wider picture, at asset management within the SG group itself, as is the case with a lot of European banks, it’s very much at the start in terms of developing a global business. The origins of the business are very strong but they are linked to retail and institutional businesses in France. In the last four years they’ve set us up in London, bought Yamaichi in Tokyo and now TCW.”
Although it is still too early to discuss how SGAM in London may work with TCW, Richards says the different investment centres in Paris, London, Tokyo, Singapore and New York were already starting to develop closer ties but these are still fairly loose.
“SGAM remains a federation of fund management companies with a big existing opportunity for cross-selling,” he says. “We haven’t really yet got as far as a group as saying we want an integrated investment process. And there’s no reason why SocGen would necessarily want to do that straightaway.”
For his part Warner says that in the future there will be big marketing opportunities, particularly as the London operation with its £20 billion target looks to bring in more business from overseas. “Clearly the chance to work with TCW in North America is probably our single greatest marketing opportunity,” he says.
Meanwhile Percy, helps to maintain links with Paris by attending the fortnightly executive committee that Collas chairs.
Some questions still to answer
So everything in SGAM’s garden looks rosy as it plots the next five-year plan. However in order for the business to move on to the next level there are still some issues it has to address.
The criticism from some market observers is that Horlick and co are very much trying to have their cake and eat it. Horlick argues that it is not a one-woman firm and yet she is still managing a substantial share of its assets under management. She recognizes this problem and admits that this situation has to change.
Her detractors will also say that it is a bit rich of her to say that the publicity surrounding her is not her fault. She has quite willingly used her profile to sell the firm and even now, three years down the line, Horlick’s visage is still SocGen’s primary marketing device.
To an extent, the firm, which was so fortunate in its timing of entry into the market, has exuded a certain amount of novelty value. Once its freshness wears off it may have to find a new way to sell itself. And as the firm grows, clients like Devonport may not feel they will benefit from the special status as one of its first clients. Also as Horlick starts to hand over more responsibility to her team, will funds feel as prepared to let the lesser lights run their investments when they really want her as their manager?
And perhaps more important than any of those factors, how will the firm fare if the market correction turns into a longer-running bear period? Fund management companies enjoyed a boom time in the bull run of the 1990s but harder times could be ahead.
Horlick, for her part, says that talk of economic austerity is overplayed. “I don’t think there’s going to be a recession, I think there will be a soft landing in the US,” she says. “The Fed has been very aggressive in the way that it has brought down interest rates and I think that will work.”
She says her team recently discussed the difference between an economy that moves from 2% growth to minus 1%, that is, technically in recession, and one that moves from 5% growth to 2%. “What effect does that have on the performance of companies? We now know that it is pretty much the same,” she says. “It may not technically be a recession but it will be seen as a slowdown on that scale and it has a marked effect on company’s profits. We have been through that phase now, so I think we’re going to avoid a technical recession and see growth, not at 5%, but at a reasonable level which should be very good for the markets.”
In order to become a fully-fledged competitor with the big five, as Horlick aims, SGAM needs to hit her target of £20 billion of assets under management in the next five years.
When he hears that figure, Warner’s usually ebullient expression briefly clouds over before he says gravely: “I think that’s eminently achievable. Our expectation is that we will see faster growth in our assets under management from outside the UK because there are some huge markets out there that are less mature than the UK and it has always been our aim to have a geographically balanced business.”
As Richard Branson recently found out to his cost, you wouldn’t want to bet against Horlick.
