“It’s been tough for the industry to remain relevant through all the change,” says Martin Gilbert, who founded Aberdeen Asset Management and guided it through several transformative mergers before stepping back in 2019 after nearly four decades. His firm has since had to struggle on without him – and its vowels after rebranding as Abrdn.
His view is hard to challenge. Today’s fund managers are no longer the masters of the universe they once were, driven by a range of factors combined to drain power away from an industry that was formerly the City of London’s crown jewel.
It is a story of new investment trends, ill-thought-through pension reforms, a struggling stock market, overzealous regulators and a growing culture of risk aversion in the UK. Add a dash of scandal, such as Neil Woodford’s dramatic fall from grace, and you have a toxic brew.
But it didn’t have to be this way.
The golden age
The ascendancy of fund managers can arguably be traced to December 1994, when most people were scratching their heads as to why Yasser Arafat was being awarded the Nobel Peace Prize and how East 17’s Stay Another Day could possibly be beating Mariah Carey in the Christmas charts.
There was similar incredulity in the City. But this was the result of SG Warburg’s revelation that it was about to be bought by the Wall Street bank Morgan Stanley.
Here, just eight years after Margaret Thatcher’s Big Bang of financial deregulation, was definitive proof that even the most celebrated corporate finance house in the UK, a constituent of the FTSE 100 no less, couldn’t hack it alone and was succumbing to foreign overtures.
But that wasn’t even the worst of it: within days the talks collapsed and the US business revealed it had only really wanted to get its hands on SG Warburg’s asset management business.
Sir Siegmund Warburg, who had founded the eponymous firm with Henry Grunfeld in 1946, was no doubt spinning in his grave. The German-born banker rarely bothered to hide his disdain for asset management, describing that side of the business as mere “share-pushing”.
His prejudice survived. A few years ago, one former employee told me: “Asset management was where you were sent if you failed in corporate finance.”
To distance itself, SG Warburg renamed its fund arm Mercury Asset Management and floated a quarter of the business in 1987. Just seven years later, the American barbarians at the gate were suggesting it was one of the choicest morsels in the City.
In 1995, SG Warburg was bought by Swiss Bank Corporation, starting the slow subsumption into what became UBS and allowing Mercury Asset Management to gain full independence. If you were trying to pinpoint the dawning of the UK fund management’s golden age, this would be a good candidate.
True, Mercury was itself bought by Merrill Lynch, another Wall Street bank, in 1997 and rebranded as Merrill Lynch Investment Managers. However, unlike its erstwhile parent, it managed to retain its corporate DNA, continue as the most important buy-side firm in the UK, and become an extraordinary hotbed for investment talent.
At one point, Mercury was managing pension fund assets for more than half the companies in the FTSE 100. Alumni include Paul Marshall (now of hedge fund Marshall Wace and a potential bidder for The Telegraph), Nicola Horlick (who was for years ubiquitously known as the City’s “superwoman”), Anne Richards, Andreas Utermann, Elizabeth Corley, Saker Nusseibeh and Stephen Zimmerman.
Many went on to run the plethora of new buy-side firms moving to the UK or being set up from scratch. Despite the original misgivings, the influx of foreign firms helped turn London – with a significant offshoot in Edinburgh – into the leading fund management hub in the world. Today the UK is home to 1,100 asset management firms that collectively look after £11.6 trillion.
One of the most impressive power players at Mercury was Carol Galley, who was at the vanguard of a new breed of star fund managers at other firms such as Anthony Bolton (who was famous for visiting every company before buying its shares), Nick Train, Terry Smith, and Neil Woodford.
All were household names in the 1990s and 2000s, bestriding the corporate landscape and the City news pages. Galley did far more than merely manage money and was, for example, credited with masterminding Granada’s takeovers of London Weekend Television in 1994 and Forte Group in 1996.
Toby Nangle, a former fund manager himself and now an independent financial markets commentator, remembers Sir Clive Thompson, the father of one of his university friends and the longtime boss of Rentokil, excitedly telling him about meeting Chris Poil, the head of UK equities at Baring Asset Management: “That was how it was back then: Footsie chief executives were starstruck by equities managers.”
Industry in crisis
How the mighty have fallen.
When fund managers are in the papers these days, the news is almost invariably bad. The industry is in turmoil and UK asset managers, especially those of the listed variety, are struggling badly.
Jupiter, a perennial takeover target that never gets bought, has been hit by a wave of customer withdrawals and the departures of industry veteran Richard Buxton and star stock picker Ben Whitmore.
Shares in St James’s Place plunged earlier this year after it was forced to set aside £426m to deal with a fee fiasco and possible crackdown by the regulator. The company has now lost nearly three-quarters of its market value since the beginning of 2022.
The share price of emerging markets specialist Ashmore is approaching lows not seen since the financial crisis. Even Baillie Gifford, which achieved brilliant returns thanks to early bets on tech companies such as Amazon and Tesla, has been forced to start cutting staff. Its assets fell by a third to £223bn in 2022 as central banks started hiking interest rates and growth stocks floundered.
Few firms are having a tougher time than Abrdn. Its search for additional revenue streams has seen it head down a succession of dead ends. The firm, which was demoted from the FTSE 100 last year, dipped into private equity before getting out again. It set up a joint venture with Virgin Money that it then sold, more than halving its money in the process. Unsurprisingly, this was not a great look for professional investors.
Abrdn is now making a push into wealth management and grasping the importance of online by acquiring Interactive Investor, the UK’s second-largest consumer investment site. Recently, its chief investment officer said the amount of flack the company received in the media for its much-derided rebrand amounts to corporate bullying – comments that sparked a fresh wave of ridicule.
Even the old-school stars still in the game are suffering. Terry Smith’s Fundsmith Equity Fund and Nick Train’s WS Lindsell Train UK Equity Fund were hit by redemptions in every single month of 2023, adding up to a cool £2.2bn in combined outflows over the course of last year.
The pensions problem
Some of this was both predictable and predicted. Almost exactly 20 years ago, Huw van Steenis, then head of the global financial research team at Morgan Stanley, came up with his “barbell” theory to explain how things would likely shake out.
He forecast that most money would gravitate to either cheap, index-tracking funds or high-return specialist managers, making life hard for traditional active asset managers in the middle.
That’s basically what’s happened. Gilbert says those working within the industry had a pretty good idea of what was coming down the track. Bulking up for the coming storm was the motivation for Abrdn’s acquisition of Scottish Widows Investment Partnership in 2013, as well as its merger with Standard Life in 2017.
The very biggest firms have been able to operate at both ends of the barbell. Over two-thirds of the $10 trillion managed by BlackRock, the world’s largest and arguably best-run fund management firm, are invested in exchange-traded funds and other passive funds, which are low-cost and seek to match the performance of the underlying index. However, its private markets strategies – such as private equity, private credit and infrastructure investments – attracted $14bn of net inflows to the firm last year.
In his annual letter to shareholders last month, BlackRock chief executive Larry Fink said the “portfolio of the future” includes private markets, describing them as a “primary growth driver” for his business. At the end of last year, it came to light that Fink had held talks about taking a majority stake in Warburg Pincus, one of the biggest private equity groups in the world.
Last month’s €2.3bn deal to list European private equity group CVC Capital in Amsterdam drew huge investor interest, highlighting how the fortunes of investment firms that invest in private assets have diverged from those which have to make their money from bonds and equities. “There are still quite a few fund managers in what you might call the ‘mushy middle’,” says Nangle. “The question now is whether these firms will die or be taken out.”
The investment industry certainly hasn’t been helped by a range of accounting, tax and regulatory changes over the past 30 years, altering the environment in ways that were almost impossible to predict. These can be traced back to the media mogul Robert Maxwell falling off his yacht near the Canary Islands in 1991.
Shortly after the tycoon’s mysterious death, it emerged that he’d been dipping into the Mirror group’s pension scheme. The subsequent backlash has been described by economist Sir John Kay as “one of the great avoidable catastrophes of British public policy”.
New tax and accounting measures resulted in companies having to disclose the surpluses or deficits of their pension schemes in their accounts. Unfortunately, these numbers were large, volatile and subject to movements in interest rates over which the company had no control.
Many finance directors quite understandably decided to close their final salary schemes, first to new members and then to new accruals. As these “defined benefit” schemes “aged” – with most members in or approaching retirement – the biggest pools of risk capital in the UK switched en masse out of equities and into bonds, reducing their allocation to UK-listed shares from 48pc in 2000 to just 3pc today, according to the Bank of England.
Nor has the process run its course. JPMorgan has forecast that £600bn of around £2 trillion in private sector pensions will be offloaded by their corporate sponsors in the coming decade and “bought out” by insurance companies.
This means two things: firstly, the vast majority of the money that moves will no longer be managed by asset managers and, secondly, none of it will be invested in equities (which insurers aren’t allowed to hold because of Solvency II regulations).
Killing defined-benefit pensions would have been less damaging if policymakers had ensured there was an adequate replacement. Those who despair at what might have been tend to point to the pension systems of Canada, Australia, and the Netherlands. These countries came to the realisation that their investment sectors had to be completely reengineered more than 20 years ago. The UK has just tried to muddle through.
“The original sin in this country was that we messed up our pensions reform,” says van Steenis. “We moved from defined benefit to defined contribution but without creating a system like Australia with far larger, professionally run pots of money to invest across all asset classes.”
For starters, Brits aren’t putting aside enough money for their pensions. Auto-enrollment, which was introduced in 2012, is a step in the right direction but only a small one. The average employee in the UK is contributing around 8pc of their salary towards a retirement pot. This compares to between 12pc and 15pc in many other rich countries.
In the UK, the average person will change jobs seven or eight times and end their careers with the same number of pension pots. Australia and Canada, by contrast, established large-scale public and private schemes into which savers will continuously pay regardless of where they are employed or how frequently they switch jobs.
Generally speaking, bigger schemes are more sophisticated, invest in a wider range of assets and therefore create more demand for specialist fund managers.
“The UK’s dirty secret is that it has Oxford, Cambridge, the USS, Wellcome Trust and a couple of others but below that, it gets pretty unsophisticated pretty quickly,” says one industry expert. “In Australia and Canada, where they have huge pools of pension fund assets that can support thriving fund management industries.”
Aside from pensions, people in the UK tend to hoard their wealth in property and cash rather than dabbling in the stock market.
There’s close to £2 trillion in various savings accounts in this country, which is roughly equivalent to the entire market capitalisation of the FTSE 100. Listed shares are a lower percentage of total household assets in the UK than in most other developed countries, according to a recent report by the Centre for Policy Studies.
Part of the reason for this is cultural. Years of spiralling property prices have resulted in Englishmen and women considering their home not only a castle but also a nest egg.
But this country also appears to have become increasingly risk-averse with a regulatory regime more focused on preventing members of the public from losing money rather than encouraging the development of products to help them make decent returns.
“At the moment, buying shares is treated by the regulators as a more dangerous pursuit than gambling,” says Nick King, a former government adviser and research fellow at the CPS. “And high street banks are discouraged even from suggesting that their customers might benefit from moving their savings into shares, or offering easy ways to do this.”
Asset management insiders were privately furious about a market study on the industry produced by the Financial Conduct Authority in 2017. Many thought it fell just short of claiming active investment management was a bit of a con and fund managers were essentially out to scalp their clients.
The FCA denied this characterisation. But it’s telling that its final report felt compelled to address “a perception that our interim findings suggested that passive funds were preferable to active funds”. This, the regulator stressed, was not the case – although it did also conclude there was “weak price competition in a number of areas of the asset management industry”.
In fairness to the watchdog, it had a point. “I’m a former fund manager and I’d say that picking an actively managed fund that will outperform the benchmark net of fees is not much easier than picking the underlying stocks,” says Nangle. “That’s why, for the vast majority of retail investors, passive funds that just give you access to the benchmark at a lower cost is a no-brainer.”
Risk and reward
There is little doubt that asset managers have faced plenty of headwinds. But they have also been complicit in their own downfall, according to industry experts. “They lost their entrepreneurial buzz,” says one. Brexit has undoubtedly sucked up a great deal of management bandwidth but the lack of fresh strategic thinking predated the 2016 referendum.
Fund managers should perhaps have been quicker to branch out into private assets and hedge funds, much as BlackRock has done. Instead, they became too timid, too risk-averse and, frankly, a little too pious. “They sat around, started getting preachy and hoped ESG would save them,” says one financial industry expert. “It didn’t because, at the end of the day, investors want their fund managers to make money.”
Gilbert argues this characterisation is a little unfair. “You get pigeonholed as an asset manager,” he says. “Nobody was going to come to us at Aberdeen Asset Management (as then was) for an infrastructure fund; they’d come to invest in emerging markets. You can, of course, say firms should branch into new asset classes but it’s easier said than done.”
Nevertheless, there are plenty of unlisted fund managers – including Marshall Wace, Chris Hohn’s TCI, John Armitage’s Egerton Capital and Stephen Butt’s Silchester International Investors – that have been highly entrepreneurial and extremely successful. Many of these are not household brands, and some are so shrouded in secrecy that they are barely industry names.
And that’s the way they like it. Listed UK fund managers, like listed UK shares, may be in the doldrums. But many of the firms that operate away from public scrutiny continue to thrive, thank you very much.
Accounts show that Butt, a former Morgan Stanley banker and disciple of the legendary value investor Benjamin Graham, paid himself at least £31m last year. He and his family are worth roughly £600m through their majority stake in Silchester’s parent company, according to an estimate by Bloomberg.
Such éminences grises are often playing key roles behind the scenes in corporate deals, much as Galley did in the 1990s. For example, Silchester owned a 15pc stake in the supermarket Morrisons when two private equity firms came knocking. Michael Cowan, one of Butt’s co-founders, advised the board and was credited with helping raise the winning bid by £700m.
What can Silchester’s listed rival do to pull themselves out of their current trough? Certainly little is likely to change until the UK government stops tinkering around the edges and enacts wholesale pension reforms, while also providing some measure of legislative push-back against overcautious watchdogs.
In the meantime, mergers would be an obvious solution – combining firms is one way to increase the asset base and cut costs.
However, it’s rarely as simple as that. Many such marriages of convenience have turned rocky. The 2017 tie-up between Standard Life and Aberdeen Asset Management has frequently been characterised as two drunks leaning on each other to stay vaguely upright.
An industry expert says he knows of several investors who have looked at taking listed fund managers private but, damningly, decided they weren’t really worth the effort.
There remains one other intriguing possibility. UK banks, which are also struggling, earn very little fee income compared to their international peers. That is partly because they no longer have asset management divisions.
Barclays, for example, sold its fund management arm, Barclays Global Investors, to BlackRock in 2009 in order to raise capital in the wake of the financial crisis. The bank ultimately made £8bn from the disposal but gave up a stake in a business that would today be worth £18bn.
Could the share prices of UK-listed asset managers fall far enough that high-street lenders might be tempted to correct their hasty divestments and regain access to large pools of money and steady fee income? And would the regulators allow it? Would bank shareholders?
Lloyds Banking Group and Schroders set up a wealth management joint venture in 2019. Might this be a glimpse of the future? If nothing else, it would provide a fitting end to the golden era of asset management: out of banks were you taken and to banks you shall return.
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