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Scotland’s capital ideas

As one large multi-national electronics giant after another pulls the plug on its Scottish venture, and with North Sea oil running out, Scotland’s politicians have been working themselves into a froth trying to shore up the Scottish economy. Luckily, Scotland can claim at least one solid success story that seems set to continue. Scottish fund management, in decline through the 1980s and 1990s when centres like London and New York were flourishing, is on a roll.

For the past few years, virtually all the major players have been winning oodles of new money despite fierce competition from financial centres around the world. Martin Currie director Ross Leckie says: “Scotland used to be thought of as safe but dull – the sausage rather than the sizzle.

But, now, when pension fund managers around the world want to put some sizzle into their portfolio, they look to Edinburgh.”

To understand the transformation that has taken place, one needs to look at where the sector was in the late 1980s and 1990s. This was a time when, if you were an enterprising Scottish fund manager, you packed your suitcase and headed south at speed. It was also a time when you would be shown the door if you suggested to a hot shot London or New York fund manager that Scotland was where their careers would flourish.

Andy Green, head of investment strategy at investment consultant William Mercer, reckons the cause of the Scottish slump, by and large, was sustained underperformance by the big balanced portfolio fund houses that were a part of major life insurance companies.

These houses had been created largely as asset management arms for the insurance companies. Their business was to attract third-party funds to manage, but they were seen as “tied houses” and rather dull places to be. As a result, for a long period, they were not able to attract the same quality of staff as their London counterparts.

Scotland did have a few success stories during this period, in the shape of specialist boutiques such as Baillie Gifford and Martin Currie. But as Leckie notes, in the 1990s, fund management houses that wanted to make a name for themselves adhered firmly to the notion that “big is beautiful”.

The key statistic in winning new business at the time was the volume of money under management – the top line figure. “It was a scary time for little Scottish boutiques. Large fund houses were consolidating and getting larger. We had to figure out how we could play in a world where everyone was boasting about how many billions they had under management,” Leckie says.

The answer lay in specialisation and, for the large houses, in establishing their credentials as managers of third-party mandates, something Scottish Life and Aegon Investment (formerly Scottish Equitable) achieved in spades.

For the small houses, the answer lay in way-above-average performance.

When they achieved this, they generated excitement and a distinctive track record – so they could begin to get the attention of fund management superstars in London and elsewhere. Then they offered carefully structured remuneration packages, with significant personal equity and the ability to influence the firm’s future direction, and suddenly the sector found itself attracting, instead of losing, talent.

Green says: “What held the Scottish fund management sector back was a game of musical chairs, a constant revolving and recycling of personnel between the players, with no new blood bringing in fresh ideas. Over the last two or three years that situation has changed dramatically.”

It’s not just the boutiques, with their strong specialist funds, that have attracted new talent. Scottish Widows, which suffered a heavy blow when virtually its entire European funds team defected to Scottish firm BlackRock in 1999, has hired 50 investment professionals in the past two years. Christopher Walker, head of institutional business at Scottish Widows calls this “the biggest expansion by any fund house in Europe”.

The result, he points out, can be seen in the launch of innovative products, such as Scottish Widows’ liquidity fund, which attracted £3bn in its first few weeks of operation, making it the second biggest manager of liquidity funds in the UK.

Walker explains that a liquidity fund is a daily priced fund that invests in short-term cash instruments. It is ideal for companies which want to have their cash surpluses managed with a keener eye than the average company treasury department generally manages. “In the US there are trillions of dollars in liquidity funds. UK finance directors have been a lot slower to wake up to the fact that they could add as much as 200 basis points (ie, 2%) by giving their cash surpluses to a liquidity fund manager,” he says.

The lessons of this Scottish turnaround could usefully be adopted by company boards in other sectors and other regions. Scotland’s fund houses have shown that attracting talented senior staff makes a huge difference in a relatively short time frame. They have also shown that you won’t get the real stars if your corporate goals don’t have the right kind of “sizzle” about them. Furthermore, once you have attracted talent, you have to keep it. If you can’t reward your new high fliers with a package that gives them a fair stake in the future success of your operation, you’ll lose them – and the advantage you will have built up.


Name/Funds under management Scottish Widows – £84.0bn
Standard Life – £65.7bn
Friends Ivory & Sime – £34.8bn
Aberdeen Asset Management – £32.9bn
Aegon Asset Management – £32.4bn
Baillie Gifford & Co – £21.9bn
Abbey National Asset Managers – £21.5bn
Britannic Asset Management – £17.9bn
Bell Lawrie White – £17.0bn
Scottish Life – £8.4bn*
Edinburgh Fund Managers – £7.9bn
Martin Currie – £6.6bn
BlackRock – £5.7bn
First State Investments – £3.9bn
Scottish Investment Trust – £1.3bn
Glasgow Investment Managers – £1.0bn
Bank of Scotland Portfolio Mgt – £0.8bn
Newton Investment Mgt – £0.7bn
Scottish Value Mgt – £0.7bn
Rathbone Investment Mgt – £0.7bn
Source: CA Magazine, Dec 2001 * 1999

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