Keiron Root’s monthly review of developments in the investment fund markets.

One of the anticipated consequences of the global recession, and the squeeze being experienced by the investment management sector in particular, was an increase in merger and acquisition activity among investment management firms. And, in recent weeks, there has been plenty of evidence that this is, indeed, taking place.

Investment management firms merge, or get taken over, for one of three reasons – management teams that have built up successful businesses sell them to larger players in order to realise their value; they are companies that have got into difficulty and need bailing out; or they are subsidiaries of larger organisations that get sold off when they are deemed surplus to requirements.

Liquidating assets
While there have been examples of all three over the past couple of years, activity since the beginning of 2009 has been dominated by the last group, particularly where the disposal is being made by a banking operation that needs to raise cash. And it is not that the fund management arm is failing to deliver profits. Conversely, it is the fact that many of these subsidiaries are making money that makes them attractive to potential purchasers, enabling the hard-pressed sellers to inject some cash into their balance sheets.

This is certainly the case with Barclays Global Investors (BGI), due to be acquired by BlackRock subject to approval by Barclays’ shareholders at a special meeting in early August. BGI has been one of the success stories of the global investment management business in recent years, but is regarded as a ‘non-core’ activity for a banking group, so fulfils the main criteria for disposal by a bank looking to raise cash. Assuming the deal goes through, it will create a major global player in the investment management business.

Rationalising behaviour
On a somewhat smaller scale, but for similar reasons, Credit Suisse disposed of its UK-based fund management business to Aberdeen Asset Management towards the end of last year. There has been much speculation as to how the Credit Suisse funds would be integrated into the established range of Aberdeen trusts and in mid-July came the answer – some would be sold on to other groups.

As Aberdeen points out, the whole transaction with Credit Suisse involved £36 billion of assets under management in over 190 funds domiciled in eight different countries. ‘Given the scale and complexity of the acquisition, it was inevitable that certain parts of the business would be less suited to integration into the Aberdeen business model,’ observes Gary Marshall, chief executive of Aberdeen Unit Trust Managers.

More specifically, the deal included 27 UK-authorised retail funds. Aberdeen is retaining 17 of these, including 12 multi-manager portfolios that will continued to be managed by the group’s multi-manager team, headed by Aidan Kearney and Graham Duce, who joined from Credit Suisse.

However, the group has decided that two umbrella OEIC structures, containing ten sub-funds, do not fit its range and so is in the process of selling on their management contracts to Premier Asset Management. These are the renamed Aberdeen Income Funds ICVC (comprising Income, Monthly Income, Alpha Income and Corporate Bond Monthly Income funds) and the Aberdeen Growth Funds ICVC (comprising the Alpha Growth, UK Mid 250, Fellowship, Managed Assets, Smaller Companies and UK Thematic funds).

Turning full circle
As well as significantly increasing the size of Premier’s funds under management – the deal will add £858 million to its previous total of £1.4 billion – it will also have the effect of reuniting the income fund investors with a fund manager who established their performance. For Premier has also formed what it describes as a ‘strategic alliance’ with PSigma Asset Management, one of whose partners is Dr Bill Mott, who for many years headed the equity income team at Credit Suisse and built up an impressive track record while doing so.

Mott’s team will act as investment advisers to the two funds he previously managed at Credit Suisse, the former CS Income and CS Monthly Income funds, as well as the Alpha Growth and Alpha Income portfolios.

Mike O’Shea, chief executive at Premier Asset Management, observes that ‘Bill will be a familiar name to many of the investors coming over, and his reputation as one of the most highly respected managers of UK equities will, I’m sure, provide significant reassurance. The remaining funds moving from Aberdeen will be passed to key members of the Premier investment team including CIO Paul Branigan, head of fixed income Paul Smith and head of global equities Mike Jennings.’

Gathering momentum
There has also been some significant activity at the fund manager level, with announcements that two long-serving managers at GAM (Global Asset Management), John Bennett and Ross Hollyman, will be moving to other houses early in 2010. Bennett, currently manager of the GAM Star Continental European Equity fund, will be joining Gartmore’s top-performing European equity team, to enable current managers Roger Guy and Guillaume Rambourg, to concentrate  on their growing list of alternative and institutional mandates.

Ross Hollyman, meanwhile, is to join Liontrust Asset Management. Currently GAM’s investment director responsible for UK and European equities, Hollyman’s brief is to develop a range of ‘global equity investment processes’ at Liontrust.

Long considered a fund management house of major potential, Liontrust suffered a double blow earlier this year when two key fund managers, Jeremy Lang and William Pattisson, left the group. Liontrust has always followed a process-driven approach to investment, and recruiting someone of Hollyman’s standing could prove crucial in driving this forward.

Developing the process
Nigel Legge, chief executive of Liontrust, argues that ‘Ross is ideally suited to Liontrust because, like all our managers, he is a process-driven investor. Ross worked with two of our existing team, Gary West and James Inglis-Jones for many years at JP Morgan Fleming. He uses multi-factor investment processes, one of which is similar to Gary and James’s cash flow solution.’

Indeed, the group is planning a number of launches to exploit these ‘Global equity investment processes’, such as its European Absolute Return Fund, launched at the beginning of July. Liontrust could indeed prove to be a name to watch over the next few years, having also recently recruited one of the ‘big beasts’ of the fund management jungle, Adrian Collins, as its non-executive deputy chairman, with a view to his becoming non-executive chairman when the current incumbent, Bernard Asher, retires. A former managing director of Gartmore Investment Management, Collins has an enviable track record of success in the sector and could prove to be the catalyst Liontrust needs to move into the premier League of investment management houses.

A new approach
However, even with, or perhaps because of, a degree of rationalisation among the larger fund management houses, there is still scope for new boutique managers to make an entrance. The latest is Armstrong Investment Management (AIM), formed by Patrick Armstrong and Dr Ana Cukic Armstrong, who most recently headed up the multi-manager team at Insight Investment.

Focusing on the pension fund and wealth management sectors, AIM intends to fill the gap between traditional and alternative managed funds with the launch of a new multi-asset investment business.

Patrick Armstrong observes, ‘We believe it is the ideal time to launch a new pension and wealth management proposition. Many investors have been left disappointed by large faceless organisations, and by outdated investment products. We intend to offer clients an intimate service, and partner with them to achieve their investment aims.’