How Barclays Asset Management arm is flexing its msucles since last year's acquisition of Wells Fargo Nikko took its assets to a massive $300 bn
Bill Smith is delighted. And well he might be. Three months ago he was appointed second-in-command at BZW Asset Management which, following its acquisition of Wells Fargo Nikko at the end of last year, now has a formidable $300 bn or so in assets under management. That puts BZWAM's deputy chairman right up there among the power merchants of the world's fund management industry.
For Smith, it's a return to fund management following a six year spell in BZW's equity business. But it's a far cry from his early days as a fund manager at Standard Life. BZWAM is no standard operation.
Think about it. $300 bn under management. That ranks BZWAM in the world's top five fund management institutions, up there with the likes of Fidelity and snapping at the heels of the Swiss giant UBS. Barclays has moved from outside the elite to become a dominant player in the space of just twelve months. The Wells Fargo acquisition, which was only arranged a year ago this month, was sealed for the princely sum of $440 mn at the end of December last year.
BZWAM may be behind a select few in the overall rankings, but in indexed funds it is now a clear global leader. As Smith casually notes, the acquisition created 'a very large organisation both in terms of the size of funds and geographical range.' There was an obvious need to rethink the structure of the fund management operation to allow the predominantly quant-driven Wells Fargo to slide into place without cramping the style of BZW's existing passive, active and property management businesses.
In fact, a restructuring was well overdue. The quantitative division of BZW's business had made a name for itself in the UK which led to difficulties in marketing the active side. Conversely, in other areas such as the Asia Pacific region, BZW was known as an active manager, which led to difficulties in explaining its quant expertise. If all it did was active quant management things would probably have been a lot easier. As it was, confusion reigned.
With these problems in mind and the impending arrival of Wells Fargo, BZWAM was recreated last September to become an umbrella group for three new divisions: BZW Barclays Global Investors on the quant side; BZW Investment Management for the active business; and BZW Property Investment Management, which runs a portfolio of $1.3 bn or so.
It was the structure which would allow all activities to function effectively, explains Smith. BZWAM keeps to an overview role, allowing each separate business to retain as much control of its own affairs as possible. The BZWAM wigwam provides central services in areas like IT, personnel, marketing and overall business strategy.
If you run with Smith's explanation, Wells Fargo Nikko Investment Advisers slipped smoothly into the new BZW Barclays Global Investors framework along with BZW's existing quant business. MasterWorks, the defined contribution pension plan administration division of Wells Fargo Bank, which was also part of the acquisition package - and a significant business in its own right - completes the Global Investors trio. Together the division accounts for over $250 bn of the group's total.
That grouping left it clear for the active side, under the banner of BZW Investment Management, to reassert itself. Smith points out that the active operation is 'quite a substantial fund management business in its own right. Although it looks small in relation to our total assets, by most criteria it's quite a large business'.
That's an understatement. With $50 bn under management it's a sizeable active outfit. But there's a danger of it being overshadowed by its big quant brother. Andrew Skirton, BZWIM's chief executive, is quick to defend his corner (see 'BZW Investment Management). BZW Barclays Global Investors
When the deal was announced last June, the assets of Wells Fargo were about $180 bn and they're now well over $265 bn,' trumpets Smith. 'That was growth in the second half of last year and the first quarter of this year.'
Smith is then cautious about attributing the reasons for this growth. Synergies between the two organisations, perhaps? Global reach? 'It's always difficult to make claims on behalf of clients - I'm very careful about doing that,' says Smith. 'The main reason as far as I can see is that the personnel and service were not impaired throughout the period. I think it was as good as we could have hoped for as a transition because obviously there's a risk in any merger or acquisition that new business might be put on hold.'
To ensure that isn't the case, the Global Investors operation - spanning offices in California, Toronto, London and Tokyo - is run by two joint chief executives. Pattie Dunn is based in San Francisco and looks after the Americas and the Asia Pacific region, while Lindsay Tomlinson in London runs the European and Middle Eastern side of the business. Both are overseen by GI's chairman Fred Grauer.
The vast bulk of GI's business is in passive investment products which account for around $234 bn of its total assets. The remaining $31 bn or so is in active quant products where there is greater work on the initial decision-making followed by a process of careful monitoring. Most of the products were developed by Wells Fargo over the past few years prior to the acquisition although the Tactical Asset Allocation fund has been going since 1972.
'On the passive side the objective is very well defined in terms of tracking relative to a benchmark and being efficient at doing that,' explains Smith. 'The mechanism is constant monitoring of benchmark and risk factors. The minimising of transaction costs is also an essential part of delivering an efficient tracking portfolio. We have developed a crossing mechanism so that when we do our trades in our own portfolios we can do so in a way which reduces the overall transaction costs.'
The ability to act as a private exchange in this sense has been enhanced by marrying the US and European operations. In fact, BZWAM has claimed in the past that, if it touted itself as such, its internal trades would rank it as the tenth largest stock exchange in the world.
From Global Investors' perspective it's difficult to define what constitutes a fund manager since there are a number of different personnel with various inputs into the process. As Smith asks: 'Is somebody who designs tracking strategies considered to be a portfolio manager?'
Fund managers apart, the firm has 18 in-house 'researchers' whose role is also somewhat different from the traditional analyst's. 'One of the factors that our researchers have identified in America in stock price behaviour is analysts' forecasts,' says Smith. 'We track the forecasts of securities analysts on a quantitative basis to see how that affects stock prices. That has been a significant factor in the performance of funds. So our research includes research into factors that help to create expectations in the market. And that's an important factor in stock price behaviour,' he notes.
Smith adds that when running a tracker fund you are concerned primarily with the share price and how it fits into the index. The nature of a company and its future strategy simply do not come into the equation, which rules out company visits or other qualitative methods of obtaining company information. Basically if you're not in the index you ain't gonna get noticed.
And on the active quant side? 'Normally, what we would do is analyse factors such as price to book; return on capital; yield and analysts' forecasts; to determine their impact on stock prices and apply that in a disciplined way to portfolio construction.' BZW Investment Management
If you're not in the position of being likely to get much joy out of the massive quant side of the business then don't despair. There's still over $50 bn of actively managed funds swilling around in the BZW stable. Roughly half of that goes into equities, with the remainder in fixed income, property and cash.
Andrew Skirton, chief executive of BZWIM, explains that the active side is not as UK-oriented as one might expect from a UK-based group. That is partly due to the old passive side of the business taking priority in the domestic market as explained earlier and partly due to a conscious decision in the early 1990s to diversify the active business internationally. 'We felt that the brand value of Barclays and BZW was such that it was possible to build the business overseas,' says Skirton.
As a result of that decision, BZWIM now has nearly $5.5 bn under management in Japan and ranks as the third largest pension fund manager in Hong Kong. 'Similar things have been achieved to a greater or lesser extent around the world,' says Skirton. 'We've built these businesses up to manage active assets and to source the business from the local environment. The strategy was two-fold: to generate increased levels of investment expertise in the local marketplace as well as to source business from the local environment.'
When Skirton says 'around the world' he means it. Aside from London, Tokyo and Hong Kong, BZWIM also has offices in Australia, France, Germany, New Zealand, Spain, Thailand and the US. And that spread is important in terms of stock selection. A great deal of freedom is handed down to the chief investment officers in each centre and, with local clients, those offices can exploit their regional knowledge and experience to the full.
'Our approach is very much to rely on the expertise and the resources that we have as a group. That is central to the way we manage money,' stresses Skirton. He believes that on the ground local expertise can add value to the business - both at the stock selection level and in contributing to a broader asset allocation picture.'
That picture starts off in London but relies heavily on input from each office. David Berry, director of investment strategy, is responsible for coordinating the approach to asset allocation with the regional chief investment officers, and he works closely with resident economist Noel Mills who carries out research.
Berry and his global crew talk regularly but there is a more formal conference call once a month to hammer out the key issues of the day and debate asset allocation opportunities. 'We don't believe in getting together every month to discuss absolutely everything,' says Skirton. 'We focus on things such as if we're overweight in an area should we stay overweight; or are key issues stirring in Japan and should we be focusing more on that.'
Centrally-driven asset allocation with input and contributions from across the globe is how Skirton describes the process. And that local input - followed by local interpretation - is key. 'If we decide that we all wish to become overweight US, then in a UK portfolio that may mean a very different target percentage from the target for our Japanese client base or our Australian client base. But all our portfolios will express a bullish view of the US relative to their benchmark or peer group. It needs to be interpreted locally but driven centrally.'
Asset allocation is very much top down with econometric models acting as catalysts for initiating debate, identifying value and focusing discussions more effectively. The models help identify whether markets are under- or over-valued at any given time, but then there is a good deal of 'judgement' applied on top of that.
Once asset allocation is determined, the local offices are free to interpret it as they feel necessary. So does that mean they can ignore the whole centrally-driven process? 'They are responsible for their client base. But they would need to justify performance back to me ultimately,' adds Skirton with a glint in his eye. 'In practice, as long as asset allocation is a highly participative process it doesn't become an issue.'
Stock selection itself is largely dependent on the development of themes for investment and picking sectors that are likely to develop from economic trends over the next year or so. That being said, there is a definite bottom up element - particularly in the less developed markets in Asia.
'Top down views are linked in with bottom up feeling as well. You can't separate the two or you get great confusion,' says Skirton. 'You've got to be able to systematise what you're doing to benefit from the themes that have been identified by the top down perspective and integrate them with the bottom up opportunities.'
In more developed markets, such as the US and UK, themes that are identified during the asset allocation process are picked up and help to drive stock selection. For example, in the UK at the start of the year it was decided that the much talked about 'feel-good' - Skirton corrects the term to 'feel-better' - factor might enter the consumer psyche in the second half of the year. The team then focused on investing in sectors like brewing, the media and housebuilders which should benefit from that sort of effect.
'There is no one way to pick stocks in my opinion,' says Skirton. 'We are looking to be bottom up when it comes to picking particular stocks but the rationale for those stock weightings will be the top down themes that we are capturing within them. We are trying to leverage our bottom up capability, that's probably the best way of putting it.'
Does that 'leverage' mean that companies are prised open by regular visits from BZWIM managers and other meetings with management? Yes and no. There's no team of analysts as such. Rather the active operation is built on a group of portfolio managers-cum-stock analysts who all spend time identifying stock opportunities and getting them into portfolios.
'We don't just go and see a list of companies each year. We will focus on the companies which are interesting to us as a result of our view of where we are going. Which bank should we buy in the bank sector, for example, if we decide to buy banks.'
Skirton sees his opportunity to talk about the UK-based competition and breaks into a smile. 'We then go out and say perhaps we don't know enough about NatWest. Let's get them in.' Different Strokes
One year ago the old BZW asset management was one-third passive and two-thirds active. Today, the newly created BZWAM tells a very different story with around 80 per cent in passive management. What on earth is Barclays doing?
'Well indexing certainly isn't dead,' says Bill Smith, as he sits looking at the growth of the indexed side of his fund over the past year. 'Some people may say that its growth has capped out but I guess that the evidence of the last year would contradict that somewhat.'
Smith argues that, when indexation was establishing itself, there was a period in which its use was questioned as it was seen as being mutually exclusive to active management. That is evidently no longer the case and Smith stresses the benefits of indexation as part of active strategies.
'If you are implementing an active strategy then you can use indexing techniques so that you've got a benchmark to position yourself relative to. Some of the techniques that we've got which are rising out of the passive side are very useful when it comes to the active portfolios. As markets evolve, indexation will become an increasing part of people's portfolios.'
Does that then mean that investor relations is a dying art? With the world's index managers outperforming the world's active managers over the long term, if you're not in the index there's little you can do to attract the tracker's attention.
Not at all, according to Andrew Skirton. 'It feels at times that the whole world's going passive. The whole world's going quant. It isn't. In the US the overwhelming majority of pension funds are managing assets in an active way. Indexation serves a purpose - it's a superb product. But it's not the answer for all clients and we have to respond to client requirements, wishes and desires.'
Smith and Skirton are both convinced that the fund management market place is going to expand 'exponentially' over the next 5-10 years. Pension obligations in continental Europe and the growth of defined contribution pension plans are just two areas they cite as catalysts for this expansion. 'We've got to be in there,' says Skirton. 'And active management is an integral part of that opportunity explosion.'
Smith adds that the Wells Fargo acquisition has given the group the ability to deliver investment products which meet a wide range of investment criteria. 'We're delighted with the way things have gone,' he says. 'Mind you, you'd probably expect me to say that anyway.'