Money managers build European business despite ills

Money managers are building their European businesses even as the sovereign-debt crisis has scared away firms from making investments on the Continent.

Executives at these firms see the crisis environment as an opportunity to grab market share — and talent — away from bank- and insurance-owned European competitors that have long held the bulk of institutional and wholesale assets.

The crisis “is actually helping the asset management industry in Europe,” said Benjamin F. Phillips, a partner at money manager consultant Casey Quirk & Associates LLC. “Global firms are committing more to Continental Europe now than we have seen anytime in the past five years. It's a very specific [country-by-country] strategy and one that's thoughtful [about] potential revenue.”

Some U.S. firms, eager to diversify their businesses globally, have gotten a piece of the action. William Blair & Co. LLC, Prudential Financial Inc., MFS Investment Management and T. Rowe Price Associates Inc. saw European ex-U.K. assets under management increase by 50% or more in the three-year period ended March 31, according to data from eVestment Alliance.

To be fair, the MSCI Europe ex-U.K. index also rose about 50% in that period, the earliest quarters of which include the post-financial-crisis rally.

In the 21/2-year period through March 31 — when the index declined 3.2% — William Blair's European assets more than tripled, Prudential's more than doubled and MFS' rose 35.6%.

Australian firm First State Investments' European AUM in that period jumped 44%, while AUM at bond manager Rogge Global Partners PLC rose 68.1%.

And other firms, such as J.P. Morgan Asset Management and Neuberger Berman Group LLC, have opened new offices and are adding sales positions to boost their business on the Continent.

“It's been a pretty strong growth period,” said James J. Sullivan, senior managing director and head of fixed income at Prudential Investment Management, which does business in Europe as Pramerica Investment Management Ltd. He said assets from Asia are growing the fastest for the firm, but Europe is growing fastest in terms of the number of new clients. Compound annualized AUM growth in institutional fixed income across the firm over the past three years was 24%, and for five years, 20%, Mr. Sullivan said.

“It's a good time [to expand]. Because of the turmoil going on in Europe, we're seeing a strong pool of talent that is available,” Mr. Sullivan said. “Many firms are in turmoil, many of which are owned by banks that are structurally in question.”

HUNTING GROUND

Hedge funds that haven't met performance targets also have been a hunting ground for talent, he said.

“The stronghold of traditional [European] managers is lessening by the day,” said Dik van Lomwel, a managing director and head of Europe and the Middle East at Neuberger Berman Europe Ltd. “We have been gradually increasing our footprint across the region since we became independent in 2009.”

In the past 18 months, the firm has opened offices in Frankfurt, Amsterdam and Milan.

“It feels like we're taking [market] share from the bank-owned competitors,” Mr. Van Lomwel said. He said Neuberger Berman is “not immune to the volatility in Europe, [but] we are benefiting from our simple ownership model — we are a partnership but are independent.” Neuberger Berman executives completed a management buyout of the firm in May 2009 from previous owner Lehman Brothers Holdings Inc., which filed for bankruptcy in September 2008.

Australia's First State, meanwhile, conducted all of its European business from London before opening a Paris office in late 2011. A Frankfurt office is planned to open this fall.

“The days of having a single European strategy and flying out from London to present to all are halcyon days; they have passed,” said Gary Withers, regional managing director for emerging Europe, Middle East and Africa at First State in London. “We're definitely seeing the markets become more local and less European — the Spanish, the Italian and the German risks are quite different.”

Being on the ground in each country allows a manager to tap not only into the large institutional asset owners but also smaller, more regional investors.

“In Germany, you've got a strong regional focus. Therefore, there are many institutional and wholesale clients that are regionally based. If you don't go to them, they won't come find you in London,” Mr. Withers said. “You have to have somebody based in Germany who can do the legwork into the different regions.”

Despite William Blair's strong growth in European AUM, Thomas Ross, a partner and head of European distribution, said the current crisis environment is “not a great time” to build an equity business in Europe, “because many investors are concerned about [the crisis] and [are] decreasing allocations to equities.”

STRONG PERFORMERS

However, “the environment is one where some active managers have found 2011 difficult” from a performance standpoint, which allows strong performers a chance to stand out, Mr. Ross said. William Blair, which acquired global macro hedge fund Singer Partners in June 2011, is developing a dynamic diversified growth strategy aimed at the European market to be run by a team led by Brian Singer, a partner and head of dynamic allocation strategies.

Managers said they don't discount the risks to European and global markets that the eurozone crisis poses. Still, they are committed to the region for the long term.

Too often, that's not the case with U.S. managers looking to build their businesses in Europe, said Fernand Schoppig, president of FS Associates, a money manager consultant.

“Too many U.S. money managers are looking for the quick fix instead of taking the time to understand the intricacies of the different marketplaces — which, in the end, leads to major disappointment,” Mr. Schoppig wrote in an e-mail. “Once we tell them that a carefully structured and well-researched business development strategy to tackle foreign markets requires a three- to five-year time horizon until positive results are visible, their interest wanes.”

Managers see opportunity in Europe today in part because of an increase in mandates up for grabs, driven both by changes in asset allocation and by factors such as private banks' increasingly using open architecture for their fund offerings.

The “money in motion is unprecedented” and will transform the market share landscape in Europe in coming years, Mr. Phillips said.

“The winners tend to be firms that have strong alternative capabilities” — not necessarily pure alpha strategies, but those such as managed volatility that offer downside protection, he said. Other winning characteristics are strategies with embedded advice, such as asset allocation, and being on “the away team,” Mr. Phillips said. “Local European fund managers — particularly those owned by banks and insurance companies — have struggled” to attract and retain investment talent, he said.

Some 68% of 160 European managers expect their AUM to rise less than 7% over the next two years, according to a State Street Corp. report released last month.

“Against a challenging overall backdrop, significant opportunities exist for the asset management industry in Europe,” the report said. “The challenge is that the emerging opportunities often stem from a wholesale reassessment by investors of their needs and priorities post- crisis. As a consequence, unprecedented levels of agility and innovation will be required as asset managers and investors adjust to a radically different environment.”

Gregory A. Ehret, executive vice president and head of Europe, the Middle East and Africa at State Street Global Advisors, said SSgA and other firms have benefited from a widespread move to passive investing in Europe.

But the European crisis — an outgrowth, Mr. Ehret argues, of the global financial crisis in 2008 — has also given clients a “thirst for advice.”

“The big change with [both the global financial and more recent European crises] is that our clients are asking us and their consultants for advice about where they should invest their money next.”

Michael O'Brien, a managing director and global head of the institutional client group at J.P. Morgan Asset Management, said: “We are at a crossroads. The challenges institutional investors are facing from an asset allocation perspective haven't been seen since the 1970s. There's a high degree of uncertainty around key issues, such as economic growth, regulatory changes and, more importantly, the euro itself.”

Mr. O'Brien agrees that the crisis “has pushed asset managers closer to clients,” creating both “a greater focus on fee-adjusted returns” and ways managers can add value through shared insight or customized strategies.

Drew Carter is a reporter for sister publication Pensions & Investments.