Principal Global Investors has reinvented itself for its first forays into the British retail market, where the key to its success is likely to be how different its offerings are, writes Tomas Hirst.
Principal Global Investors has undergone a year of change as it begins its push into the British retail market.
The traditionally institution-orientated fund manager brought in Steven Brown as head of wholesale to bring its Dublin-domiciled offerings to the attention of IFAs and fund of funds managers.
“Until September 2007 [the firm] had a pure institutional focus and I came on board in summer last year and had to rebrand to position it for the retail market,” says Brown. “It’s taken a year to get to where I wanted it to be.”
The process has included a complete remodelling of the way the company presents itself, both in its marketing – it has launched a new website – and in its reporting to the market. Its aim is to bring the company to the attention of fund of funds managers, wrap providers, bank platforms and other intermediaries.
Brown says the company’s unique investment process will help to differentiate it from its competitors.
“We’re a fundamental fund manager, but to be where we want to be in terms of identifying the correct stocks, we created a proprietary quant system, which uses 10 separate tools to fulfil the three requirements we seek,” he says. “Those requirements are improving and sustainable fundamentals, rising investor expectations and being an attractive relative valuation in its individual space.”
Through this screening process the firm is able to narrow down its investment universe, giving its analysts a list of quality companies from which to make their stock picks. In the Principal Global Investors US Equity Fund, for instance, the analysts look at the components of the Russell 3000 index and the screening process will take out about 80% of stocks, leaving 600 to be considered for the portfolio.
This process not only gives fund managers ideas about what they could be using in their portfolios but also allows them to identify stocks already held within a fund that are not performing as expected, says Brown.
“Within that same process, when the reports are driven the analysts will look at the stocks that we are holding in the fund which have maybe fallen to the bottom of the ranking system,” he says. “You then have to evaluate if there’s justifiable reason to hold on to those stocks or is it time that we should be moving away from them?”
The American equity offering, managed by Jeff Schwarte
and Mustafa Sagun, has consistently outperformed the S&P
500 index since its launch in December 2003, producing annualisedreturns of 8.2% against a 5.6% return from its benchmark. Unlike many of the funds operating in American
equities, the fund has managed to produce a positive return
of 2.2% over the year to September 1.
The firm’s Japanese Equity Fund, however, has suffered under difficult market conditions. With the Nikkei 225 falling by 19% so far in 2008 the fund’s decline of 15.77% over 12 months may seem a modest slide, but its performance places it at 212 of 259 funds – firmly in the fourth quartile. This has knocked its performance over three years into negative territory: the fund returned a loss of 4.8% to September 1.
The importance of Principal’s equity offering has increased in recent years, says Brown, as the firm moves away from its traditional bond fund focus.
“Historically the business was known for its fixed- income capability and we’ve had a lot of exposure in that space,” he says. “More recently it’s predominantly been equity focused because all of our equity funds run on the same fundamental process. The two that stand out in terms of performance and popularity are Global Emerging Markets and US Equity.”
Impressively, of the nine Principal Global funds with a three-year track record seven have produced double-digit positive returns with three funds, including the Global Emerging Market fund, posting returns of more than 50%. Despite this track record, Brown says interest in the emerging market product is not wholly due to good performance.
“I suspect some of that is down to what appeals to the investor in the current climate,” he says. “If you take the emerging market fund, we currently have some form of representation in 50 emerging markets.”
Diversification has become an increasingly popular buzz-word for the asset management industry as high-conviction strategies unwind amid unpredictable market conditions.
Among emerging markets, China, which many commentators were predicting might weather the global downturn better than developed economies, has seen its stockmarket hit badly. Evidence of this can be seen in the performance of Principal’s two Asia-focused offerings, which have both produced double-digit losses over the past year.
In contrast, the Global Emerging Markets proposition is down only 3.12% since last September. Although this does not compare favourably with its peer group’s average loss of 0.07%, it has had little effect on the fund’s three-year performance, which gave investors a 69.16% return on capital.
“Whereas some businesses are more focused on specific emerging markets, we can cover all of them to create a true global emerging market fund,” says Brown. “We’ll have holdings in companies that people have never heard of in countries that people would be very surprised about.”
The equity side of the business, however, is not the only area where the company has defied challenging market conditions. Principal’s best-performing fund relative to its peer-group is the Principal High Yield Investment, which has produced 18.01% over one year and 21.77% over three years to September 1. The fund has been a consistently strong performer and at present sits second and first of 41 funds in its sector over one and three years respectively.
“Our [bond] funds are fairly esoteric and have a high- yield focus which is global in nature,” says Brown. “This makes them fairly specialist and although the past 12 months haven’t been great, people predicting the apocalypse have been proved wrong.”
The popularity of the company’s equity offerings as well as the resilience of its fixed-income funds has seen global assets under management swell to $244.4 billion (£139 billion). This represents a 266% growth in the size of the business over five years and despite troubling forecasts for the industry as a whole, Brown says there is still room for growth.
“Because, as a business, we are relatively unknown we’ve seen a continual increase in flows,” he says. “If you take the UK as an example, the information available to the professional investor means that they are recognising that they should be taking a look at the US again, and in doing that we’re already coming up on their radar.”
Principal is hoping to take advantage of the continuing trend among British investors to look beyond traditional asset classes such as British equities. According to statistics from the Investment Management Association (IMA) while British-domiciled funds saw total assets under management fall from £458.2 billion in July 2007 to £414.3 billion 12 months later, assets in offshore domiciled funds grew by 11%. This puts total assets managed offshore at £18.2 billion despite net outflows of £91.3m in July.
This increase suggests that at least some professional investors are becoming more comfortable investing offshore. With the advent of Ucits IV and the continuing push for fund “passports” that would allow for greater transparency as well as further access to other markets, it is clear that demand exists. The problem is that with the wealth of funds available onshore, a product has to appear profoundly different from others to be looked at by an adviser. This is not only because they have traditionally operated solely in the British-domiciled universe but also because some advisers use platforms that do not allow them to run performance comparisons between onshore and offshore vehicles.
Furthermore, as reported in Fund Strategy (August 18), some IFAs feel that if a fund is good enough for the British market then there is no good reason to keep it offshore. Darius McDermott, the managing director of Chelsea Financial Services, says he prefers onshore since “if the funds are good enough for the UK market, why not have them onshore?”These concerns, among others, are being addressed by a committee, which has been in discussions with the IMA since January about the best way to bring offshore funds into the British market. Principal Global was among the first to give impetus to the discussions and Brown says he is hoping for offshore funds to be able to list in IMA sectors to make it easier to compare their performance with their onshore peers. Brown and Nick Smith, the head of retail for Allianz Global Investors, say that the British market is ready to embrace offshore vehicles, providing they match the clarity and accountability of existing onshore offerings.
James Davies, an investment research manager at Chartwell Investment Management, says the move may open up a range of thematic plays that have not been available to IFAs and fund of funds managers who limit themselves to onshore funds. The relatively small size of the business and the specialist nature of the offerings make Principal an interesting play, says Brown. He says the fact that the company is not based in Britain means that it is not having to compete for attention against the behemoths of the asset management industry.
“The key factor in the UK is that fund of funds managers and wealth managers have this wealth of information available and are able to add value for their end users by investing in funds that perhaps their clients have not even heard of,” Brown says. “Because of this we can get our message across without having to directly compete with some of the largest asset managers in the retail space.”
Principal remains an unknown quantity in terms of the British retail market as IFAs are unwilling to comment on the group until they have more information on the funds. How successful the group will be, however, will be less dependent on the outcome of its negotiations with the IMA than on its ability to continue its strong performance in areas where it can offer products unlike those already in the market. This, more than anything else, will bring it to the attention of advisers and wealth managers.
PRINCIPAL GLOBAL INVESTORS is a diversified asset management organisation and a member of the Principal Financial Group. It manages $244.4 billion (£139 billion) in assets mainly for retirement plans and other institutional clients. Its investment capabilities encompass a range of equity, fixed income and real estate investments as well as specialised overlay and advisory services.
The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.