Standard Life Investments is planning to expand its business beyond its traditional core areas of British equities, fixed income and property. Frances Hughes reports on its strategy.
Standard Life Investments’ (SLI) growth strategy is meant to come to fruition this year.
There is a lot of development going on. In the next few months the group plans to launch an absolute return fund and introduce sterling share classes on its Indian and Chinese Sicavs and its European Smaller Companies fund. Later in the year it also plans to launch unconstrained American and European funds, says Jacqueline Kerr, head of mutual funds at SLI.
“There are lots of things we’ve been working on that will come out in 2008,” Kerr says. “We’re going to focus on areas where there is a gap in the market. We want to make sure our product is a strong and credible offering.
“We hope to have sterling share classes on the Indian and Chinese Sicav funds and the European Smaller Companies fund in the next few months. Later this year we’ll be launching European and US unconstrained funds.
“We’ve been building our team in Boston [and] we hope to launch an absolute return fund into the market as well.
“But it’s not just the UK,” Kerr adds. “We have strong plans to develop distribution in Europe and Asia.
“Property, UK equities and fixed income is what we have focused our efforts on for the last few years. We now have plans to expand and build our business from our strength in UK equities and property. To me, it’s just good business sense.”
According to Kerr, one of the top-selling SLI funds in 2007 was the £1.4 billion Select Property fund, managed by Andrew Jackson. Launched in October 2005, the fund is a mix of global direct property exposure and property securities. In January last year SLI launched the Global Reit fund too, which is also managed by Jackson. But Kerr says inflows have not been as strong.
“Global Reit funds have not been successful in terms of funds under management because of the volatility in markets and the downturn in property,” says Kerr. “But we’re still comfortable that our funds will attract money in the medium to long term.”
Of the 33 SLI funds that are listed by Morningstar, six sit in the IMA UK All Companies sector, two in UK Equity Income and one in UK Smaller Companies. And of these nine, five are first quartile over three years to February 11, while two do not have a three-year track record, according to Morningstar.
“We have been successful with UK equities,” says Kerr, “and we have been capitalising on that. But we do have a strong fixed-income team as well.”
There are five SLI funds listed in the IMA UK Corporate Bond sector, while two sit in IMA UK Gilt and UK Other Bond sectors.
Kerr says the SLI AAA Income fund, managed by Andrew Sutherland is one of the group’s most popular fixed-income funds, especially over the last few months. The fund, which was launched in 1999, is first quartile over both one and three years to February 11. “The AAA Income fund provides advisers with an alternative to a gilt fund,” Kerr says. “That’s been very popular in terms of inflow, especially more recently with [advisers] de-risking portfolios. Fixed income in the retail market has not been that popular up until the last few months of 2007. Now there’s more of a focus.”
Of the 26 SLI funds with a three-year track record, 16 posted above-median returns. Over three years to February 11, 10 of the 26 are first quartile, seven are second quartile, six are third quartile and three are fourth quartile. And of the 31 SLI funds with a one-year track record, 12 are in the top two quartiles.
Michael Clarkson, senior fund manager at Solus, holds the £791m SLI UK Equity High Income fund in his multi-manager portfolios. Over both one and three years to February 11, it is first quartile, according to Morningstar.
“It’s important that fund managers have time to concentrate on fund management, and it’s important for us to see fund managers one to one,” says Clarkson. “Standard Life is very good with that.”
Clarkson has held the SLI UK Equity High Income fund since November 2005. Managed by Karen Robertson, the fund is ranked fourth out of 74 funds in the IMA UK Equity Income sector over three years. It returned 31.6% compared with a sector average of 19.5%.
“We’re very pleased with it,” says Clarkson. “It’s got a good track record [and] we hold it in high regard. There are a lot of UK High Income funds out there.”
Like Clarkson, Anna Bowes, savings and investments manager at AWD Chase de Vere, speaks highly of the UK Equity High Income fund and its manager.
“Standard Life Investments has some great fund managers [and] Karen Robertson springs to mind instantly,” says Bowes. “Standard Life [Investments] has managed to distance itself from [the] life company side, which is actually quite a difficult thing to do. The reason that it has been able to do that is because it has both good funds and good managers.”
Clarkson says he likes the consistency of approach at SLI, particularly the Matrix quantitative system it uses and its “focus on change” philosophy. He says the most important factor for him is process.
“We think of a fund rather than a fund group [and] we invest in an investment process rather than a specific manager,” he says. “It’s good to have a consistent approach. Stock Matrix is a tool to help them [fund managers]. It’s a filter. Each fund manager will use it to a different degree. There’s a big universe of stocks.”
The Matrix system is a quantitative proprietary tool, which Kerr says is adapted for different markets. “The two key tools we use in the UK are the Matrix and the winners list,” she says. “The Matrix looks at momentum, growth and value indicators, [which] we constantly back-test. Our winners list is our best 20 ideas. It encompasses our key ideas coming from research done by fund managers and analysts.”
During the recent market volatility, however, Kerr says Matrix did not work well. “When it’s bottom-up fundamentals that count, that’s when we perform really well,” she says. “But in the end, we believe that the bottom-up fundamentals win. Ultimately, we believe that earnings will drive share prices.”
“The Matrix is all very well,” Kerr adds, “but it still has to have good people. To identify what the drivers for change are going to be, it’s important you have a team of really good people. If you harness a strong investment process and get a great team to implement it, you get better results for investors.”
“We are not a star manager culture,” says Kerr. “We want advisers to feel that it’s not a disaster if a fund manager leaves. They still have the benefit of the team and the process.”
A case in point is when Mark Niznik left the group for Artemis in April last year. Harry Nimmo, manager of SLI’s UK Smaller Companies fund, took over management of Niznik’s £440m UK Opportunities fund until his permanent replacement, Caspar Trenchard, was appointed.
“We did lose some money [when Niznik left], but not a lot,” says Kerr. “Advisers see that the investment philosophy behind it, and the team approach, is still there.”
In 2007, gross sales of SLI’s mutual funds increased by 44.7% on 2006. Net sales were up only 13.5% however, owing to outflows from nervous investors towards the end of the year. “We, like the rest of the industry, suffered outflows,” says Kerr. “But we are confident we have retained market share.”