Finding its position in the market

Société Générale may be a major name in the French banking world, but its UK fund business, SG Asset Management, seems to prefer to fly the flag for Britain, with no fewer than six UK equity funds in its range of 20. Performance across the range, where the oldest fund dates back only to March 1998, is respectable, with 11 out of the 17 funds with a three-year track record in the top half of their respective sectors over that period, rising to 13 out of 18 funds over one year.

In 1998, when the UK Growth fund was launched, the vogue for index trackers was at its height. SGAM’s clear commitment to active fund management led Virgin boss Richard Branson to stake his money on a high-profile bet that the SGAM fund could not outperform the FTSE All-Share – and hence the Virgin UK Index Tracking fund – by 2% a year over three years. The ensuing three years, of course, saw the technology-led boom and bust in global stockmarkets, and SGAM duly won the wager.

SGAM director Mikkel Bates describes the firm’s philosophy: “First and foremost, we are active fund managers – there is nothing to help achieve returns better than fundamental research and experienced fund managers.”

He says a key strength of SGAM is its size: “At a company level, we are a relatively small – and therefore nimble and flexible – part of a large, global group. We have access to a good team of fund managers here and also to a large, successful team in the US from our purchase of TCW, with primarily bond fund managers in Europe and a Far East team based in Singapore and Tokyo. We are still self-contained in London, but we don’t shut ourselves off.”

The expansion in the retail range to 20 funds came earlier this year, as the firm converted its unit trusts to subfunds of an Oeic. It was reported at the time that it had opened up its institutional funds to make them available to retail investors, but this, says Bates, is only one side of the story. “It wasn’t a case of opening up the institutional funds; we opened up the retail funds to institutional investors as well. The institutional funds tend to be more controlled, and some institutional investors wanted access to the higher-alpha, less constrained funds on the retail side.

“There were funds on the institutional side – such as most of the fixed interest funds, the Far East, global emerging markets and UK smaller companies funds – that we didn’t have access to in the retail range. The ranges we had developed, both on the retail and institutional sides, proved incomplete and this was a short cut to completion.”

Origen director Tony Lanning says he currently does not recommend any SG funds, though he is reconsidering this stance: “It is becoming interesting in a number of areas. In the past, we have recommended the Technology fund. We still think Alan Torry is one of the best tech fund managers, but we are not recommending any tech funds at present.

“The other area is the guys who joined from UBS – Hugh Sergeant and Hari Sandhu, who run the UK Growth and UK Special Opportunities funds. We are very impressed with the funds, but we are not yet actively supporting them.”

James Dalby, head of investment strategy at Bates Investment Services, is still using the Technology fund run by Torry. He adds: “The one fund we have our eye on is UK Special Opportunities [run by Sergeant and Sandhu]. We have been tracking it for the past 20 months and have found it has outperformed in 13 of those months.”

Lanning singles out the acquisition of TCW as one of the main factors behind his renewed interest: “SGAM is beginning to sub-delegate some of the funds, and a lot of products that were not previously available are starting to show up. One of the most interesting is the American Growth fund run by TCW in LA – we are looking at it closely.

“Any opportunity to access fund managers we couldn’t previously access is applauded. TCW has a fantastic record, but we haven’t yet met any of its managers. We are interested because the US is very hard to get right.”

Before the TCW link-up, Torry was also SGAM’s American fund manager. Bates explains: “The previously institutional US fund and the previously retail American Growth fund were both run by Alan Torry. When we converted the fund range to an Oeic, we had two choices. We could either merge the funds or we could offer a choice. Given that we now have within our group TCW in LA, managing $90bn of assets, we decided it would be better to offer a choice.

“TCW manages funds according to a number of different styles and this fund is modelled on the ‘multi-strategies’ style. Komal Sri-Kumar is chairman of the asset allocation committee; he takes a macro view and feeds it into the four strategies that make up the fund. Sri allocates between the strategies and the underlying managers pick the stocks.”

Despite his support for the TCW-run American Growth fund, Lanning admits to feeling a little sorry for Torry: “I think it must have been a kick in the teeth for Torry to be taken off the American Growth fund. He runs the SG US fund, but it’s a tiny fund. Torry is one of the biggest names at SGAM but he is no longer running anything of real interest. I was surprised they took American Growth away from him, but what they have replaced it with is a fab product.”

Lanning says the Income fund – which has in its time been run by founding director Nicola Horlick, and Adrian Gosden, now of Artemis – “stands out as a particular dog”.

But Bates is keen to defend the fund, which has been run by Malcolm Murray since July last year: “Malcolm Murray has been running the fund for 14 months now, and he is one of the most experienced income/total return fund managers I know, with a track record of 20 years at UBS (formerly Phillips & Drew). His strength is his value bias, which suits this fund – it is a total return fund with a slightly above-average income requirement. Clients in this fund tend to be more risk-averse, so he takes a cautious view to avoid any potential capital erosion.

“Our fund doesn’t aim for an enormous yield, but it is cautious, so in bull markets like we saw in 2003 it will underperform. We don’t try to match the Income fund against its sector; we prefer to measure it against the FTSE All-Share index, and it has held up against the index in both strongly rising and fairly flat markets since Malcolm took over.”

With a three-year return of 22.78%, SG Income is not the firm’s best-performing fund in absolute terms, but neither is it the worst. Best over the period is SG Pacific – one of the previously institutional funds – with a return of 43.47%. However, despite this impressive growth, the fund is in fact third-quartile in its sector, where the average return was 49.14%. Over one year, it has fallen into the bottom quartile.

Worst performer in absolute terms is the SG Technology fund, with a three-year decline of 13.74%, though this fund is in the second quartile of its sector over the period, slightly trailing the average return of -10.7%.

In its early days, SGAM was synonymous with the superwoman-like figure of Horlick, but Bates says the firm has had no trouble moving on since her departure last year: “We benefited from Nicola Horlick’s profile when we started, but we soon tried to raise the profile of the rest of the team. By the time Nicola left, she was CEO rather than running money, and in that sense we were already out from under her shadow as a fund manager. There has been no perceptible change in people’s attitude to us since her departure.”

Lanning agrees: “We’d never have bought SG funds on the strength of Nicola Horlick, and now SG appears not to be chasing mass distribution, it’s not much of an issue. At my end of the market, I don’t think the association with Horlick makes any difference. There is a big risk in building a business around big names, but time is a great healer.”

However, both Lanning and Dalby feel SGAM is failing to make the impact in the market that it could. Dalby says: “Despite its broad fund range and relative size, SGAM is struggling to stand out from the rest of the market. John Richards, the CIO, is someone who we rate, but it just seems that with around 20 retail funds SGAM doesn’t excel in any one area. The good news for them is that they don’t tend to be absolutely awful in any one area either. All in all, I would say they are average, which, given their size, means they are not punching their weight.”

Lanning concurs: “Société Générale is a big bank, but in the UK it is still very much a niche player. SGAM hasn’t quite found its position in the market yet – its retail proposition is some way behind the likes of UBS, which from our perspective has done it more successfully. The strength of using high-profile names comes back to bite you when they walk away. There was a period when it was unclear what was happening – not just at the fund manager level, but operationally.”

But he adds: “Interesting products are turning SG into a niche player with support from the big fund strategists and multi-managers, which is where it wants to be hitting. However, it has quite a big fund range that could do with consolidation.”

Consolidation is not on the cards at present. Bates says the first thing on SGAM’s agenda is the conversion to Oeic status of the American Growth and UK Concentrated Core funds, which missed out on the earlier switch because of the change in management in one case, and in the other because of a change in emphasis from a global ex-US fund to a UK focus-type product.

Next will be an application for distributor status on some of the group’s Luxembourg Sicav funds, to take advantage of the rule change in this year’s Budget. “We are trying to avoid duplication, so we won’t be offering the UK and European funds, but there will be some funds managed by TCW and some more esoteric funds that we don’t have in our onshore range,” says Bates. “There’s never a dull moment.”

SG Asset Management, established in London in 1998, is the UK arm of SG Asset Management SA, the global investment management division of Société Générale. SGAM is an active manager offering both pooled and segregated services to retail and institutional investors, covering all major asset classes. Globally, SGAM’s 260 fund managers and 210 analysts run £176bn of assets from offices in London, Los Angeles, Tokyo, Singapore and Paris.