Running Funds Far From The Madding Crowd

Bagpipes and plaid kilts are what come to mind when most people think of Edinburgh. That image is just fine with Chris Ruffle, who recently moved to this medieval Scottish city to join fund managers Martin Currie Ltd. Ruffle will visit more than 100 companies in the Pacific Basin this year, and after the hustle and bustle of Taipei, Shanghai, and Seoul, he loves coming home to sedate Edinburgh, where he and his wife are renovating a castle that they call home.

And they're happy to keep the city's secret: Edinburgh harbors a thriving fund-management industry that is the envy of Wall Street. With its independent boutiques, plus funds controlled by Scotland's big life insurers, Edinburgh beat all but London and Paris among European Union cities in the amount of equity funds invested last year. Altogether, Edinburgh's investment gurus manage $220 billion in assets, employ some 5,000 people, and account for 25% of the transactions at the London Stock Exchange. Now they are making a push into the U.S., whose pension and mutual-fund managers are rapidly increasing their overseas investments, particularly in the esoteric markets that are Edinburgh's specialty.

SCOTTISH EMPIRES. Managing other people's money is old hat in Edinburgh. And these days fund management is one of the hot spots of global finance. On June 21, Barclays Bank PLC, Britain's largest bank, acquired the San Francisco-based fund-management joint venture between Wells Fargo & Co. and Nikko Securities Co., with $250 billion under management. Major Continental banks have also announced their interest in expanding their fund-management capabilities, following Commerzbank's acquisition of London-based Jupiter Tyndall Group PLC this spring.

In fact, hardly a financial institution in the world hasn't pronounced a desire to move into fund management or expand an existing operation. So global investment banks would love to get their hands on the lucrative business of Edinburgh's two dozen or so boutiques. With such names as Martin Currie, Ivory & Sime, and Baillie Gifford, they dissect the performance of thousands of companies, analyze the political risk of governments in Asia and Latin America, and assess the new cadre of managers in emerging economies--all from quiet Edinburgh.

Not that Scottish money managers don't get out and kick the tires. Many, like Ruffle, spend half their working hours on airplanes and in hotels on site visits. But they make their investment decisions far from the hurly-burly of a trading floor. Some of the older fund management houses occupy Georgian mansions, built in tidy rows around Charlotte Square in so-called New Town, which was built in the mid-1700s as the city's financial district.

Among the main strengths of the Edinburgh houses are their niche specialties. Dunedin Fund Managers Ltd., with $8 billion under management, emphasizes Japanese and other Pacific Basin equities. Martin Currie, managing $5.7 billion, has recently built a reputation for following India and Taiwan. Edinburgh Fund Managers PLC, with $5.5 billion under management, has one-fourth of clients' money in Asian and Latin American emerging markets, and in April it organized a team to explore investment opportunities in 15 African stock markets.

Why the powerful presence of global fund managers in misty Scotland? History, mostly. In the 19th century, Scotland produced a large number of industrialists who created shipbuilding and manufacturing empires--including Andrew Carnegie and the Mellon dynasty. The Scottish economy couldn't absorb the excess capital, so the wealthy barons hired Scottish bankers, famous for their thrift, to export it. The bankers created the first mutual funds, called investment trusts even today, as a way to pool surplus capital, scour the world for investment opportunities, and divvy up the returns. Much of the money ended up in what was then the world's most promising emerging market, America, to build railroads, run cattle ranches, or operate silver mines.

Scottish fund managers thrived because their shrewd investments paid off. Like most of their peers, Edinburgh managers are careful with money, but their expertise in emerging markets satisfies the desire of pension fund trustees to participate in fast-growing economies without taking on high risks. For example, Edinburgh Fund Manager Director Michael Balfour oversees seven teams of fund managers, each with a geographic specialty, and he decides how much of each client's money should be allocated to each region. Balfour, in turn, must justify his choices to four other directors he describes as "conservative and boring." "We've had no Barings, no Guinness, no Metallgesellschaft," he says, ticking off the past decade's financial blowups. "Nothing goes wrong."

Well, almost nothing. Balfour and his colleagues are still digging out from a rout over much of the past year, when a combination of steep interest-rate hikes and Mexico's peso scare sent investors scurrying to their bunkers. Equity prices fell sharply in emerging markets and even in mature ones such as London's. John Colban, research manager for pension consultants Sedgwick Noble Lowndes, says total fund returns of most Scottish houses underperformed Britain's median of -4.8% in 1994.

Still, most clients will overlook a bad year if long-term performance remains high. Jim Biundo, who oversees Colorado-based U S West Inc.'s $9 billion pension fund, has used Dunedin since 1988 to invest $300 million in Pacific Basin equities, and he agrees 1994 was not a banner year. But over five years, returns have averaged 12.3%, vs. 6.8% for a Europe, Far East, and Australia portfolio run by American-based fund managers for U S West. Now, Biundo may give Dunedin a bigger chunk of funds.

Dunedin hopes to attract more U.S. pension fund money, as do other Edinburgh houses. Some have had big wins already (table). Baillie Gifford, for example, manages pension funds for Goodyear Tire & Rubber, J.C. Penney, and United Airlines, as well as New York and five other states. In a search for more diversification and higher returns, U.S. managers invested $50 billion worth of new pension assets in overseas markets in 1994. According to Connecticut-based consultants Greenwich Associates, 70% of that went into equities. Many pension fund managers say that by 1998, they want to have 15% of their overall funds in international assets--up from around 11% now. That means $150 billion in net new funds will pour out of the U.S. over the next three years.

EASY RECRUITING. Europe's universal banks and Wall Street's investment banks aren't blind to that trend. So they are eyeing the Edinburgh firms as possible acquisitions, impressed by their growth and specialization. The fund-management business produces more reliable earnings than do trading profits and can be lucrative even in a down market. Income from fees ranges from 0.5% to 1.5%, based on the portfolio's value. Specialized investment trusts, such as those for emerging-market stocks, command higher fees.

So far, though, mergers have been few. Murray Johnstone Ltd. of Glasgow and Edinburgh agreed to be acquired last year by Boston-based United Asset Management Corp. At Dunedin, half-owned by Bank of Scotland Ltd., Investment Director Gordon Anderson says: "Merger discussions go on all the time these days." Balfour at Edinburgh Fund Managers says U.S. investment bankers have "been in to see if we want to sell." But, he asks: "Why would we sell? We're just 100 employees, and we're fantastically profitable."

There's another reason to want to stay independent. Fund managers here like their lifestyle, which combines the adrenaline-pumped pace of the world's capital markets with the relaxed feel of a weekend in the country. House prices and office rents are one-third the going rate in London. Crime and pollution are almost nonexistent. Morning and evening "rush hours" last 15 minutes. Transportation is so simple that many employees go home for lunch. "We don't find recruiting to be much of a problem," says Dunedin's Anderson. No matter what happens, Edinburgh will remain a preeminent place to manage other people's money, because the managers just don't want to leave.

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