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Cracking the Swip

The first responsibility of any asset management business is to achieve a high standard of investment returns for all the people and businesses who entrust it with their money – and for the intermediaries who recommend the investment in the first place.

But how do intermediaries choose the right asset manager, especially given the question marks placed against past performance figures by the FSA&#39s decision to exclude them from its league tables?

The answer must be to assess the fundamentals of asset management. If the fundamentals are not right, then the rest of the business, however superficially successful, will swiftly prove to be decidedly flaky.

The fundamentals boil down to two key questions.

First, is the business of sufficient scale to operate successfully on a sustainable basis? Second, is it able to leverage that scale for the benefit of investors and intermediaries?

Take scale. It matters in asset management. It is essential to spread the rapidly increasing cost of technology and research across a wider base of assets.

Two examples illustrate this point.

Scottish Widows Investment Partnership has spent £1m on a state-of-the-art performance measurement system called Socrates, which measures the performance of individual investmentmanagers and teams against benchmarks.

Bluntly, how many boutiques could make this kind of investment or repeat it as the technology develops, as it most surely will?

It was Socrates who said that “the unexamined life is not worth living”. In asset management, the unresearched investment is not worth making. Scale affords the opportunity to obtain, share and leverage information and know-ledge. In simple terms, it means more companies can be researched in more depth.

Better research and more of it are what scale delivers.

The arguments for scale are compelling, provided that its advantages can be realised for the benefit of investors. This, in turn, leads to process and people.

The investment philosophy driving the process is critical. It is vital to understand businesses as well as markets. Only then is it possible to know what price is appropriate for a given enterprise, whether it is labelled value, growth or something else in the eyes of the market.

This philosophy is tried and tested in markets that are highly speculative and momentum-driven but it ultimately prevails.

Risk control is also a vital part of the investment process. A robust approach to risk control provides investors and intermediaries with the confidence that portfolios are being properly constructed in unusually challenging markets. In volatile markets, it is vital to provide risk protection as well as upside potential.

Scale, technology, research, process and philosophy are key issues in asset management but they all have to be managed by people.

The achievement of consistent, high-quality investment performance is attained by the delivery of a coherent investment philosophy with a distinct culture and ethos and by attracting and retaining top-quality people.

This is, of course, easier said than done. It takes time for a new asset management business to construct teams of people capable of achieving its objectives. It also takes time to create a culture of motivated investment teams geared to achieving sustained superior investment performance.

For these reasons, Swip is run with a distinctive partnership structure so that those participating in its partnership scheme have a part of their remuneration linked to profit and business growth.

This is above normal sal-ary and bonus arrangements. It is an approach which is intended to help set Scottish Widows Investment Partnership apart from its competition – hence the choice of name.

The final ingredient in the successful asset management business has to be ambition. Given the mix of assets required by customers and the rapid consolidation of the asset management sector, ambitions must be global. But only businesses of a certain scale have the credibility to have global ambitions.

Which brings us back full circle. More and more in asset management, issues boil down to scale. In combining the funds previously managed by Scottish Widows Investment Management and Hill Samuel Asset Management, Swip has gone straight into the top 10 asset management businesses in the UK.

It, therefore, has the fundamentals in place to achieve sustained high-quality investment performance.

In turn, that performance will be the primary capability underpinning Swip&#39s busi-ness objectives.

Sustained high-quality investment performance is a function of having in place all the asset management fundamentals. That is self-evidently true. For intermediaries looking forward, an assessment of those fundamentals will become increasingly crucial.

What the creation of Swip is seeking to do is put all those fundamentals in place.


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