The City’s rollercoaster year


London fund managers deserve credit for their handling of recent global turmoil. But challenges lie ahead, says Elliot Wilson

These are hairy times for London’s fund managers. Market jitters in the spring, caused by upheaval and disasters across the globe, turned into a rollercoaster summer marred by concerns over Europes’ debt pit and America’s debt ceiling.

Leading stocks fell, rose, and fell some more. Amid it all, the City’s fund managers struggled to keep pace with daily events in an environment where customers appeared to embrace risk one week, sinking capital into emerging-market and commodity funds, only to flee from uncertainty the next.

Maybe London’s fund managers should formally adopt one of John F Kennedy’s most famous maxims. When asked why he wanted to be president of the United States, JFK told his interlocutor: “Because that’s where the action is.”

Rarely has the City’s sprawling fund management industry, a daily importer and re-exporter of billions of dollars of retail and institutional capital, seen so much action. Nor has it ever been so important: as a method of preserving and nurturing the precious wealth of a nervous, brittle West and an increasingly assertive and dominant emerging world.

Despite, or perhaps because of, the chaos surrounding events across the globe, London’s fund managers are busier than ever.

According to figures from the Investment Management Association (IMA), a London body whose members manage around £3.4 trillion in investment capital, the second quarter of 2011 saw the highest sales of fund of funds on record, rising 37 per cent year on year to £63.5bn.

More than ever, fund managers come to London in search of help, advice and new products from their UK-based counterparts

Tracker fund sales jumped 33 per cent over the period to just over £30bn, while so-called ethical funds also swelled in popularity. Total fund sales in the second quarter topped £600bn, nearly back to pre-financial crisis levels, and a 22 per cent rise over the same period a year ago.

Records are being set everywhere one looks. At times it seems that the main problem is matching surging demand with the right products.

Net retail sales of global funds based out of London, geared toward everything from commodities to emerging-market blue-chips, hit £2.2bn in June, the highest rate on record.

Demand also soared for products closer to home, with sales of funds connected to the performance of sterling hitting a record high in the second quarter. 

Strange times indeed

These then are strange times for the City’s fund management industry. Turbulence goes hand in hand with profit in specific areas of finance, notably hedge funds, but rarely does it tally well with the staid old world of selling generic fund products to retail and institutional clients.

Yet more than ever, it seems, the world needs London and its fund managers.

It’s sometimes easy to overlook how vital this sector is, not just to Britain’s economy but also to a global desire to maximise and protect wealth and assets.

More than ever, fund managers come to London in search of help, advice and new products from their UK-based counterparts.

Take Motilal Oswal Asset Management, one of India’s leading fund managers. Seeking a way to drive demand for Indian stocks among global investors, Motilal’s managing director Nitin Rakesh turned to London-based Gemini Investment Management, which built them a series of funds explicitly designed to channel foreign capital into Indian securities.

With Indian stocks set to rise after several bad months, rarely can such a move have been better timed – and it was all done in London, sucking global capital into the Square Mile before repackaging it and funneling it, as foreign institutional investor (FII) money into India’s riskier but higher-growth equity markets.

What explains London’s continuing global pull? Miles Templeman, director-general of the Institute of Directors (IoD), a body representing around 44,000 UK company directors, notes that predictions of the demise of the City in 2008, at the height of the Lehman-induced financial crisis, were “very premature”.

“London still has so much going for it, not the least…the status of English as a global language, and the deep pool of talented individuals,” he adds.

“London’s financial centre benefits enormously from the presence of the world’s leading legal services and an abundance of creative and technological industries.”

This clustering of global talent – perhaps, ironically, never more important than during these turbulent and uncertain times – in turn reinforces the view of the City as a “safe” financial centre and, just as importantly and generally, a great place to do business.

No room for complacency

Other advantages are also easily overlooked. Richard Buxton, head of UK equities at British asset management giant Schroders, highlights the City’s position at, in financial terms at least, the centre of the world.

But London cannot afford to be complacent. Much can still go wrong, despite the sturdy consistency of an industry that briefly wobbled in 2008 before quickly righting itself

“London still has and will never lose the unique benefit of its time zone,” he says. “It sounds daft but it’s a huge advantage. You can genuinely link up Asia and the US [from here].”

Regardless of their intrinsic geographical advantage, London’s fund managers have, undeniably, done well to survive the carnage of the past few years.

Many believe the industry has survived in large part because they have learned to become more international; more relevant to a rising set of nations external to the troubled regions of Europe and North America.

Thus, the likes of Schroders, Aberdeen Asset Management, Henderson Global Investors and other leading City asset management giants have expanded aggressively across the emerging world.

“UK fund managers have managed to go global, or at least to become more global, while retaining operations in London. That, I believe, is why there was a limited impact on London as a centre for fund management during the financial crisis,” says Raj Mehta, corporate finance director at KPMG’s financial services practice.

But London cannot afford to be complacent. Much can still go wrong, despite the sturdy consistency of an industry that briefly wobbled in 2008 before quickly righting itself.

“London [still]has to compete with other global financial hubs,” says the IoD’s Templeman.

“High rates of personal taxation can deter internationally mobile talent, while raising little or no extra revenue, and former strong points, such as London’s airports, are turning into weaknesses.

“And that’s before we even mention the shifting regulatory environment.”

In short, London’s fund managers deserve credit for riding out the worst of the financial crisis and the stock market gyrations of recent months. But challenges remain ahead.

If London’s fund management industry is to maintain its standing in the long run and compete with fast-rising Asian nations and city states, it needs to find a way of maintaining its many, powerful existing advantages while fixing its weaknesses.