First Sentier Investors: Targeting UK deals

By Elizabeth Fry

First Sentier Investors is one of the few Australian managers to play well in an international arena. Most have struggled with their overseas ambitions even as the local market becomes more saturated.

The $251 billion asset manager established a foothold in the UK market twenty years ago. Early success in pursuing attractive growth opportunities in Asia-Pacific, China, and emerging market equities gave the then Colonial First State Global Asset Management a solid enough presence in London and Edinburgh to build a substantial business.

Harry Moore, the global head of distribution who recently relocated to London, says building relationships in the wholesale and institutional markets and growing its client book over that time has allowed First Sentier to embed itself into the market and expand alongside clients and platforms.

Asked about opportunities for Aussie managers, Moore pointed to private market deals, specifically in European or global unlisted infrastructure. "This is because of where UK pension funds are in the unlisted infrastructure space. For some, it's early days," he says.

"It's an interesting piece that will play out for another decade."

First Sentier changed its name as part of a rebranding following the sale from Commonwealth Bank of Australia in 2019 to Mitsubishi UFJ Trust and Banking Corporation, a subsidiary of Japanese conglomerate Mitsubishi UFJ Financial Group. in markets outside of Australia.

Moore explains that Aussie pension funds were early buyers of unlisted infrastructure assets and have a distinct advantage since many UK pension funds were slow to move into this asset class.

He notes that Australian asset owners are opening offices in Europe to find additional opportunities and higher returns in private markets.

"We think there are genuine returns available, and hopefully, the performance we derive for clients is positive, notwithstanding private market strategies are typically more expensive."

Aside from infrastructure deals, Moore is also looking at Chinese equities and responsible investment. On the latter, he argues that the new sustainable finance disclosure regulations (SFDR) are throwing up fresh opportunities for active managers.

"You can't underestimate its relevance. It is part of every conversation I have over here, every day."

That's because pension funds struggle to navigate the transition to a lower-carbon future.

While actively managed funds have been able to change their strategies to meet the evolving investor thirst for sustainable funds, it's harder for passive funds to comply with the new rules.

SFDR and the EU Taxonomy are key pieces of regulation impacting asset owners and managers in Europe.

Big opportunities

According to Moore, clients are looking for more detail from managers on how they are engaging with companies, which SFDR rating they are attributing to investment strategies with an overarching view to avoid greenwashing.

Will this push more funds towards active managers? "Potentially," he says. "Or to more thematic funds which can be passive."

Moore expects the new SDFR regulation will eventually impact Australia by influencing buying decisions.

As in Australia, the challenges for managers are fees and portfolio risk.

The merging of pension funds across the UK will likely result in a radical overhaul of the asset management industry as pensions pool money into low-cost passive index funds or active strategies where the pooling achieves benefits of scale and lower fees.

That presents two opportunities. Firstly, managers can be part of that aggregation. Second, Moore goes on to say, asset managers can engage on a bilateral basis with some of those entities because aggregation is ongoing.

On data from Willis Towers Watson, the UK pension market is worth around US$3.68 trillion.

The defined contribution market - while still nascent - is worth US$699 million and is growing fast - having nearly doubled in the last five years.

"That market is interesting to Australians as they have watched these schemes grow and their investment strategies develop," Moore says.

"We can see the defined contribution market evolving, and it could be larger than the Australian market. Then you've got the wholesale market which is significant. Wholesale clients still embrace active management, and that market is magnitudes larger."

Defined benefit funds are worth $U$2.98 trillion, but most have moved to de-risk portfolios, which has seen assets shift from growth products into safer investment classes.

According to Moore, this takes away a significant opportunity for active managers since many clients will pursue a whole-of-portfolio solution with the world's top asset managers.

Specifically, he notes American International Group's US$150 billion outsourcing deal with the US$10 trillion BlackRock. And British Airways last year shifting US$35 billion of its pension assets to BlackRock.

"If you want to outsource that level of assets, you can only go to a handful of global players.

"For FSI, it's about maintaining the existing book, continuing to build a stronger institutional business, and staying relevant with good performance and strong engagement," he says.

Partnering with pensions

Moore recognises that partnering with pension funds is the topic du jour.

Moore claims he has never met an asset manager who wouldn't want to want to partner with a super fund although he warns that partnering with a $500 billion pension fund is difficult.

"Everyone says they want to be a partner, but can you really partner, and what does that partnership mean to the client?".

Providing a whole-of-portfolio service is not what First Sentier offers.

"Of course, we want access to discuss opportunities, but you have to make sure you can have the breadth of conversation," he cautions.

"We have niche strategies and a clear identity. We approach clients when there is an interest and a validity rather than being all things to all people."

How then are managers thriving in such a dynamic marketplace? And what does he advise peers wanting to sell products in the UK?

As super funds merge and grow, he says, the trick is to grow with them even though there might be a time when they outgrow your strategies.

"That calls for an honest conversation about where you can cross-pollinate. For instance, can you work with clients on their responsible investment and diversity policies?

"Sometimes you can add value, and sometimes you can't, but you at least can have a broad conversation about what you can provide in addition to investment services."

As in Australia, the defined contribution market is heavily weighted towards passive investment in an increasingly fee-constrained environment.

"There is an opportunity for active managers in the medium term, but now passive investment is being pursued," he says.

"We are part of an industry consultation on fee caps. If caps are introduced, it is more difficult to introduce unlisted and illiquid assets, which provide diversification benefits and should benefit returns."

Moving in parallel

Moore thinks the Australian and the UK/Europe markets are running in parallel and share many of the same characteristics. However, with such big pools of capital, he predicts that many more pension funds and entities will reach a greater scale in UK/Europe than in Australia.

Moore is not convinced that the industry shakeout will result in fewer managers since anything of interest to London clients will appeal to clients in Europe.

"While the London market might be challenging, there is still an opportunity if you have a good asset class and a strategy to distribute more broadly through Europe.

First Sentier is well-placed to expand its business offshore.

But for newcomers, building relationships with asset consultants, regional platforms, and wholesale and institutional markets is hard work.

Moore advises a serious commitment to a region is paramount. "Further, those efforts must be consistent."

"It may well be that clients might not want what you provide today, but that doesn't mean that they won't support you in the future. You must be clear on strategy and not be moved too much by market ructions."

Back in Australia, First Sentier has focussed on insurers that are beginning to invest in unlisted infrastructure and the wholesale market, with the sale of many wealth businesses after the royal commission into financial services.

The asset manager is also looking at challenges and opportunities in the platform world, noting that the sale of BT will shake up the market.

And what about the skills needed for a distribution manager to compete in the UK?

"A portfolio manager and business development manager require similar skills but more insight into sustainability trends and responsible investment."