In 2004, when he was the group’s chief investment officer, his team stealthily sold off equities worth £7.5bn (€10.9bn) held by its parent institution, in order to meet solvency and reporting requirements of the insurance company. They used crafty trades, masked in less traceable derivatives, so as not to shock the market. Competitors knew something was afoot, and reported trades of several hundred million going through the market. Jaws dropped when their true extent was reported in the insurance company’s 2005 results.
“There was a whole bunch of us, who did a profound job in six weeks,” recalls Mr Skeoch, who supervised the biggest ever unloading of assets by a UK institution. “And it was almost invisible to the market place. It was a pretty exacting thing to do.”
Mr Skeoch and his investment team were the unsung heroes of the great sell off. As always, it was Standard Life, the insurance company, who were in the news, in this case about their solvency problems, how they turned them around to avoid problems faced by rivals such as Equitable Life, and how investors would be faced with poorer returns due to reduced equity exposure.
The story has been much the same since. Whether it’s been talk of broken promises to holders of mortgage endowments, significant job losses in Edinburgh, or the high-profile and controversial demutualisation, expected to raise €8bn this summer, with consequent payouts for some small investors, the old insurance company, rather than its still youthful asset management offspring has hogged the headlines.
But while Standard Life’s insurance and pensions division has been having a torrid time, losing £330m (€480.8m) in 2004 when policy sales plummeted – although it is now back in the black – SLI has done very little wrong since its creation in 1998. It has consistently been the most profitable arm of the group.
The right move
Sneered at by competitors during the first two years of its existence for managing only internal assets, SLI’s high-profile move away from its Lothian Road HQ to separate premises on the more genteel side of Edinburgh’s city centre has proved to be more than an expensive publicity stunt. Insurance companies may not be renowned for their financial stewardship of clients’ assets, but Mr Skeoch believes the money management force he has created at SLI is the exception.
While the insurance company has savaged its headcount in life and pensions, cutting 1700 jobs in 2004 alone, Mr Skeoch has been allowed a free reign to expand in order to service fast-growing assets, which are £7.3bn up on 2005 to nudge £120bn. Third-party assets now account for £28bn of this total, having increased by more than 50 per cent last year.
Mr Skeoch has recruited 40 people in the last three years, now overseeing 550, to help bring in and keep this new money.
“When we first talked to pension fund consultants, nobody had any doubt that we had the financial strength and wherewithal to be a real player in fund management,” says Mr Skeoch. “The question would be whether we could do it in a short time-frame.”
This all depended on whether improved performance in key classes such as UK equities could be generated. This could only be done if SLI could recruit professionals attracted to an investment culture, rather than an old-school insurance shop.
“Now the boot is on the other foot,” says Mr Skeoch. “People see us a fund manager and want to know what is going on with our parent.”
The success which SLI has achieved has been down to converting the once sceptical consultant community on its doorstep. SLI’s recent appointment to run £225m in high alpha UK equites for Cheshire County Council would have been a major coup five years ago, but these “backyard” successes are simply part of expectations today. Mr Skeoch is keener to talk about the faster expansion happening further afield. “We won an equity income trust from Deutsche last year [a £100m fund previously managed internally] plus some active UK mandates for large clients, but we are not about to stand still. We have been generating success in our back yard, now we need to show we can do it globally.”
SLI picked up a handy €100m corporate bond, balance sheet, mandate from a German insurer last year, but the big deal for Mr Skeoch is that his company wasn’t competing with its old foes of Fidelity and Schroders. This was among the Germans, with SLI the foreign interloper. “The good thing for us was that we were competing with locals and won on the strength of our investment process,” he says. “But both of the people who did our pitch, the CFM [client fund manager] and the fund manager, were native Germans.
“It is a good instance of one of those things we have really striven to do over the last five or six years. We have been trying to take SLI into a much more global space. A lot of people see us as very Scottish,” says the man who certainly isn’t. “Edinburgh is a great place to operate as a fund manager, and people here are very proud of the heritage of the Edinburgh fund management community, but we are branching out.”
Offering solutions
Holland is also seen as a key market for pension scheme clients seeking liability-driven solutions. In this sphere, Mr Skeoch is keen to trumpet his group as offering real investment solutions, not just matching cashflows. Rather than obliterating risk over the short-term, he pictures an evolving LDI sphere, exploiting a variety of investment opportunities over a five- to seven-year term “to generate good, strong, medium-term return for a risk.”
Not for Mr Skeoch are the consultant-led solutions requiring schemes to turn their entire assets over to expensive, inflation-hedging bonds or derivatives.
“There is an opportunity here for somebody who wants to take the longer-term view,” believes Mr Skeoch. “We are fund managers, not actuaries, not pension fund consultants. But we do have a good idea of portfolio construction – how to build a pool of assets to generate a particular return profile, or mitigate a certain set of risks. So by ‘liability driven’ investment, I mean something very different from the ‘liability’ run investments currently in the market place.”
Much of the expertise which SLI has developed in this area has come from managing assets for its internal insurance company client, which faces huge liabilities from maturing policies, in the same was as pension schemes must adjust to mass retirement. “Our proud claim is that active investment management has added £1bn of value to Standard Life’s with profits fund in the last three years, but it is difficult to get people to understand this story, looking at all the issues which have been around,” reflects Mr Skeoch.
And despite strong speculation that Standard Life will sell its high revenue generating asset management business after the flotation, Mr Skeoch expects to keep the same parent, and for expansion to continue. “We are joined at the hip to Standard Life,” he affirms.
Although there are no problems with current performance, there are fears that SLI’s fast expansion could eventually lead to its downfall. The secret to continued success must be about maintaining the correct structure, with Mr Skeoch able to take a “helicopter view” of his troops’ activities.
Chasing huge clients
“There are very few organisations in the world which have an industrial strength investment process that runs joined-up investing, where alpha is concentrated in portfolios of size. Some of our best alpha is in portfolios of £3bn,” he says.
He sees a future of “huge clients,” such as European pension schemes outsourcing mandates to a lead, fiduciary manager who then sub-contracts to smaller specialists. But how can SLI win this type of business if it does not have a depth of products and is known only in several asset classes?
“There is a danger of us being seen as a niche manager outside the UK,” he admits. His defence is that SLI’s well-known private equity offering is sold in 20 countries, including a $225m (€175m) mandate secured from San Bernadino county in California last year. Unfortunately, this success only goes to further confirm the niche nature of the organisation.
Ignoring the hedge fund ‘fad’ and looking for balance
Hedge funds are a fashion, and have yet to prove themselves as a cast-iron asset class, which can weather all markets, believes Keith Skeoch, CEO of Standard Life Investments.
“Hedge funds are a fad, like the width of your tie,” remarks Mr Skeoch. “Neck ties are clearly here to stay, but those of us of a certain age will remember broad kipper ties and pencil-thin ties. But if you talk about non-traditional asset classes aiming at generating absolute return, then that is here to stay.
“If you look back through history, hedge funds massively outperform the long-only community only in bear markets. There is no evidence that absolute return and hedge fund type strategies outperform long-only in an up market.”
Mr Skeoch would rather devote his energies to launching products such as SLI’s unconstrained Oeic fund, which is already up 35 per cent since its November 2005 launch. “We also have a very large pooled fund in the CAPS survey, which was up 18 per cent last year, against a background of some hedge funds struggling to achieve LIBOR. There are people out there who generate returns of 20 per cent, and I take my hat off to them. Where I have an issue is, whether you are operating in a long/short or absolute return community, is whether you can operate successfully in the arbitrage space once you have scale. Due to the illiquidity premium, if you chuck enough money at it, the arbitrage possibility disappears.”
The clever operators in the hedge fund space have worked this out, and move back to long-only investing in the bull market, says Mr Skeoch. He is also scathing of the amount of commodities products being launched. “We don’t do commodities, although a lot of people see it as a growing asset class,” says Mr Skeoch. “I have been in this business for 25 years, they have come in and out of fashion, and are not a viable, long-term asset class.”
What he does back, is the move to the so-called “new balanced” mandate, also championed by Alan Brown, head of investments at Schroders. This involves a manager generating returns consistent with a liability profile and associated risks. Mr Skeoch says one manager would be responsible for the entire mandate, adding alpha to benchmark returns. “Some specialists will then get bits and pieces of that mandate on a sub-advisory basis, working through somebody like SLI, or one of the actuarial consultants.”
Mr Skeoch’s new order will therefore see some mega-groups, handling the core, long-term asset classes, working alongside a plethora of specialist boutiques who can extract alpha from more peripheral or fashionable assets.
“This will take a long time to play out, but my hope is we will see some mediocrity go to the wall,” says Mr Skeoch. “There is clearly overcapacity in bits of our industry.”
