The merged business currently makes tactical asset allocation decisions for over €100bn of assets and is planning to offer TAA as an overlay strategy.
Mr Broccardo says: “TAA was neglected in the late 1990s when people were making 20 to 30 per cent, depending on which equity strategy they were using. But in a world where people have more realistic long-run return expectations, the advantage of asset allocation has become obvious again.”
Adding that F&C aims to “commoditise” TAA, he contends that many investors who awarded asset allocation mandates in the past were reluctant to use their risk budgets.
He explains: “They have pulled their asset allocation punches. In the UK, asset managers have made very timid allocations in aggregate over a number of years.
“They have been spending all of their risk budget on stock selection and strategy possibly because they were less confident about their ability to add asset allocation value or because they were not prepared to take risk in that area.
“We look to define a certain amount of value-added from asset allocation and we always target an amount of risk in a portfolio to generate that.”
Mr Broccardo expects the greatest demand for TAA mandates to come from continental Europe.
“We are working with our distribution channels to see how this product might come to market,” he adds.
Research capabilities
F&C is ploughing considerable resources into economic research, asset allocation, market strategy and asset liability modelling.
The GTAA process combines top-down and bottom-up research using quantitative techniques and qualitative analysis. To implement the process, F&C has assembled a 12-strong strategy team of analysts based in Amsterdam and London.
The formation of dedicated teams of managers within F&C is a strategy seen as key to profiting from the growing trend towards specialist mandates.
The structures of the newly-merged European equity investment team and the global equity team will encompass sub-teams dedicated respectively to “core” and “high alpha” strategies. The former will aim to fulfil the needs of the lower risk segment of client portfolios, the latter the higher return, higher risk segment.
Mr Broccardo explains that investors are increasingly hiring specialist rather than generalist managers and that the injection of new talent from Isis is designed to allow F&C to have the sought after capabilities, but in a wide range of asset classes.
A further innovation will be the integration of the UK equity team into the European team.
The move is also designed to meet the changing demands of clients who are increasingly asking for pan-European portfolios.
“We want to be the leader in the pan-European marketplace, “ says Mr Broccardo .
Richard Wilson, former head of international equities at Gartmore, has been drafted in to run the pan-European equity team.
“We needed someone with broad equity fund management experience to run a team of 40 people,” says Mr Broccardo.
New product launches are high on the agenda at F&C, which will soon roll out a new long/short hedge fund and a fund of hedge funds.
The firm, which manages €1.72bn of assets in alternative investments and structured products, will be marketing these products to existing institutional clients in Europe.
F&C has also inherited a €2.16bn socially responsible investment portfolio from Isis.
Mr Broccardo is both quick to underline F&C’s commitment to SRI and to refute a suggestion by a UK national newspaper that he might be less enthusiastic and vocal than Robert Talbut, the former CIO of Isis, on corporate governance issues.
He says: “We take corporate governance extremely seriously. Our experience is that good governance is correlated with transparency and clarity within companies, which in turn is correlated with achievement at divisional levels in terms of hitting targets, which ultimately in the medium term is reflected in share prices and the relative valuation of those firms.”
However, F&C’s professed commitment to good corporate governance is called into question by the Ł13m (€19m) paid to new non-executive chairman Bob Jenkins as a result of the merger. Claiming to have admired Isis’s SRI strategy from afar, Mr Broccardo says that one of his first decisions following the merger was to upgrade the reporting structure for the SRI team within F&C.
Karina Litvack, who leads a 12-strong governance and SRI team, reports directly to Mr Boccardo. When working for Isis, she reported through a head of research to the CIO.
Ethical comeback
F&C has absorbed a number of ethical funds, both UK and global, which were managed previously by Isis under the Stewardship brand. Poor performance over the last three and five years has been turned around in the last 12 months with the Stewardship International Fund returning 8.92 per cent compared with a sector average of 3.26 per cent and 5.99 per cent registered by the S&P 1200 index.
Isis had been marketing its Stewardship funds actively in the UK and overseas. Mr Broccardo says F&C will promote the SRI funds to its existing continental European client base and to consultants in Europe.
Mr Broccardo is particularly bullish about the prospects for F&C’s Pacific equity investment capability following the structuring of a new London-based team of eight fund managers, with three focusing on Japanese equities and five on Asia ex-Japan.
He boldly predicts that F&C, which manages $6bn (€4.72bn) of assets in Pacific equities, will be “the market” in London for this asset class.
“We see Asia-Pacific as an exciting region in the medium term, with China playing an important part in driving investment opportunities. It is our aspiration to be seen clearly as a leader in the provision of active Pacific equity products. We want this important source of alpha to be a key part of our proposition.
It is hard to quibble with F&C’s performance in the asset class over the last 12 months. The F&C Pacific Equity Fund has returned a respectable 8.94 per cent compared with a sector average of 2.01 per cent and the 9.3 per cent performance of the MSCI AC Pacific ex-Japan index.
F&C has enlarged its bond team to 47 members, hailing it as “one of the biggest and best resourced fixed income department in Europe”. Helen Roberts, newly-appointed head of sovereign debt, is leading a drive to boost F&C’s share of the actively-managed inflation-linked bond market in Europe.
F&C, which manages €3.5bn of assets in inflation-linked bonds, claims it can achieve a return of 50 basis points above the Barclays Inflation-Linked Global Bond index.
The firm, which manages fixed income assets totalling Ł65bn, has also been urging investors to move down the yield curve and buy Triple B-rated and high yield bonds.
Mr Broccardo says: “We have raised a lot of money for high yield products over the last two years. It was the right asset allocation to make.”
Now F&C is starting to actively market its small-cap equity investments.
“Its an alpha source which our clients have looked upon as a specialist product in the past. Maybe there are ways in which the significant alpha to be derived from small-cap equities can be used in other products,” he says.
Raising alpha
With the merger complete and the desired specialist investment structure now in place, Mr Broccardo expresses optimism for the future.
“We now have the opportunity to develop new high alpha strategies for a rapidly-changing marketplace. There has never been a time in my career when client demands have changed so quickly in the space of five years. But the acceptance of different ways of satisfying those demands is much higher.”
