Gary Withers, First State Investments’ recently appointed CEO, is in his element, energetically building what he sees as a “pure alpha firm” in an industry getting bogged down in tangential and peripheral issues
First State Investments represents the UK and Asian operation of Australia’s Colonial First State Global Asset Management, which is the asset management business of the Commonwealth Bank of Australia (CBA).
First State, previously Colonial First State, is built on the acquisition in 2000 of Stewart Ivory, which tried bravely to grow a diverse fund management business, having acquired it at the peak of the market. By the end of 2003, First State shook out what were considered loss-making non-core activities, and the business set a new course.
“It is like a phoenix risen from the ashes,” says Withers. “We picked up a $1bn business and have transformed it into a $30bn business. But,” he adds generously, “we did inherit Stewart Ivory’s excellent Asia Pacific track record and investment philosophy.”
Despite rocky markets, he has ambitious expansion plans for First State and is intent on strengthening his teams in alternatives, emerging markets, and infrastructure, which he sees as part of the DNA of the firm’s Australian parentage.
Know your corporate
A veteran of the industry, with both retail and institutional experience (his previous post was head of asset management Emea and then head of global investors at Credit Suisse Asset Management, and he oversaw the sale of CSAM’s businesses to Aberdeen Asset Management), he believes the recent upheaval has provided a great opportunity for firms that know who they are, and what they want to do.
For First State, that means a smaller unit dedicated to outperformance and long-term investing. Different business models have their pros and cons, but he speaks animatedly about how many major investment firms “lost the plot” in the 1990s, with skewed incentives in both corporate and governance terms as they bought in assets and then milked them for as much cashflow as possible.
He believes such short-term business models are as perishable as their style: “What they do is see an opening, magic up a product, sell it hard, close it off and then try to find the next opportunity. The problem is, if you can attract $1bn assets in six months, those funds can walk the other way in six months as well.
“That is just miles from what we do here. I suppose both are asset management models, but with such a different ethos. We do not like the flipping and leverage way of doing things,” notes Withers. “It is more like buy and hold, but with constant reviews.”
Best owners
Withers now considers classic investment banks are not particularly good long-term owners of a long-only asset manager – and nor are insurers. (He had a spell with Aviva as head of strategy and in 2002 became chief executive of Norwich Union Life, until he moved to Credit Suisse in 2007). “The problem with insurers is they are used to steady income streams, so they tend to take the money for granted. With all those captive assets they should be fantastic asset managers, but a lot of them just do not get the performance driver.”
He recalls the golden days of Mercury Asset Management, which then became part of Merrill Lynch Investment Management, the bellwether of the industry in the UK. “It was drilled into us that if we had poor performance we could actually end up with no assets,” he explains. That is why he wants to make sure First State Investments remains a pure, active, long-only asset manager.
The flagship fund is the Asia Pacific Leaders fund, which has delivered top-quartile performance over three and five years. “I want to build that kind of investment capability across all of our products. That, actually, is the most interesting bit of what I am doing.”
The smaller firm provides more fun, long-term success and stability, attracting what he calls the right kind of talent. “We have time horizons of five to 10 years, not five to 10 months. It is less sales-target-driven, although just as disciplined. It is about understanding corporate management, sticking with what you know and being aware there will be bad years as well as good years.”
The right kind of client
He feels the strategy and philosophy sits well with the client base, which is “very long term by nature”. “We attract the type of client that accepts our investment approach,” he says, especially among very demanding high-net-worth investors. “We see the money as our own. We look after client money in the same way we would our own.”
Part of the strength of the process is being prepared to admit to being wrong, but to hold absolute positions. “We call it conviction, but with caution,” he explains. In the heady years up to 2008, that was highly unfashionable, as it was all to do with momentum.
Conviction also served the firm well through the financial crisis, when, for example, in contrast to other managers, many First State funds had no bank stocks in their portfolios.
Now, with Asia and emerging markets the new favourites, the firm is looking for upside from economic growth but is also alert to downturns and spikes. Performance is protected by a degree of caution, by avoiding the hot stocks. “We see a whole lot of people rushing after the same things and we try to avoid that.”
First State has offices in Hong Kong, Singapore and Indonesia, supplying regional equity and bond investment expertise to the global investment team and a range of products to Asian investors. The company is represented in Shenzhen and Beijing as First State Cinda, a joint venture with China Cinda Asset Management Corporation.
In the UK, First State is also the investment manager for the Scottish Oriental Smaller Companies Trust (SOSCOT), an investment trust which invests mainly in smaller Asia (ex-Japan) quoted companies.
Capacity counts
Withers is alert to capacity issues and the impact they can have on performance: “We have had to close funds, but we re-open them where appropriate,” he explains. In 2009 First State set up the European Direct Infrastructure fund, which had a first soft-close in October at $230m and is coming up for another close. “That could go all the way to $1bn, to $1.5bn,” he says, “but we are careful not to let fund flows outstrip capacity.”
While the investment banks are looking for big tickets – the sovereign wealth clients with $1bn or more, First State is happy with mandates of $50m plus.
Mega mandates put a firm’s name up in lights across the industry, but Withers warns such flows are increasingly likely to be seen as conflicted, by regulators and clients alike.
“As we have seen, it is very hard to run a big ship in a tight way and still let creativity flourish. The temptation is to wield the power that you have in an almost obsessive way. For a long time that was allowed and admired, so no wonder many firms thought they could profit from it. But times are changing.”
He is clear he does not see First State getting involved in distribution. “We are definitely not in this space, and we are happy with that. We spend very little on marketing, yet we were the fifth largest net retail seller in the UK in 2009,” he notes. “That rests entirely on performance and ratings, and selection by the professionals employed by wealth managers to screen funds.”
Critical of the endemic European marketing ploys of “pump and sell”, churning product through big marketing pushes, he says independent financial advisers have got wise to that. “They did really well last year, on the whole. They got it right. Unlike other Continental European financial firms, they did not buy at the top and sell at the bottom, and they did the right thing. The population here is very well served by this kind of adviser.”
Future plans
He likes the niche First State occupies on the spectrum of product providers, with a simple proposition and genuine capability. “It is very profitable and long term, very attractive, because we are not burdened with expensive marketing and distribution costs.” Last year, the firm made record profits in a period when many others were struggling.
Withers wants to build on the model built with products the firm and the parent company are very comfortable with – infrastructure, resources and related securities. He is also keen to continue to manage the firm’s “fabulous” Asia franchise and bring access to the UK.
His ultimate aim is to build a strong franchise as a multi-asset manager. “It is not easy to assemble that kind of team. We probably need another year or two.” He admits to looking covertly for people or teams to join him, but with certain provisos.
“We do not want or need to buy mainstream capability. The world does not need another UK equity fund. We go back to what we are good at – getting a unique team together and building on it. So we have to have compatibility of interest and outlook. There are possibilities around, but very good people do not move easily, or cheaply.”
Prudently, Withers will not be drawn on a timetable for his corporate ambition, but concedes: “I would be disappointed if I cannot get to where I want to be within 12 to 24 months, and ideally it would begin by 2011. We do not have to do it, but it is a logical step, and I have support from Australia to do it. They are not short-term thinkers – there is a five-year horizon, at least.”
Caroline Allen is investment editor in Incisive Media’s Financial Services Division and managing editor of Global Wealth
