Schroders Plants Its Flag

Schroder Investment Management’s top brass in London have determined that continental Europe and North Asia offer the best growth prospects for the next five to 10 years, and it is the job of Simon Rigby (pictured), the managing director for Asia, to ensure the fund management giant realizes it in this part of the world. To that end he has been very busy expanding the firm’s retail and institutional presence in South Korea, Mainland China and Taiwan through a mixed strategy of partnerships and acquisitions.

Korea

The firm has just obtained a coveted and rare investment trust management company (ITMC) license, only the third foreigner to do so after Franklin Templeton and Scudder Investments. The license is preliminary, which means Schroders has six months to put in the required capital, staff and systems before the authorities give the business the real green light. The timing seems good because local fund managers have acquired a bad reputation. With the new license, Rigby hopes to launch domestic equity and bond funds under the Schroder name by the end of the year.

The local office – not a full branch but a rep office – is being managed by Jeon Kil-soo, who has been with Schroders for six years. Other top people include Richard Firth, who as Korean chief investment officer remains based in Hong Kong but spends most of his time in Seoul; and MY Choi as head of sales. Rigby expects a staff of 21, and is still looking to hire local fund managers, mutual fund sales people and a compliance officer.

Like competitors such as Fidelity Investments and Jardine Fleming, Schroders prefers to go it alone rather than become involved in a joint venture. But unlike the others, which also want proprietary distribution, Schroders prefers to rely on local partners. It has a relationship with Daewoo Securities, for example, although Rigby isn’t looking past securities companies to sell Schroder funds for now.

“The hardest part about getting the license was explaining things to regulators that seemed perfectly natural to a Western fund manager,” Rigby says. For example, the lines of control from Seoul to Rigby’s office in Hong Kong to London are clear in practice but tax reasons et cetera, make the legal structure complicated, something the regulators didn’t grasp. Going forward, Rigby sees the biggest risk will be a fragile economy with a shaky financial system. The first funds won’t come out until late this year, and Rigby can’t predict what kind of market conditions may exist. “Launching our first fund will be interesting,” he says.

China

“We’re quite open about wanting to do a joint venture with a financial institution,” he says about the Mainland China market. In fact, Schroders hopes to announce by the end of February a strategic alliance with a local player, made with the explicit aim of establishing a joint venture once China has entered the World Trade Organization. He hopes that once the JV rules have been hammered out in post-WTO China, Schroders will then be able to move ahead quickly with its partner. Although at this stage it’s still a guess, Rigby hopes to have a JV by mid-2002 to target the domestic retail mutual fund industry.

Schroders is talking to a range of potential partners, including asset management companies and securities firms. Asset managers bring the prize of a license as well as industry knowledge, but no distribution and the premium on that license will be high. Securities firms provide distribution and if they don’t have an asset management business, will rely more on the foreign partner. But Schroders would have to go cap in hand to the China Securities Regulatory Commission for a license.

Two leading contenders are China Asset Management and Galaxy Securities, to which Schroders has provided technical advice and has a relationship. Rigby, however, declined to comment on whether they are potential partners.

Whatever the final choice will depend on Schroders’ confidence in the key players at the partner firm. “You’ve got to feel who you’re dealing with will absolutely have the confidence from CSRC,” Rigby says. At the forefront of Schroders’ effort have been Tina So, head of investment, and David Lui, a former director of the Hong Kong Stock Exchange who came on board last year to head Schroders’ China business.

The trick to dealing in China is the huge cost involved. Far more resources must be spent than in other Asian markets to establish and launch products, and profitability is years away. But Rigby says the rigamarole is necessary: “The prime mover advantage exists in China.” The regulators will ultimately allow only a managed oligarchy of foreigners to operate in China, and Schroders is determined to be among the in crowd.

Taiwan

In Taiwan, Schroders is looking to acquire a small firm, Asia Pacific, which has a securities investment trust enterprise (SITE) license. These hard-to-get licenses allow a company to create and buy and sell mutual funds. At present, Schroders only has a securities investment consulting enterprise (SICE) license, which lets it act only as a financial advisor and not sell product. Because the regulators are so stingy about handing out SITE licenses, Schroders wants to buy one. This will shave off one or two years from organically obtaining its own SITE license – valuable time to allow Schroders quicker access to the local institutional and retail market.

It’s not a done deal yet, however. Due diligence continues. More importantly, Schroders must ask itself what it is buying – just a license? Are the staff suitable, and can they be converted to the Schroders culture? Is there any distribution to leverage? Rigby hopes to make a final decision within the next three weeks.