Abbey, the UK banking and financial services group, decided to outsource its asset management late last year. Previously this had been handled by its own investment managers, Abbey National Asset Managers (ANAM), based in Glasgow. ANAM was the investment manager for Abbey’s two life and pensions providers: Scottish Mutual Assurance and Scottish Provident.
The decision to outsource ANAM’s equity and bond fund management activities was part of a multi-manager strategy being rolled out by Abbey’s chief investment officer, James Bevan. Three years ago, he set up Inscape, a wealth management programme that adopts a multi-manager approach.
Inscape has produced consistent returns across different asset classes – in contrast to the Glasgow operation. In a review of core and non-core operations last year, Abbey decided to extend the multi-manager approach to its fund management activities.
That meant closing down ANAM and outsourcing the £20bn (e29bn) assets under management to an external manager. John Kelly, head of manager selection at Abbey, explains: “What happened was that the consideration coalesced around moving to a single external manager and then to pluralise that into multiple suppliers over time.”
The list of asset managers capable of handling this assignment was short, says Kelly. “The family of funds that we had is an eclectic group, with high-risk and low -isk bonds, equities and cash. So we had to find a manager who was more than competent to meet
the objectives of all those funds straightaway.
“We also had to find someone also on whom we could deposit £20bn without knocking them over. We know from long experience that many managers have an attractive record but dropping £20bn on them will capsize them.
“We had to be sure from the regulatory, customer and our own standpoint whatever platform we were going on would be a stable one, in all areas – geographies, asset classes and risk levels. So you will appreciate that the list of finalists who could demonstrate those skills was relatively short.”
Abbey eventually chose State Street Global Advisors (SSgA) which was already one of the managers in the Inscape programme. During the transition SSgA would both manage the funds under the agreed mandate and get the funds into shape so they could be moved to their final destinations.
Nigel Wightman, managing director at SSgA, says that the transition manager has to be prepared to move fast: “These decisions to go from internal to external management are difficult and complex decisions, but they’re decisions that once you have taken you need to implement quickly. So that is typically why we come in on Day One as the interim manager of the whole thing.”
Transitioning a £20bn portfolio also demands a number of different skills, “You obviously need people who are expert in taking on board large and complex portfolios, and who have the technical skills to be able to do that. You then need to have the transition skills to be able to move their assets both to internally managed portfolios and to other externally managed portfolios. And finally you need the fund management skills.”
The outsourcing has been carried out in two stages, he says. “Basically, we did two things. We transitioned assets that we were expected to retain in the medium term and we also transitioned assets that were then moving on to other external managers.”
The second stage is still under way, but the first stage was completed over a single weekend. This required extensive pre-planning, says Kelly. “Before we moved, we went to see the regulators and explained exactly what we were doing, because it’s not something you want to surprise them with. So there was an extensive degree of planning with external oversight to make sure that we hadn’t dropped anything or forgotten anything.
“Clearly we had to have a rehearsal, too. It was a passing exercise from us to State Street and they were determined to make it as easy as they could. So they offered us fund manager support all the way through the exercise. Their systems are superb, so once the data got to them it was in the safest of safe hands.”
The transition was timed for the last weekend in January. “We set ourselves a target of affirming proper transfer by Sunday, and it had been done by Saturday morning. On Friday we were fund managers and on the following Monday we were not.”
The process was eased by the straightforward nature of the assets to be transitioned. “There weren’t any strange or exotic investments, but UK government securities and stocks on major exchanges for the most part,” says Kelly. This reduced the amount of exception reporting when the transitioned assets were matched against the lists sent through before.
“With the systems that are available, exception reporting is a very speedy process. What happens is that all your attention is focused on a small number of securities where a number could be wrong. It was extremely well done,” says Kelly.
To date, Abbey has moved funds to six managers: Barclays Global Investors, JP Morgan Fleming Asset Management, Pimco, RCM, Schroders and Goldman Sachs Asset Management.
This still leaves SSgA with a substantial mandate, says Wightman. “We are left with a large and complex range of portfolios that we are managing – both equity and fixed income UK and overseas under a variety of different briefs. So not just passive but enhanced mandates, indexed plus about 100 basis points, and fully active mandates.”
Abbey says outsourcing ANAM will be cost and profit neutral, and
that saving costs is not an objective. “Generally speaking, external managers are dearer than in-house managers so in terms of cost savings that simply is not a driver,” says
Kelly. “In investment terms it was
a J curve decision. Abbey was prepared to incur additional costs today with the expectation that over time its reputation as a fund management house would improve and its ability to grow assets and retain assets would follow that.”

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