THE BUY SIDE - Life Beyond BT

Hermes Pensions Manage ment is finally gaining some room to maneuver. The venerable British institution, which has long been beholden to its owner and largest client, the BT Pension Scheme, is about to embark on an ambitious five-year expansion designed to increase its capabilities and broaden its investor base.

Under the plan Hermes, with BT’s blessing, will invest £50 million ($99 million) to build up its technology infrastructure and hire new specialist investment teams with the aim of turning the genteel pension-asset manager into a cutting-edge, multiboutique investment house.

Doing so will be no mean feat for newly minted CEO Rupert Clarke, who previously ran Hermes’s real estate group. Clarke has already inherited one major work in progress: an aggressive expansion of Hermes’s alternative investing strategies begun by the firm’s former star executive, Mark Anson.

Clarke, 49, stepped up as interim CEO in July after Anson — who had only joined the firm in February 2006 — announced that he was returning to the U.S. to join Chicago-based Nuveen Investments. In December, after a three-month search, Hermes announced that Clarke would be taking up the job permanently.

As part of its new expansion plan, Hermes for the first time will pursue a divide-and-conquer approach, creating a dedicated 35-person team to handle BTPS’s portfolio and freeing the rest of the investment staff to focus more closely on third-party asset management. Hermes, which currently employs 153 investment professionals, manages funds for some 240 external clients — including pension funds, insurance companies, government entities and financial institutions — but BTPS still accounts for £37.1 billion of its £52.4 billion in assets.

Not surprisingly, BTPS trustees have always been concerned lest the third-party business detract from the management of its own assets. External investors, meanwhile, have worried that BTPS would dominate Hermes’s best, capacity-constrained funds. By separating the management teams and increasing capabilities, Clarke hopes to allay both sides’ concerns.

“If we’re going to expand our range of first-class investment products for all of our clients, we simply need to have more flexibility in terms of our operating platform and resource allocation,” he says. “The focus of our structure will be on developing high-alpha products and growing third-party investor business, but that doesn’t mean that we’re going to take our eye off the ball for BTPS.”

As a means of reassuring its owner, Hermes has assigned the talented Nigel Labram — who was recently promoted to executive director of strategy and alternatives for Hermes — the task of running the new pension team for BTPS. The 54-year-old commodities expert, who previously worked at UBS and Rabobank, has overseen Hermes’s burgeoning portfolio of alternative investments since fall 2006. The portfolio has more than doubled in size over the past two years as BTPS, under Anson, increased its weighting in alternatives to 15 percent of its portfolio, from 7 percent. Those strategies will still be the area of greatest emphasis going forward.

“The breadth of the team that we already have is tremendous — and now we’re going to be able to grow,” says Labram.