Bank of Ireland has built a thriving U.S. investment business out of audacious marketing, solid performance and unabashed Irishness.
By Andrew Capon
March 2001
Institutional Investor Magazine
Bank of Ireland has built a thriving U.S. investment business out of audacious marketing, solid performance and unabashed Irishness.
When William Cotter became chief executive of Bank of Ireland Asset Management in 1985, he found himself in what was once a classic Irish quandary: lots of ambition but few opportunities. The firm already controlled 20 percent of the slow-growing Irish asset management market. Larger, more established British and Scottish firms dominated the U.K. pension business, and the Continent posed equally daunting competitive obstacles.
So the former investment banker did what generations of his countrymen have done: He looked to “the other side” - the U.S. - as a place to grow. Says Cotter, “That’s where they keep the money.” He and his colleagues saw possibilities in the “wave of new money coming into international assets from U.S. public pension funds, and that was what encouraged us to take the step.”
Still, the American foray required considerable audacity on Cotter’s part. As an asset management business owned by a commercial bank and operating from a second-tier financial center, Dublin-based BIAM had little claim to global marketing expertise. In fact, the firm had no foreign clients whatsoever. Moreover, it was going up against London-based merchant banks like Barings, Flemings and Schroders that had sterling reputations in international investment; big Swiss banks with a growing U.S. presence; not to mention the U.S. firms, including Brinson Partners, Capital Guardian Trust Co., J.P. Morgan Investment Management and Wellington Management Co., that had amassed sizable global asset bases.
BIAM’s early results in the U.S. were none too encouraging. Cotter calls them a “disaster.” Lacking knowledge of the market, he tried to enter into a series of joint ventures with U.S. managers possessing strong regional customer bases. The theory was that BIAM would handle the investment management and the U.S. firms would market and distribute the products. But Cotter’s prospective U.S. partners insisted on access to BIAM’s Irish clients as a quid pro quo, and he refused. The joint venture strategy never got off the ground.
But rather than retreat, Cotter - characteristically - concluded that he hadn’t been bold enough. So late in 1988 the firm set up an office in Chicago and soon afterward hired Denis Curran away from the Irish Development Agency, which promotes investment in Ireland, to run it. Curran’s brief: Lead an all-out marketing blitz to sell BIAM’s services to U.S. tax-exempt pension funds.
Cotter’s instincts were sound, and his timing superb. Between 1991 and 1999 U.S. public pension plans more than tripled their international equity exposure, from 3.3 percent to 11.5 percent - an increase of $311 billion - according to InterSec Research Corp. From a standing start, BIAM has leapt forward to manage more than $25 billion for 260 U.S. tax-exempt pension plans, most of it in international equities. The U.S. business now accounts for about half of BIAM’s $55 billion in total assets, while generating 70 percent of its revenues and 80 percent of its profits. The firm’s U.S. client roster includes the California Public Employees’ Retirement System; the California State Teachers’ Retirement System; the state retirement systems of Arizona, Colorado, Maryland and Ohio; the New York State Common Retirement Fund; and the New York City Employees’ Retirement System.
Today BIAM ranks as the ninth-largest manager of international assets for U.S. tax-exempt funds, a slot ahead of Deutsche Asset Management and a notch behind UBS Asset Management. It’s one of just four European-owned firms among the top ten (the others: Barclays Global Investors, Deutsche and UBS). Significantly, BIAM is the only one of the four that has not felt it needed to make an acquisition to bolster its U.S. presence.
How did a modest Dublin firm ever succeed in carving out such a disproportionate share of the U.S. pension market when so many bigger, grander foreign firms found the effort frustrating? Start with what might be called enlightened naïveté. Unburdened by established practices or long-standing relationships in the U.S., Cotter and his senior management team were able to create an American asset management arm essentially from scratch. BIAM was thus five to ten years ahead of many of its competitors in such areas as customer service and outsourcing. And Cotter, Curran and his predecessor, Denis Donovan (now treasurer of BIAM’s parent company, the Bank of Ireland), were not at all coy about playing the Irish card when marketing the firm in the early days.
Curran unabashedly refers to this as pursuing “Paddy money” - retirement funds whose pensioners or trustees have a strong (if only sentimental) connection to Ireland. BIAM’s first client in the U.S. was heavily Irish-American Brockton, Massachusetts, which awarded it $1 million in 1989. The firm’s first major account, won in 1991, was a $30 million international equity mandate from the New York City Police Pension Fund. That was quickly followed by a $20 million account from the State Retirement and Pension System of Maryland. In each instance, the Irish connection helped. “If you have a strength, why not exploit it?” asks Curran.
The boys from BIAM also had enormous drive. Curran recalls that he and Donovan flew from Dublin to New York to Alaska to San Francisco to Hawaii to Dallas to Los Angeles and then back to New York on a marketing trip - all in one week. Flying 15,000 miles a week was common in those early days. “We felt we had no choice,” says Curran. “People didn’t know us, and we had to get in their faces.” Cotter himself spent a good deal of time stateside. He tells of bumping into the head of a Scottish fund management house who complained about having to spend six weeks a year in the U.S. At the time, Cotter, now 56, was spending two weeks of every month in the States, visiting prospects and overseeing the business.
BIAM prospered because, along with a bit of blarney, the firm delivered solid performance. Donna Gilding, chief investment officer for New York City’s comptroller’s office, which oversees the police fund, says: “Sure the brogue helped, given the large Irish constituency in the police department. But even if the reason for the appointment might be questioned, no one can doubt that it has proved to be an inspired selection.” BIAM has the best track record of the fund’s dozen-plus international equity managers, she reports.
As of the end of last year, BIAM ranked in the top quartile of InterSec Research’s EAFE manager universe for both five- and ten-year periods and near the top of the second quartile for one- and three-year periods. Like many value managers, the firm struggled in the technology-crazed markets of 1998, 1999 and early 2000. But just before the inflating of the Internet bubble, BIAM - in the three years ended in 1997 - ranked as the leading manager in the EAFE universe.
The architect of BIAM’s performance is chief investment officer Chris Reilly, a former City of London securities analyst whom Cotter promoted to CIO 15 years ago, after Reilly had spent just five years as a portfolio manager. The 56-year-old Reilly and his 12 portfolio managers share a large dealing desk in the firm’s Georgian headquarters on Dublin’s Fitzwilliam Street. He likens the environment to a turn-of-the-century merchant bank. “You see old sepia pictures of the partners sitting in one room,” Reilly says. “There is a sense that they’re all in it together. That’s what I want to foster here. It also makes for quick decision making. We are constantly talking about ideas.” There is no research department as such, and fund managers do their own trading, which is highly unusual in a firm of BIAM’s size.
The firm’s investing approach is steadfastly value-oriented, and Reilly and his portfolio managers pride themselves on sharp stock picking. He abhors adherence, whether explicit or tacit, to indexes. “Firms that build indexes should not dictate investment policy,” he argues. “We do not allow the components of the index to influence our stock selection, no matter what the weighting is.” As a result, BIAM doesn’t own shares in General Electric Co., the world’s largest-capitalization stock, and it didn’t own Japanese shares in the late 1980s, when they made up 60 percent of EAFE.
To Cotter, the surge of interest in index funds and index-based performance-measurement techniques is a dead giveaway that many firms are in effect bundling investment and business risk. Marketing and salespeople would prefer that their firms stick close to an index return to minimize client carping about relative performance. The BIAM chief doesn’t buy it. “I am of the mind that this business is a branch of commerce,” he declares. “You have to take risks to succeed.”
To be sure, BIAM paid a price for its value philosophy and stock-picker approach in the late 1990s, when the technology frenzy took hold and shares of large-cap, high-growth companies soared, defying traditional valuation rules. Reilly admits that this was a trying time but insists that “you have got to stick to your guns, although it’s hard when everyone is telling you the world has changed and that you are a Luddite.”
Although steadfast in its investment philosophy, BIAM has been quite willing to adapt in other ways to fit changing times. Cotter’s 13 years in corporate finance dealing with a variety of industries gave the BIAM chief an ideal perspective: that of the informed outsider. He’d had the opportunity to review many business models and certainly wasn’t married to the status quo. He saw ample room for improvement in asset management. “I thought this was the craziest business in the world,” he says.
What particularly bothered him was the lack of performance consistency across a firm. Identical mandates from two pension funds could result in dramatically different returns, depending on the selections of the individual fund manager. Cotter says: “I couldn’t understand why the clients tolerated it, and I knew that they wouldn’t forever and that the industry had to change. I looked at it from a very Irish perspective of two clients meeting in the village pub and comparing notes. If you were the one on the wrong end of bad performance and you were both employing the same firm, you would rightly be furious.”
To impose consistency at BIAM, he created a new layer of control. Fund managers would continue to pick individual stocks, but “portfolio construction” specialists would smooth out variations among holdings to ensure that each client got the same results over time. The firm now has four of these so-called constructors, two of them former chief investment officers at other investment managers. They also keep client-relationship managers up to speed on changes in the portfolio and the rationale for them. Competitors now have similar arrangements.
Ever since BIAM opened its original U.S. office in Chicago more than a decade ago, it has focused on building a distinct client-servicing team to deal directly with U.S. accounts. That way, BIAM’s portfolio managers are free to focus on their primary contribution - performance - rather than having to wine and dine prospects. BIAM today has 40 U.S. client-service reps, based in Chicago; Greenwich, Connecticut (now the international operation’s headquarters); and Santa Monica.
The BIAM model has been widely duplicated by other firms, notes David Comstock, a senior research analyst at investment consultant Ennis Knupp & Associates. But even money managers with large client-service groups tend to give clients greater access to portfolio managers than does BIAM. As Comstock points out, if you don’t provide such access, “you have to be sure that the client-service people know what’s going on, and in that respect, Bank of Ireland is definitely one of the best.”
New York’s Gilding concurs that the degree of communication and trust between BIAM’s marketers and its portfolio managers is unusual. “When Denis Curran calls, you listen, because he knows what is going on in the portfolio right down to individual stocks,” she says. “Quite frankly, I don’t often make time for lunch with marketers, but Denis is an exception.”
To give more focus to distinct asset management functions, Cotter early on outsourced back-office activities. In 1992 he created a separate group - Bank of Ireland Securities Services - to handle custody, trade settlement and fund accounting for BIAM, allowing the asset management group to concentrate on running money and winning mandates. Almost a decade later many large asset managers, such as Pacific Investment Management Co., Robeco Groep and Scottish Widows Investment Partnership, are adopting a similar approach. BISS itself now provides custody and administration for American International Group, Barclays Global Investors and Putnam Investments, among others.
Cotter has always run a lean business. For instance, in the interest of efficiency, BIAM avoids taking on a wide range of mandates with different benchmarks. Cotter brags that in PricewaterhouseCoopers’ latest annual survey of some 70 asset managers in the U.K. and Ireland, BIAM came out with the lowest cost-to-income ratio.
BIAM has begun to spread its wings in other markets. Within three months of opening its doors in Australia in 1997, it had begun to win new accounts, mainly by capitalizing on consulting contacts made in the U.S. Today in Australia it has 22 clients and $608 million in assets. A push in Japan that started in 1999 has landed BIAM five clients and $123 million in assets, despite pension consultants’ relative lack of importance in that market. Meanwhile, in the U.S. BIAM has added $1 billion from existing clients in the past year.
What might stop BIAM’s international roll? Cotter doesn’t accept the conventional wisdom that midsize firms, particularly those from small national markets, have little future in trying to compete on one end of the market against global behemoths and on the other against specialist boutiques. His blunt response to the very suggestion is: “We have proven that the idea that a midsize manager cannot compete is absolute balls. Size doesn’t buy skill or knowledge.” Or boldness.
