Starting over in a volatile market

BUSINESS INTERVIEW:The newly-appointed chief executive of Prescient Investment Managers, formerly AIB Investment Managers, is confident that the business has a bright future, despite the challenging economic conditions it faces

THE IRONY THAT loss-making AIB decided to sell its profitable fund management business was not lost on the woman who has taken over the running of the firm under its new owners, South African financial group Prescient Holdings.

Fiona Sweeney took over as chief executive of the former AIB Investment Managers in June under its new name, Prescient Investment Managers (Ireland).

Two years ago, AIB deemed the asset management company to be surplus to requirements, classifying it as “non-core” as the bank set about raising capital to help meet losses and reducing the size of a business that became bloated during the property boom. As a profitable business it was odd that the subsidiary was unwanted by the bank.

“AIBIM has never made a loss, so it is actually a profit-making business and yet AIB had to sell it,” says Sweeney, sitting in her offices on Percy Place at the edge of the Grand Canal in Dublin.

“You could look at that and say that it is pretty ironic for a business that has actually done pretty well to be put up on the block.”

Established in 1966, AIBIM was run largely autonomously of AIB management in Ballsbridge and the bank’s capital markets division in the IFSC into which it reported.

The business was on the market for almost two years before regulatory approval cleared the sale to the South Africans in June.

Irish Life and Permanent came close to buying the company and was even named preferred bidder in March 2011 before the Central Bank stress tests that month threw that company into its own tailspin and scuppered any takeover plans.

The sales process had to start over: the bidders included financier Dermot Desmond’s investment firm IIU and there was joint interest from Bloxham Stockbrokers and a Swiss bank Bellevue.

Sweeney notes the coincidence that the sale to Prescient was approved on the day Bloxham was put into provisional liquidation over accounting irregularities.

Given the 20-month sales process, she says she asked herself whether it was ever going to end, but she and the firm got on with business and kept plugging away amid all the bidding.

“It is always unsettling but you get used to it. Everything becomes the norm in the end. Yes, you are in a sale process and in a period of uncertainty, but I would say the vast majority of people just worked their way through that, did everything possible to keep our existing client base and add to it,” says Sweeney, a 25-year veteran of the Irish funds industry.

She points out that rival Bank of Ireland Asset Management, where she worked for 11 years in the 1980s and 1990s, endured an long drawn-out sales process before its acquisition by US financial group State Street Global Advisors.

Now that AIBIM has finally been acquired, the task facing Sweeney is to grow the business under its new owners.

“It is not just a matter of celebrating the end of a pregnancy – it is the birth of a baby. You actually have to get on and do that,” she says about running the company.

Sweeney took over from Frank O’Riordan, who had been AIBIM’s managing director from 2009. O’Riordan and 20 of the firm’s 100 staff did not move to Prescient.

Sweeney says they had been on AIB contracts and had worked for the firm for more than 20 years. “Those people had to make a decision as to whether they wanted to go back to AIB,” she says.

The bank was offering a redundancy and early retirement scheme that attracted some staff back to the bank. Some of those 20 staff were members of AIB’s defined benefit pension scheme and that may also been a factor, she says.

Three senior staff who were on AIB contracts at AIBIM – head of asset management Louise McGuigan, head of equities Paul Cahill and economist Michael Hegarty – have joined Prescient.

The financial climate makes this a challenging time for the €80 billion Irish pensions industry, but Sweeney and Prescient still see opportunities to grow further.

The South African firm, which was founded by investment managers Herman Steyn and Guy Toms in Cape Town in 1998, plans to double assets under management from their current level of €15.7 billion over the next six to seven years, says Sweeney.

Prescient, the 10th largest investment manager in South Africa, said it saw the purchase of AIBIM as an opportunity to grow into Europe and further afield.

The firm, which is preparing for a listing on the Johannesburg Stock Exchange at the end of this month, also plans to expand in Africa by selling investment products into Namibia (where it has a joint venture), Botswana, Ghana, Kenya and Morocco.

Prescient wasn’t a stranger to Ireland prior to the AIBIM deal. The firm has had an office in Dublin under the name Stadia, which managed investment funds sold to South African investors since 2009. Prescient bought this business from Irish Life in 2007.

Prescient had €8.8 billion of assets under management prior to the purchase of AIBIM. The acquisition brought a further €6.9 billion at the end of June under its roof.

The assets under management at the Irish business have fallen from €8.5 billion last year. Sweeney says this is as a result of the British life and pensions company Legal General ending a partnership agreement last March and taking back the management of about €1.5 billion of assets held by the former AIB unit.

AIBIM had distributed Legal General’s products in Ireland for the British insurer, but the business had grown to “a critical scale” that it made sense for the company “to be served by their own local presence”, says Sweeney.

The level of assets under management has an effect on the price Prescient is paying for AIBIM.

Original bidders were reported to have submitted offers of about €25 million for AIBIM early in the sales process, but the bids subsequently fell in the later offers. Sweeney says the final price will be determined in three instalments.

The first payment was made on May 31st last based on assets under management at the end of last year and reflected any change over the intervening five months. This took account of the assets taken back by Legal General.

The second tranche will be paid on May 31st, 2013, and the third, on November 30th 2013, based on assets under management at those dates.

Sweeney believes that Prescient Ireland can increase its assets under management both organically and through acquisitions, particularly of private client firms.

“I would see us doing small add-ons in the Irish market. There are a lot more businesses around town and their assets under management may be based on a number of large clients,” she says.

Sweeney says Prescient is still in talks with AIB to continue selling tracker investment products through its branches following the bank’s sale of the firm.

“It hasn’t been finally finalised – we are still in negotiations as to how that will work out for both sides,” she says.

Sweeney says recent wide-ranging changes of ownership across the fund management industry could create openings.

Irish Life Investment Managers, the leader in the market, has been acquired by the State through its takeover of Irish Life arising from the recapitalisation of Permanent TSB. The Government has said that it plans to sell the business.

Sweeney says the company is still “a very strong competitor” despite the uncertainty around the business. These kinds of changes lead to opportunities for others.

“All uncertainty leads to business coming up for review. People work very hard and we have worked very, very hard to retain our clients and Irish Life will work very hard to retain their clients.

“Certainly, in any mix, once you do have a change of ownership there is that period where people may wish to go to review or consultants may see it as an opportunity to say, ‘Well, we have been meaning to do this anyway, so this is a moment that might actually just present itself’. This is just the catalyst to do that,” she says.

Sweeney is also eyeing opportunities to sell new products as companies attempt to plug large deficits in their pensions schemes.

Pensions account for €4.8 billion of assets under management at Prescient, or 69 per cent of the Irish business, followed by institutional (8.6 per cent) retail (8.5 per cent), charities (6.4 per cent) and credit unions (3.3 per cent).

Deficits in defined benefit schemes, which guarantee retirement income as a percentage of final salary, have forced firms to take “quite drastic actions” by closing schemes to new entrants, demanding higher contributions from members and imposing caps on payouts on retirement.

Citing analysts’ figures, she says the total deficit in Irish defined benefit pension schemes could have been as high as €25 billion in late 2009 and estimates that 80 per cent of defined benefit pension schemes are in deficit.

For those reasons, Sweeney believes that a product Prescient has been selling for years to investors in South Africa could be popular among Irish pension funds.

It is known as a “positive return product” and is composed of a mixture of equities, cash and bonds. The investor is protected against a decline in the value of the equities by using yield from other parts of the investment to purchase derivatives covering the downside risk.

Investors won’t benefit from an increase in equities made by the market but the return – based on the Consumer Price Index plus 4 per cent – is roughly around actuarial estimates for long-term returns on equities, she says.

“Given the significant volatility and how difficult it is to actually fund pension schemes, we certainly believe that it will be a very attractive product in the marketplace,” she says.

Sweeney also believes that the new sovereign annuity bonds planned by the National Treasury Management Agency, which pay a steady stream of principal and interest to investors, will help pension funds reduce their deficits.

Amortising bonds will allow pension funds to match up cashflows, she says.

Given that annuities are linked to German government bond yields, which have fallen to about 1.4 per cent, the costs involved are high. Allowing investors to buy Irish bonds yielding 6 per cent on the Government’s 2020 debt will make annuities cheaper, she says.

While this option may seem attractive to trustees aiming to reduce deficits, Sweeney warns that risk of default on bonds could be passed on to the pensioners.

However, the sharp fall in Irish borrowing costs on a year ago may give pension trustees and schemes members some comfort, she says.

“Trustees must also consider if their members will wish to have the payment of their pensions principally linked to the prospects for the Irish economy,” she says.

The proposed inflation-linked Government bonds should also be attractive in the domestic market as “it is difficult to hedge Irish inflation at present”, she says.

The lack of Irish inflation bonds has meant pension funds have used bonds linked to euro zone inflation for hedging. While the difference between Irish and euro zone inflation is not that high at present, she says, it has been much more significant in the past.

“It also makes sense for the NTMA to diversify its source of funding, particularly by tapping into an area where there is a clear lack of supply,” she says.

Sweeney believes the European Central Bank will go further to ease economic pressure in the euro zone by lowering interest rates to 0.5 per cent “over the next couple of months” from its already record low of 0.75 per cent.

The euro can be saved, she says, if Germany accepts that it must share losses by recapitalising weaker banks in the euro area or guaranteeing peripheral economies “in one way or another”.

Prescient says that the single currency is likely to remain “under moderate downside pressure” against the US dollar and sterling.

A downside risk facing Sweeney personally is the loss of her office.

Her South African bosses prefer open-plan offices. Sweeney says she visited Prescient’s head office in Cape Town in January and saw all 72 staff at desks out on the floor.

The Prescient Ireland offices will be transformed into a similar set-up before November, with the firm’s 80 staff all sitting in sight of each other.

People had asked her when she got the top job in June whether it came with a bigger office. “I said ‘no’ – I’m clinging on to the one I have by fingernails,” she says, laughing.

The open-plan office characterises Prescient’s entrepreneurial approach to running the business, she says, and contrasts with the “very corporate structure” of AIB and “layers of management” that existed across the banking group.

“It is very much a can-do attitude [here] and very much ‘no idea is a bad idea’,” she says.

“It is up to everyone to come up with ideas to drive our business forward as opposed to a centrally-run type of business.”

FRIDAY INTERVIEW

Name:Fiona Sweeney

Job:Chief executive, Prescient Investment Managers (Ireland), formerly AIB Investment Managers

Age: 47

Family:Married to Dominic

Home: Donnybrook, Dublin

Hobbies: Golf – a member of Powerscourt Golf Club in Enniskerry, Co Wicklow

Education: Notre Dame School in Churchtown, Dublin, and UCD

Career:She started her career in 1987 at Bank of Ireland Asset Management, now SSgA since the firm's takeover by State Street. She moved to Friends First Asset Management in 1998 and joined AIBIM as head of pensions, a position she held until December 2009. She was appointed head of customer business for Ireland in January 2010 until her appointment as chief executive of Prescient in Ireland in June following AIBIM's takeover by the South Africa financial company.

Something you might expect:She has a Master's in Economics.

Something that might surprise:She regularly uses Dublin Bikes to get around the city.