Turmoil spreads north of the border

Scottish fund managers have their own upheavals to contend with, reports Magnus Grimond

There is very little feeling of Schadenfreude north of the border over the fate of Nicola Horlick, the head of Morgan Grenfell's pensions business suspended after allegations that she tried to lead a defection from the group. The Scottish fund management industry is still feeling bloodied, if mostly unbowed, in the face of its own upheavals.

Ivory & Sime, one of the pillars of the Scottish industry, is shortly expected to announce appointments to plug some of the gaping holes that have opened up since it was hit by a new wave of staff defections last week.

News of the latest departures from the Charlotte Square-based group drew groans rather than stunned surprise from its rivals, given that the uneasy relationship between Ivory and its senior employees has been a theme running through its activities for at least 20 years.

The imminent departure of Mark Tyndall, head of Ivory's UK investment department, Lindsay Whitelaw, manager of its Baronsmead investment trust, and John Todd, leader of the smaller companies team, along with his deputy Derek Stuart to set up their own "boutique" fund management operation follows a well-trodden path.

The genesis of fund managers Ivory & Company, now Stewart Ivory, in 1980 was the departure of directors from I&S, while 10 years later, five senior Ivory & Sime executives left to set up Aberforth Partners.

It is clear that the problems at Ivory & Sime have not been cured by the arrival of the wealthy Cayzer family's Caledonia Investments with what was in effect a controlling stake of just under 30 per cent in 1994.

Colin Hook, the former army officer put in as managing director by Caledonia, has been criticised for his autocratic management style.

One senior Edinburgh fund manager described him as: "A spare, ascetic, ram-rod figure: distant and rather unapproachable. He is very determined, with a clear idea of what he wants and where he is going, but not a very sympathetic figure to drag along those he wants to take with him."

His decision to remove fund managers from the board and replace them with "businessmen like himself" bruised some fragile egos and is likely to have contributed to the problems, according to this source.

But while the travails of Ivory & Sime may be largely self-inflicted, they are giving little satisfaction to the rest of the industry. Once a picture of stability when viewed against the maelstrom of scandal and defections which have rocked the City of London, the waves from the South have started to lap against the shores of Charlotte Square.

The sale of Dunedin to Edinburgh Fund Managers by the Bank of Scotland nearly a year ago was precipitated by an unprecedented wave of senior staff departures.

Then in October came the news that General Accident, with pounds 26bn under management, was moving its main investment department from Perth to London, with the loss of 30 fund management jobs in Scotland.

Hamish Buchan, the well respected investment trust analyst at NatWest Markets in Edinburgh, says these problems tend to take a higher profile in the relatively small world of the Scottish financial scene. But he concedes: "As a Scot and a board member of [the Government-backed] Scottish Financial Enterprise, I am not encouraged by all this. I am by temperament more of a bear than a bull."

Once the perception was that the industry north of the border turned in a superior performance to its London counterpart. "Since Big Bang, the image of the average Scottish fund manager being more isolated, more analytical, has gone, now that everyone works off a screen," says Mr Buchan.

Mike Balfour, joint managing director of Edinburgh Fund Managers, thinks the industry needs to sell itself more. "I think the Scots have been slow off the ground to market properly and the City of London has been some way ahead of us in that."

But he believes there are still tremendous opportunities for Scottish players as the big, integrated houses south of the border rack up problems with performance and compliance.

Such confidence is only partially shared by Colin McLean, founder of Scottish Value Management, a small fund management group which has made waves in recent years.

He sees Ivory & Sime's difficulties as just part of the declining margins and moves towards indexation or "passive management" of funds which are hitting the industry worldwide.

Many Scots fund managers would agree that these trends have had a disproportionate effect on medium-sized groups, in the pounds 2bn to pounds 10bn bracket.

Not large enough to handle the big fund mandates, where indexation is playing an increasing role, some have found it difficult to compete against the boutique groups for the more digestible actively managed portfolios.

The Scottish industry, heavily concentrated in this part of the market, looks particularly vulnerable. Mr McLean believes that as long as it retains its stability, the strength of Scotland's still mainly unquoted industry - leanly managed and nimble - will show through.

But the unstated threat nagging at many in the industry is that more bad publicity of the type it has suffered over the past 18 months could wipe out its reputation and with it that unique selling proposition which has made it so successful.