F&C expects UK investors to follow the Dutch pioneers
Appointed to the F&C executive board at the beginning of 2002, Williamson brings a suitably broad view to the asset manager, which was transformed last year from a UK-centric manager into a pan-European firm after its purchase by Eureko. The rebranded F&C retains little but the ampersand from the old name of Foreign & Colonial Management Ltd, providing a less imperial identity under which all of Eureko's asset management activities have been integrated.
The Eureko purchase saw funds under management more than double, from Eu41.8bn at the end of 2000 to Eu110bn at the end of 2001, with a greater skew towards fixed income, up from 22% to 47%.
An even greater change occurred in F&C's new client base, with the bulk of revenues now derived from a mix of clients in the UK (33%), the Netherlands (25%), Greece (14%), Portugal (13%) and Germany (8%). Previously, 75% of revenue was sourced from the UK.
Williamson says that the UK lags behind in terms of seeking bond diversification, a drive that began in earnest on the continent following the introduction of the euro on January 1, 1999.
"UK inflation has always been higher than on the continent, which has supported the equity culture, as equities were a proxy for real assets," she said.
Most UK pension funds have their fixed income assets invested primarily in Gilts, with relatively small allocations to higher rated corporates. Williamson argues that, in contrast, continental Europeans, because of their limited equity allocations, have had to seek diversification in their bond portfolios. Since the start of 1999, they have increased their corporate bond allocations substantially and added emerging market debt.
"The Dutch are probably the most adventurous fixed income investors, followed by the Germans and the Swiss. The French, on the other hand, still buy predominantly triple-A paper," said Williamson.
The shift from sovereign to corporate debt has been supported by an increase in corporate issuance.
European high yield has proved to be one of the scarier adventures. "It is a new asset class, which recently had a high whoops factor," said Williamson. "Companies and investors in Europe and the US realised that revenues would not keep growing at the rates they did during the long bull market and debt levels suddenly looked very high. As a consequence, the market has repriced risk and there has been a huge flight to quality. Telecoms and cable companies did particularly badly, but the high yield market now offers value. In the US, high yield debt has been part of a sophisticated pension fund portfolio for the last 10 years."
In the UK, investors are starting to look further down the credit curve in search of yield. Williamson believes that as bonds become a bigger part of portfolios, investors will consider total returns rather than viewing bonds primarily as a safe place to park money or to match liabilities. However, it may take some time before UK asset allocations resemble those on the continent.
Williamson's own background is in emerging markets, where she started out with loans to Latin America in the late 1970s. Armed with a BA, MA and MBA, from Lausanne, Pennsylvania and Wharton, respectively, she worked for Bankers Trust in New York from 1977 to 1991 covering various emerging market roles from credit restructuring to portfolio trading.
Williamson moved to Bankers Trust in London and joined F&C in 1995, where emerging market debt assets total $1.2bn, primarily in institutional money.
In the G7 countries, F&C's investment process is to look at consensus using quantitative and momentum models and then take contrarian positions when appropriate. "In the emerging and corporate markets we are more fundamentally driven, taking a three month view of the markets looking at relative valuations," said Williamson. "Liquidity becomes a real factor in emerging markets, as well as in credit, which was evident in the pricing for the fallen angels."
From the issuer's point of view, Williamson believes that disintermediation will prove to be one of the most important drivers in shaping the bond markets in Europe. "In the States, banks have tried to get exposure off their books for years. In Europe, disintermediation started much later, when banks realised that they couldn't make money lending to highly-rated corporates," she said.