THE financial services sector may have grabbed all the glory in recent years when talk turns to Scottish economic success, but look below the surface of the huge corporate institutions, such as our main banks and insurance companies, and you can find a smaller, but just as booming industry in fund management.
While HBoS and the Royal Bank of Scotland have become major players in the banking sector and Standard Life remains Europe's largest mutual insurance company, Edinburgh-based fund management companies such as Martin Currie and Artemis have been carvi
ng their own niches in the market.
There is a long history of fund management in Scotland, with some of the UK's oldest investment trusts - giving people basic access to stock markets - being set up in this country.
And having helped bankroll the New World's infrastructure in the 19th century, Scottish fund managers continued to be prominent globally throughout subsequent decades. The chairman of Ivory and Sime, then Edinburgh's bluest of blue chip finance houses, served as the first foreign representative on the governing body of Nasdaq in the late 1980s.
The importance of Scottish fund managers has continued throughout the years. And it's an industry that's as vibrant today as its ever been, despite one wag south of the Border scurrilously suggesting to Martin Currie director Ross Leckie that the sector was on its knees in Scotland.
Mr Leckie believes the industry in Scotland has never been healthier because of the way companies are developing together with Scotland's standing in the marketplace. "Scotland has got a long history of investment management and has developed a good reputation," he says. "Companies are now producing internationally-acclaimed specialist products."
The size of the market is not to be scoffed at. According to Scottish Financial Enterprise, funds under management amount to £310 billion, with about £160bn of this accounted for by Standard Life Investments and Scottish Widows Investment Partnership.
And the Scottish fund management industry is a major employer, not just in Scotland, but throughout the world. As well as 3000 people working in the sector in this country, there are a further 24,000 in the rest of the UK, continental Europe, the United States, Asia and the rest of the world.
Fund managers do not only look after private investors' money through unit trusts and open-ended investment companies (OEICs), they also manage pension scheme and charity funds.
There was a time when Scottish fund managers went through a hard time. Independent firms such as Ivory and Sime, Edinburgh Fund Managers, Murray Johnstone and Stewart Ivory were eventually bought out. But Sandy Nairn, an investment partner at Edinburgh Partners, believes that this was a way of continual development of the industry. "It is just natural evolution, with new companies replacing these others," he says.
This is reflected in the way companies have moved away from the all-singing, all-dancing approach seen in the past. Martin Currie has reinvented itself as a hedge fund manager. Edinburgh-based investment manager Walter Scott continues quietly to win big mandates in the US and younger firms such as Artemis and Aberforth have emerged with niche focus on retail investors and small companies respectively.
And Edinburgh's pool of specialist workers and its back office infrastructure continue to attract money and talented managers.
Very quietly, fund managers north of the Border have been building up their reputation, rather than their size. "Scottish houses are not trying to be big like Fidelity," Mr Leckie points out. "They are trying to exceed their clients' expectations, by offering a prime service at a prime price."
So why does Scotland continue to have an envied reputation as a centre for fund management? According to Mr Leckie, it is a matter of trust. "Scotland has a long history of investment management and has built up a good reputation," he says. "Edinburgh is internationally recognised as being trustworthy, and that is a good place to start."
ARTEMIS product and communications director Nick Wells agrees. "The Scots are noted for their prudence and that is the case when it comes to being trustworthy," he says.
These twin objectives - trust and service - have led to a move away from the way that fund managers are remunerated. In the past, their efforts have been rewarded by being paid an annual fee, irrespective of whether they performed or not. But now there has been a shift towards performance-related fees.
"Most of the new investment managers are interested in revenue as well as the level of funds under management," says Mr Leckie. "The ethos is now one of performance. They are being told that if they perform, they will be paid. If the don't, they won't."
He feels the trend is likely to continue towards performance fees, because investors are asking for it.
The way fund managers are remunerated also comes down to the type of investment people are looking at. If they are only interested in tracker funds - where the value of their investment moves in line with a selected index, such as the FTSE-100 - some companies will charge as little as 0.1 per cent. But if they want to go to the other end of the spectrum, with an aggressive equity manager, investors will pay a premium fee for what they hope is a premium performance. Scotland's fund managers offer the full range.
Almost without exception, Artemis has been put forward as the star among its Scottish fund management peers. According to Mr Wells, when the company was set up in 1997 with not a penny under management, it was decided that funds would be managed as if they were the manager's own.
"We were able to attract good managers with an environment for giving them freedom," he says.
While he does not believe that being based in Scotland necessarily provides any benefits compared to being established elsewhere in the UK, Mr Wells does concede that there is value to managers being based in the Capital. "The business lifestyle in Edinburgh is good," he says. "It works well - it is one of the investment hubs of the UK."
As for the future, there is a fundamental belief that the industry can go from strength to strength. "There is definite room for optimism," says Edinburgh Partners' Mr Nairn. "The sector is all about quality in relation to consistent performance over time. It is up to us to build on these conditions, using fundamental research. If we stick to it, we should be able to create long-term performance."
Scottish Financial Enterprise chief executive Amanda Harvie believes that the 300-year history of financial services will continue to be a platform for companies to build on in the future. "There is a strong, indigenous workforce that is highly skilled in the industry," she says. "The more business that can be attracted, the more we will be able to continue to raise our game."
