Scottish fund group Martin Currie is battling a fall in profits after losing its key Chinese operation following a brush with regulators and seeing 30% of assets wiped out in a disastrous third quarter.
It now expects pre-tax profits in the current year to drop to £12 million, from last year’s £14m and the peak of £33m in 2008, The Herald can reveal.
But chief executive Willie Watt insists that the self-styled “big boutique” has come out stronger, as well as smaller, and that its 25% private equity shareholder is still supportive.
Mr Watt said the Edinburgh-based firm had been through a sense of “dislocation” with the loss of a big chunk of assets, adding: “We have learned a lot from it, I think we are a stronger organisation, though I would rather have learned these lessons without having to go through the pain of it all.”
But the former 3i executive dismissed industry talk that US private equity backer Crestview, which bought 25% of the company in 2007, had an option to sell back its stake at historic value. “I was a long time in private equity and I would never have agreed to anything like that,” Mr Watt said.
He said Currie’s internal shares, 75% held by employees, had fallen in line with profitability since the financial crisis. The group had maintained staffing levels and hired new talent over the past two years.
Mr Watt said Crestview “still have confidence in us as a management team and me as a chief executive despite the problems”.
He said the crisis in Europe and the US election would keep markets unsettled but added: “Because we operate on an international basis we think we can find a sufficient number of clients who are in a position to make a change to enable us to see next year as being positive.” He said the group’s joint venture with Singapore-based APS, unveiled in September as a replacement for its China operation, had created a pre-eminent player in Chinese equity investment.
Martin Currie’s assets crashed from £10bn to £6.4bn in the third quarter, partly thanks to the 18% fall in world markets but not helped by underperformance and undermined by the loss of £1.6bn of assets in China.
This month it has had to sell its Chinese operation, including its six-strong research team in Shanghai, to its two star managers and co-owners after “parting company” three months ago with Chris Ruffle, who had led Currie’s pioneering operations in China since 1994. The departure followed an internal inquiry into an apparent conflict of interest between unlisted investments made by Mr Ruffle in two areas of the China portfolio, which saw Currie apologise to a client and reimburse losses, and notify the Securities and Exchange Commission in the US, triggering an inquiry.
The company said yesterday the inquiry had not deterred existing or potential clients, adding: “SEC investigations are a regular feature of the industry.”
Mr Watt said less than 0.5% of funds under management had been in unlisted securities. “We have stopped investing in private equity, we decided there were inherent conflicts of interest. We have been very transparent.”
Currie has appointed general counsel Jeremy Hill as “a big senior figure in the firm to make sure everything works effectively from a regulatory and compliance point of view”.
The firm decided in 2009 to switch resources from the crowded UK growth equity sector to global equities and emerging markets.
Andy Sowerby, sales and marketing director, said the group’s employee owners had overwhelmingly rejected a proposal to diversify into other assets to protect earnings. “That brings a cyclicality to our revenues and our profits,” he said.
“The house’s three investment trusts had also refocused towards global investing, with flagship Securities Trust of Scotland cutting its discount from 7.7% to under 1% in a year.
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