A pair of canadian mutual fund managers have boots on the ground in Europe, a situation that may give them a distinct advantage in investment management, even if their initiative hasn’t necessarily been rewarded by investors.

Both Toronto-based AGF Management Ltd. and Winnipeg-based IGM Financial Inc.
maintain money management outposts in Dublin. They were lured there, along with numerous other financial firms, after the Irish government decided to make the city a financial hub by establishing the International Financial Services Centre in 1987 — offering lower taxes and other incentives to companies willing to relocate.

The effort has been a success. According to a September 2004 report by Deloitte, there are about 20,000 people employed in the financial services industry in Dublin, with asset management making up the largest share of that number with 8,600 employees.
And the latest statistics from the Dublin Funds Industry Association show that total funds administered in Ireland reached US$768 billion in 2004 — not bad for a country of only four million people.

Initially, much of the migration to Ireland was in back-office functions, but Martin Fahey, partner and head of European equities at I.G. International Management Ltd., notes that in the past several years more firms have started to move their front-office operations there, too. The biggest name to set up shop in Dublin so far is Pioneer Investments, a subsidiary of Italy’s UniCredito Italiano Banking Group, which has about 132 billion euros under management.

Although the tax advantages may have first attracted back-office businesses, it was the labour situation that drew the Canadian money managers to Dublin. Both AGF and IG set up shop there in 1993. At the time, the country had terribly high unemployment.
This, along with Ireland’s strong tradition of higher education, meant it had a large, well-educated workforce that was unemployed, underemployed or working abroad.

As a result, money managers, such as AGF and IG, could hire analysts and portfolio managers relatively cheaply, enabling them to set up cost-effective foreign outposts.
John Arnold, managing director and chief investment officer of Dublin-based AGF International Advisors Co. Ltd., says when it opened its shop, the country faced about 20% unemployment. “There were a lot of bright young things around available for employment,” he says.

That sort of labour market — overflowing with smart, hungry, young people — is ideal for building a white-collar business. It means the clever kids are affordable. “When you’re building from scratch you need to hire them cheap enough that you can afford to employ them. And then you can afford to pay them as they become more expert,” Arnold says.

Intelligent yet inexpensive is the sort of recruit Arnold covets. He also prefers them slightly naïve, so that they can be indoctrinated into his money-management philosophy. This journey involves five years as an analyst, followed by a two-year apprenticeship a fund, before graduating to a full-fledged money manager.

Scott Penman, president of I.G. Investment Management in Winnipeg, says its decision to locate in Dublin followed much the same rationale as that of AGF. The low tax environment helped, but it was really the large crop of skilled, well-educated Irish expatriates who were then working in other European financial centres that made the opportunity irresistible.

Although both firms found themselves initially able to lure quality people home to Dublin at a reasonable cost, the advantage was sometimes too powerful. Fund firms were able to pick up high-quality employees but couldn’t always keep them stimulated.
“[You want your fund managers to be] bright enough to work hard, but not intelligent enough to find it easy,” jokes Rory Flynn, fund manager at AGF International.

A couple of those early hires may have proven too smart because they soon moved on.

Today, there are still plenty of “bright young things” in Dublin. Indeed, many of them are right around the corner from AGF’s office, which is a block away from Trinity College in the heart of the city. AGF has the basement and the top floor of a four-storey Georgian building that also houses the Norwegian embassy.

IG International is tucked away a little further from downtown, around the corner from the heavily fortified U.S. embassy. It also has a satellite office in Kilkenny. And within the Power Financial Corp. family, there is a third money management office in Dublin, Setanta Asset Management Ltd., a subsidiary of Canada Life established in 1998.

@page_break@Being in Dublin puts these firms smack in the middle of the global trading day. The timing works out well for IG International, which now has a subsidiary in Hong Kong that runs its Asian money. The firm used to outsource that function, but Peter O’Reilly, partner and global fund manager at IG International, says the fact that it is now done in-house means IG is able to run global funds in a more comprehensive way.

“We can come in here at 7 a.m. and talk to our Asian colleagues, and get a rundown on what’s gone on there. Then the European markets open. By early afternoon, New York is just kicking off so we can talk to our North American colleagues about what is going on there. So, we can touch base with all parts of the world,”O’Reilly says.

Yet the decision to feed and clothe in-house managers in a foreign jurisdiction stands in stark contrast to most Canadian fund firms, which tend to outsource their foreign portfolios to external managers. Penman says that the added fixed costs are more than made up for by the benefits of having managers on the ground with local knowledge of a huge market, and no divided loyalties. “It’s a real strength of our investment process to have links into and daily contact with global managers in different regions,” he says.

For example, if you are making a decision on whether to buy a Canadian bank stock, it helps to have insight into what is going on in European and Asian banks. He says there are intangible benefits to the investment process that more than outweigh the cost of having your own people and facilities.

Among those intangibles is the benefit of being close to Europe’s other financial centres — London, Frankfurt, Zurich and Luxembourg are all short flights away — yet part of a community that is still small enough that managers with just a few billion dollars of Canadian investors’ money don’t get overlooked.

“Dublin is a pretty good place to manage money,” says O’Reilly, noting he enjoys better access to companies in Dublin than he did when he was working in London. “If you’re an 80-billion-euro player in the City of London, you’re not really that big,” he notes, “whereas over here, if a company is coming to see one of the Big 2 [Pioneer or Bank of Ireland Asset Management, which has about 47 billion euros under management], it will make time to see you, too.

“In the past year, we’ve had the CEOs of some of the top banks in Europe in to see us,” he recalls. “If you were working in London with our assets under management, you’d be doing well to get the last seat in the room for a lunch with these companies.”

O’Reilly and Fahey estimate they get about 300 companies a year coming through Dublin for meetings, and more action than that from sell-side analysts who come over and make presentations.

IG has long understood the benefits of remaining in the orbit of major financial centres, but outside the maelstrom itself. By staying out of places such as the city, its money managers don’t have to deal with as much financial press, or juggle competing demands for their time. The result is more time spent crunching numbers, scrutinizing companies and doing the grunt work of running money. And the advent of discount airlines in Europe has made travel within the EU much more efficient and cost-effective, so keeping tabs on companies is easy enough.

Penman suggests that IG was particularly comfortable building its investment-management team in Dublin, in the shadow of London, because of its long experience running its operation from Winnipeg, some distance from Canada’s financial heart in Toronto.

However, the fact that Dublin was the ideal spot to set up shop 10 or 12 years ago doesn’t mean fund firms would make the same decision today. For one, the cost advantage has shifted to new entrants into the EU, such as Poland and Hungary.

Also, the job market in Ireland has tightened considerably. Flynn says there are so many good jobs floating about Ireland these days that, as an employer, you are lucky if you can get a good candidate back for a second interview, never mind actually hiring that person. Invariably, top prospects are juggling multiple offers and they are snapped up quickly. Any cost advantage that Ireland’s dire employment situation once conferred has vanished.

“If I was building a business today I’d be heading for somewhere like Warsaw or Budapest — where there are lots of young graduates,” Arnold says.

Firms should go to where the people are because the fund-management business is so dependent on human capital. Building a tight corporate culture works better by hiring natives who share a cultural history and will probably stay put. Hiring expatriates carries the risk that they’ll eventually want to go home, and that is why there are no Canadians working at AGF International, Arnold explains.

Ireland may not be the cost-effective opportunity it once was, but its existing financial services expertise ensures it a place in the global industry. The Deloitte report suggests there are opportunities for it to build scale in asset management by targeting hedge fund managers and niche players. It can also grow in other niches such as asset servicing, managing complex banking products, securitization, specialist debt financing and pan-European insurance.

The report counsels that supportive regulatory, tax and government policy responses can all help Ireland exploit these opportunities. However, it notes, skills are the most important driver of competitive advantage in the financial sector. So, perhaps the best way to solidify its prominence as a financial centre is to put more emphasis on math and other quantitative skills in the educational system.

If there is a message in the Dublin experience for the Canadian financial industry, it is that people are the key, and education is the chief source of their value.
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