How Edinburgh can bolster its position as a global asset management centre

PA

The return to private ownership of Royal Bank of Scotland owner NatWest last month was an important bookend in the soul-searching about Edinburgh as a financial centre.

While it’s true that Bank of Scotland owner Lloyds employs about as many people in Scotland as it does in London, banking is decidedly not the future.

Yet the need for the UK’s largest financial centre after London to come up with a compelling global story has not gone away as other regional centres attract a critical mass of financial players.

In the latest Global Financial Centres Index, Edinburgh retained a respectable 29th position and Glasgow jumped five places to 32. Yet competition from nimbler hubs like Seoul (10th ), Luxembourg (16 th ) and Amsterdam (18th ) is intensifying.

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Now, Scottish Financial Enterprise (SFE), thinks it has an answer. The lobby group last month published a strategy for asset management, one of three “global opportunities” for Scotland (the others being fintech, and green and sustainable finance).

Asset management is obviously an Edinburgh strength. The city has long been the largest such centre outside London, led by Baillie Gifford, Aberdeen and Dutch-owned Aegon Asset Management.

Yet its position has been slipping due to the rise of “passive” investing, which relies on index tracking strategies rather than the expertise of “active” stock-picking investors, an Edinburgh strength. Acquisitions have also played a part: Franklin Templeton bought Edinburgh Partners in 2018, Legg Mason acquired Martin Currie in 2014 and Walter Scott became part of Mellon Financial (now BNY) in 2006.

The harsh reality is that AUM in Scotland has been in steady decline since at least 2015, slipping to £493bn in 2023 from £548bn nine years ago, according to the latest available data from Investment Association (IA). Scotland’s share of total UK AUM halved in the same period to 5 per cent, having reached a post-financial crisis peak of 13 per cent in 2010. 

The IA believes this is not all down to shrinking AUM in Scotland and that portfolio management has become more concentrated in London, leaving “business operations” – that is, the middle-office plumbing behind the people who make investment decisions - to Scotland.

This explains why Edinburgh and Glasgow have become big centres for what’s also referred to as “asset servicing”, with Wall Street driving the trend. BlackRock, the world’s largest asset manager, last month moved its roughly 1,000 employees into a new office in Edinburgh that will in time be the firm’s fourth largest globally. Its presence in the city dates back a quarter of a century and functions as a hub for an investment platform used by BlackRock’s portfolio managers and those of its clients across Europe.

Similarly, JP Morgan and Morgan Stanley have technology hubs in Glasgow employing a combined 5,000 people. Many are data analytics graduates from Scottish universities in jobs helping the banks to run front office functions around the world. JP Morgan’s office hosts an “asset management technology” team that’s one of 10 the bank maintains globally. The SFE argues that Scotland can attract more asset servicing as firms look to escape cost pressures New York and London by relocating to cheaper regional centres, especially those with strong technology capabilities coming out of their universities, like Boston.

Sandy Begbie is the chief executive of Scottish Financial Enterprise (SFE). Picture by Graham Flack | Contributed/Graham Flack

The SFE’s doggedly optimistic chief executive, Sandy Begbie, thinks there is also a chance of attracting more front office roles to Scotland, including from firms already in London. A “wage benefit” of around 30 per cent compared to London, coupled with Scotland’s much-touted lifestyle advantage, means there’s “a decent arbitrage to be had” in shifting personnel to Scotland, he says. Of course, there is still the awkward income tax differential that adds an offsetting “Scotland weighting” to senior roles.

Nonetheless, Edinburgh does have a good case to make in the intersection between technology and finance. A lot is happening between the University of Edinburgh and the private sector, producing examples of the “digital ecosystems” that SFE thinks are important to growing the asset management pie. This mostly revolves around using AI, distributed ledger technology and tokenisation.

Last year, Aberdeen and the university launched a Centre for Investing Innovations that’s working on an AI-powered “research companion” that would use large language models to synthesise the huge amount of data needed to make investment decisions. A firm called Level E, founded by former Mexican banker Sonia Schulenberg, has developed “AI-driven autonomous investing”.

Rushad Abadan, general counsel at Aberdeen, argues that productivity levels will continue to increase with better technology and that this will “play into” where AUM gets managed.

“If you think about it like that then I think Scotland has a lot to offer in terms of where the research is being done,” he says.

The SFE calls for “a more clearly articulated government strategy” for growth and investment in the asset management sector and its importance to Scotland – as Singapore, Ireland and Luxembourg do. This needs to be joined up with “other UK industrial and growth strategies”.

Kate Forbes, deputy first minister, has developed a pitch-perfect narrative on inward investment that recognises the importance of making a globally competitive offer in core areas like offshore wind. At Panmure House in Edinburgh this week, she talked of her “mission to make Scotland the most attractive destination for investment in the UK.”

Yet financial services are missing from the pitch deck. If the sector is to be treated like the global asset to Scotland that it is, that needs to change.