Deutsche Asset Management's UK segregated and global accounts enjoyed bumper returns last year on the back of its managers' belief in the technological revolution.

Following a strong fourth quarter, estimates suggest UK segregated funds were four percentage points ahead of median. Global accounts were five over the MSCI index after adopting investment techniques used in UK segregated funds. Global ex-US funds were 10 over: Deutsche has plans to wheel out a UK specialist product from people running that process. The only bad news is that Deutsche's mixed pooled fund was only 2.1 percentage points ahead of its median, at a time when the firm has been urging smaller clients to invest their funds via this route. "New manager Stephen Barrow had to get the pooled portfolio into the shape he wanted while dealing with cash inflows,' says fund manager James Goulding. "He has completed the task and performance in the second half was in line with our in-house median.' Goulding accepts that Deutsche's dispersion of returns broadened last year: "But that is true across the industry. We are making the point that our accounts were dispersed on the right side of the median line.' He is particularly pleased that global funds have recovered from a prolonged dull spell, given that Deutsche Bank badly wants its teams to succeed on the world stage. The UK investment process originally put in place by Keith Percy and Nicola Horlick, when the firm was known as Morgan Grenfell Asset Management, has strongly delivered. Over the past 10 years its mixed pooled fund is practically top decile. The Peter Young affair was a major disruption and led to Percy and Horlick's disappearance to SG Asset Management. But Deutsche successfully held on to the rest of the team: Mark Holden's recent departure to HSBC represents a rare UK defection. It also held on to nearly all of its UK clients. The task of driving the global investment process in the same direction has fallen to Goulding, who joined Deutsche from Mercury at the same time as Horlick, and went on to perk up Deutsche's Asian process in the late 1990s. He says: "In the 1980s our global style was strong in the US through an old-fashioned process which paid little attention to risk control. In the 1990s, we concentrated on UK institutional. But now we have the resources to make ourselves a global player, strong enough to take on the Americans.' Industry analysts say that well over 100 people, including technicians, have left Deutsche's global team, including nearly 20 fund managers. Greg Fisher has become global chief investment officer, taking charge of troubleshooting and top-level tweaks, while Karl Sternberg has taken his job as regional chief investment officer in London. Sternberg has worked at Deutsche through most of his career, although he did spend a trainee year with Mercury, whose highly competitive atmosphere did not appeal. Prior to taking the chief investment officer job he ran investments for Deutsche in Australia. Like the UK team, Deutsche's global managers now combine research with portfolio construction. Teams across each region supply their services across the firm: in the old days, global managers within different divisions drew on the firm's ideas on a much more ad hoc basis. Deutsche uses the model portfolio approach, which can be modified, but never abandoned, by individual managers. One rule is that if a regional team takes a decisive view on a sector, an individual manager should not put it into reverse. The manager, however, can take a view on shading the bet.While stock weightings within the model portfolio are also made clear, individual managers can take a more personal view. Top 10 stock weightings need to be broadly replicated, but if a manager has a strong view on a stock which is not on the list, he can take a limited position in it. "If the manager's arguments are convincing, others may also adopt his view,' says Goulding. "If his personal selection succeeds, he'll be given a hard time if he has failed to persuade others to put it in their portfolios. Team work is crucial to us.' He adds: "We have a system whereby managers are chosen at random on a fortnightly basis to explain their picks and philosophy to other team members. The meetings last between 35 minutes and 1 hour 15 minutes, depending on how well managers are doing. It's quite a discipline.' Top-level fine-tuning takes place through an investment committee comprising regional desk heads and Sternberg, plus Stephen Barrow and Charlie Curtis. It meets once a fortnight to discuss trends and performance. last year it helped shift the stance of Deutsche's Japanese team further from exporters and towards technology after a dull first half. European teams in London and Frankfurt are enjoying increased team stability and success under Sandy Black, following post-Peter Young disruption. The American team, under Charles Martyn-Hemphill, is outperforming the index over one, three and five years. The UK team under Adrian Frost remains well motivated. Charlie Curtis's recent performance has lost some gloss, but Patrick Dean and Richard Wilson's success for ex-US global mandates means that they will soon be driving a new UK specialist process. Sternberg says: "Stock selection is where we have proved we can add value, so that is what we work on.' Asset allocation tends to be quite neutral, although it has added some value over the years. The firm takes the odd currency bet as necessary: "We neutralised the yen until this year, which proved the right decision,' says Sternberg. He also points out that he expects his teams to take account of how industries and companies are changing: "Anticipating changes and correctly understanding the long term impact of them is a key secret to consistent out-performance.' At the stock level, he reckons cash flow is king. "I'm not a great believer in ebitda,' he says. "An appreciation of how much cash flow results from a particular capital investment is the crucial thing.' Deutsche has appreciated the impact that technology will have on the economy for some time. Crucially, it can both lower the cost of innovation and slash the cost of goods to the customer. "We've been bullish on ARM Holdings and Sage for years,' says Sternberg. "We have taken a strong view on Colt Telecom.' But he says that Deutsche's net exposure to the new economy – technology, in its broadest sense, including media – has been modified by negative exposures to certain stocks, including telecom majors. "In Europe we are underweight on such stocks as France Telecom. That has reduced our net over- exposure to 5%. We want to be as confident as we can that, even if the technology bubble does burst, we will not under-perform the index by more than 3%.'Sternberg says that market volatility means that position taking has to change faster than in the past. Deutsche's recent underweight in Deutsche Telekom has sharply become much closer to neutral. In the modern, competitive environment Sternberg is cautious on the issue of brand strength. Deutsche is quite negative on Marks & Spencer, for example, preferring to seek necessary stores exposure from the likes of Next. It is cautious on food and consumer goods manufacturers, including Unilever, believing that they are continuing to lose pricing power: "To judge by the RPI numbers, deflation has taken a grip in certain areas.' Sternberg is also wary of the impact of the internet on other sectors, such as banking and pharmaceuticals, which makes careful stock picking essential: "There are strong pricing differences between certain countries in the drugs industry. Use of the internet by buyers could have a strong equalising effect.' It is early days for Deutsche's revamped global process to be winning business from consultants. But Goulding reports that one European multi-national has just handed over $100m, in anticipation of good times to come. The percentage of new UK mandates won by Deutsche has declined, partly in reaction to consultant fears that the firm has been winning too much new business. Estimates by Financial News suggest that Henderson was top pension fund active business winner, with £4.7bn (E7.8bn), last year, while Deutsche had to content itself with £3.5bn, which represented a lower proportion of the market than in 1998.But now that issues relating to pooled fund underperformance have been addressed, Goulding anticipates fresh balanced gains this year and progress towards the capture of specialist mandates. Deutsche is also testing out a long/short market neutral product, believing that a good stock picker should make the best of all "buy' and "sell' ideas. The process is going well, but will not be offered to clients for a while. Deutsche Bank deserves considerable credit for sponsoring a UK fund management process which is succeeding while so many others are faltering. And this year's bonus season will not leave its successful star managers unrewarded.