Belgian firm embraces new stomping grounds

KBC Asset Management, which has boosted funds under management from E140bn to E175bn during the last two years, continues to emerge as a key European player in the production and distribution of synthetic solutions, despite an often unforgiving market environment. But controlled expansion in structured products, socially responsible investments and discretionary management which was the hallmark of the fund house’s previous success, has embraced new markets outside traditional Belgian and Central European stomping grounds. “The core of our story remains the same,” insists Christiaan Sterckx, the group’s Brussels-based head of product development. “But we are now distinguishing clearly between two opportunities – those in home markets, and those in non-home markets.” The definition of the “home” market is a broad one for the group’s parent bank, which has 11m clients in Belgium and the Central and East European (CEE) countries. Virgin territories Once it had achieved a market share of more than 50 per cent on its doorstep – and as much as 70 per cent in some Flemish-speaking parts of the country - the Belgian bank decided to move into virgin territories of the CEE region to make acquisitions, rather than compete in the overbanked markets of neighbouring Germany and France. From a standing start in 1999, KBC AM already controls E6.7bn or 30 per cent of the Czech funds market and Hungarian penetration is up to 19 per cent, with nearly E3bn. While the policy is to support the parent bank’s expansion in the CEE region, by copying the Belgian model and increasing group market share, the goalposts have moved slightly. There is now a strong rationale to start diversifying into other countries, although Mr Sterckx insists this is a managed approach. While denying a U-turn, he believes market demand for the KBC speciality of structured products is now so strong, that those countries previously off limits are providing cases for expansion. “In Spain, we are now selling products, but in a more opportunistic way, via fund platforms,” admits Mr Sterkcx. Traditionally, KBC enters a banking market, and then its funds arm is duty bound to take advantage of captive distribution. In Spain, however, the group sold its 99.7 per cent stake in Banco Urquiso to Sabadell in 2006, but sales are still being made through other, external outlets. And while it is still official policy to keep profits in house by aligning banking and asset management as closely as possible, in practice, neighbouring countries, not necessarily favoured by the bank, are being seriously targeted. “Germany [is of interest], for sure, and Holland and France. We are repositioning ourselves in countries with a number of characteristics,” says Mr Sterckx. “These are developed financial markets in which we do not necessarily want to copy our home market approach of distribution via our retail or private banking branches.” Incredibly, KBC AM has already hired 125 staff to sell products outside its traditional markets (with 2800 operating in ‘home’ markets) and opportunities are also being identified in the Far East. The market in Hong Kong is relatively open to external influences; Mr Sterckx’s product design team has already enjoyed success in distributing first structured products, and now a global IPO, which has pulled in $19m (E12m) fund in the territory. Strong distribution ties are being developed with big names such as HSBC, Standard Chartered, Hang Seng and Bank of China. In China, KBC AM has gone even further, beyond sales and distribution, by setting up a local joint venture with the Capital Airports Group, to provide both capital protection structures and the management of Chinese assets. This gives access to several Chinese banking networks, which work together with the airports group. “We always look for in-house margins, keeping asset management and distribution together,” says Mr Sterckx. “But outside our home markets, we are trying to adjust to the situation we find, according to the opportunities we see. This is the natural next step of our expansion.” In fact, during 2008, one third of new sales are expected to come from Asia, one third from the Belgian doorstep and one third from other markets, including CEE countries, which should make up 20 per cent of net sales. “This is a change in strategy, due primarily to opportunities available for our asset management company to transfer part of its expertise to the Asian market,” states Mr Sterckx. “This strategy is supported by the KBC group, but it does not necessarily mean the group will be opening branches in those markets. It is an opportunistic approach to go to markets and see where we can add value.” Open architecture This embracement of open architecture – in some countries – shows that distributors in different markets now command different approaches, which also marks a change to the more unified stance prevalent two years ago. “There is some openness to our approach today,” says Mr Sterckx. “But whether we are in an open architecture framework, or we are white labeling or go for an institutional mandate, depends on our business-to-business relationship with the distributor.” In a tough market environment, Mr Sterckx has no doubt that the bias towards structured products – which account for around 40 per cent of KBC AM’s current funds under management - has helped keep assets “at a certain level,” although some clients continue to demand active products. In 2007, his team created 360 new structured products, raising E10bn in total. Rather than imposing the product range from head office, Mr Sterckx believes it is important to allow bank branch networks to select appropriate products for each client. “We have to be realistic. The most suitable product for the Czech Republic and Hungarian markets is not going to be selected by a guy in Brussels, but by a guy in Budapest, close to the market.” Product offerings are developed separately for each market segment with different ranges for private banking and retail banking. “Sometimes you can source a product which fills all needs,” says Mr Sterckx. “But in the Belgian market and CEE, it makes more sense to set up a product with more of a private banking flavour. This would normally mean there is no capital protection involved. Our private banking colleagues have often helped us manufacture these products.” Examples of loyal distributors have included the Postal Savings Bank, MSS and KBC subsiduary CSOB in the Czech Republic, where deal flow has been ensured by generating a series of local currency-based, tailor made products, offering capital protection for a conservative clientele. Product innovations during 2007 have included Bric (Brazil, Russia and China) investments, commodities and dollar/euro foreign exhange plays. Unprotected products such as the ‘Index Jumpers’ have rewarded clients with a premium, plus return of capital, if the Eurostoxx 50 index rises. Structured products based on trades of a single stock are also coming into their own. In Belgium, KBC made good headway from a ‘Booster’ product based on the share price of Fortis, one of its key competitors. “There was a lot of animosity during the takeover of ABN Amro. Each investor had his own opinion on this deal, and where the share price would go after the takeover,” says Mr Sterckx. Sometimes, though, his team’s ideas can be given short shrift, even if they are based on notes from the bank’s research department and the fund house’s chief investment officer. “There are times when we thought we had found the product of the century,” admits Mr Sterckx. “But we took it to our commercial networks, and they said it simply would not work.”

Synthetic service becoming core KBC Asset Management is increasingly using CPPI (Constant Proportion Portfolio Insurance) techniques, backed by Value at Risk parameters (VaR) – an institutional measure of risk now being used in wealth management – to structure synthetic portfolios for private clients. “We have developed this as an interesting solution with separate products, which can be used as building blocks for a portfolio, and offered as a solution for private banking clients, for whom we provide discretionary management,” reveals Mr Sterckx. Assets in the discretionary management service – known as the Privelege Portfolio – have soared from ?1bn to ?9bn in 4 years, as this has established itself as the core offer for KBC’s private banking clients, based on successful application of the CPPI formulas.“We can shift the client from risky to riskless assets. We tend to make that shift happen according to what happens in the market and according to the volatility we observe,” says Mr Sterckx. Equity exposure and volatility are used in a CPPI logarithmic calculation, with exposure increasing when volatility is reduced. “This is the thinking behind second generation CPPI. The old method was like a car that has more gears. The new method is an automatic car which shifts gear according to market conditions.”

Christiaan Sterckx, head of product development, KBC Asset Management