Boosting bank sales in Milan and London

Yuri Bender explains why Morgan Stanley has tended to depend on banks for distribution and why depolarisation in the UK market is so crucial.

Despite the economic slowdown, Stefano Russo, managing director of distribution at Morgan Stanley Investment Management, recently presided over a significant landmark: the gathering of E15bn from European markets. He is conscious that for a name as famous as Morgan Stanley, this is still a limited achievement. While the asset management arm of Swiss Bank UBS leads the way with E85bn worth of funds sold in Europe, Mr Russo must compete with fellow Americans JPMorgan Fleming on E54bn and Fidelity on E27bn. “This is a subject we have discussed in senior management meetings in the US,” confides Mr Russo. “Among the larger investment houses, we are among the ones with the smallest amount of clients outside the US. We will be developing a push for the next five years, directed to the international picture, particularly in Europe.” Currently, non-US business accounts for 10 per cent of group revenue. Mr Russo has laid down his marker: “We want to get into a 25 per cent position, which is not a minor effort by the way.” The most successful countries in terms of distribution strength have been Italy and Germany. The next three years in a UK market boosted by depolarisation – where banks are expected to snatch a huge slice of the fund sales cake from independent financial advisers (IFAs) – will also be crucial. Consequently, Mr Russo divides his time between the historic Palazzo Serbelloni, situated in Milan’s busy Corso Venezia, Morgan Stanley’s high-tech offices in London’s Canary Wharf, and a moving feast of trade fairs for German advisers. UK market push “If you ask me where we will put our coins this year, we want to make sure the UK market finds us in good shape on both the products and human resources side,” says Mr Russo. In preparation, Morgan Stanley Investment Management has restructured two families of open-ended investment company (Oeic) products, which he hopes will become flagship funds for the UK in the same way as Luxembourg-based Sicav funds are accepted by the rest of Europe. This has involved re-shaping an institutional product and a no-load oeic, unsuccessfully launched six years ago. Incredibly, Morgan Stanley has never had a UK equity fund before, but this is about to change. The new products will serve both institutional clients, and wealthy customers of banking intermediaries, with the latter channel expected to be more lucrative eventually. “Searching for institutional mandates is like elephant hunting,” believes Mr Russo. “You look for one and you have to shoot it. But everybody is after the same elephant.” Another reason for the reliance on distribution through banks is that a US-style mutual fund based model for pension products has failed to materialise in Europe. Mr Russo had returned to Milan disappointed from an audience with the Italian Treasury minister in Rome the day before his interview with PWM. “There is an unwillingness to make changes. It is not a top priority. They have had to face other emergencies. But that is also the picture right across Europe. We were waiting for a 401k system of self selection, but a number of Enron-style landmines have put people off.” France, Germany and Spain are currently at the same stage, he says. “We will always keep the necessary resources, as sooner or later, something will happen.” Mr Russo’s 25-strong team – spread over London, Milan, Madrid, Amsterdam, Frankfurt and Paris – will be able to redirect their resources accordingly. Waiting for change Until such a sea-change in state-sponsored long-term savings takes place, banks will remain Morgan Stanley’s optimum model of distribution. Over-the-counter sales by bank clerks are suffering in the current climate. “Fund sales at a branch need to be really pushed. People don’t walk into a branch and buy a product,” believes Mr Russo. His preferred channel is a fund of funds, such as the Italian GPF. This product allows banks to grant mandates to third-party managers on behalf of wealthy clients. “This sector has improved very much in Italy and outside through banks’ ability to select good funds from bad in terms of recognising style rather than asset class,” says Mr Russo. The focus on banks does not mean that the IFA sales channel is being totally disregarded. Mr Russo’s team recently hosted an IFA seminar in Munich. “We need to address this market because our old banks in Germany are setting up platforms to gather IFA business in an orderly, omnibus way.” While banks perform better in bullish markets, the current situation favours advisers, who can hold on to assets through regular client contact, believes Mr Russo. At the Munich briefing, polar explorer Reinhold Messner was invited as a motivator to stir up the salesmen. “We introduced them to this man who braved tough conditions,” says Mr Russo. “But we don’t want to present the market as Antarctica, where you can get lost forever.”

Praise for partners Stefano Russo singles out key banks in Continental Europe for special praise as distribution partners. He says they have been pivotal in leading their national markets to open up to external manufacturers: Banco Santander Centrale Hispano (BSCH) is the fastest among the three leading Spanish banks to embrace open architecture.

It has been particularly aggressive in pushing capital protected structures, enrolling Morgan Stanley to supply underling funds. More than E1.5bn has come in from these products, also sold by BBVA and La Caixa.

According to Mr Russo, the most popular underlying fund has been Global Brands, a Luxembourg Sicav investing in franchise stocks, such as Cadbury Schweppes, Davide Campari and Nestlé, managed by Egyptian-American Hassan Elmasry.

While happy to combine mutual funds with innovative structures and bank guarantees, Mr Russo is sceptical of exchange-traded funds. “ETFs are a plain vanilla, index-based product. They’re a bit like mountain bikes. The bicycle dies as an asset class, so they invent the mountain bike, but you still have to pedal. It’s nothing new, it’s just an index basket.” BNP Paribas in France has been extremely brave to outsource some European equity strategies, in a market where banks fear clients may desert them if they are unable to manage core products. The Antin Selection Europe fund will soon include Morgan Stanley, alongside Fidelity and AXA Rosenberg, following expected regulatory authorisation. France, Italy and Germany all present substantial new sub-advisory opportunities. In Italy, the most successful bank, which has implemented open architecture is Intesa BCI, whose fund management subsidiary is now called Nextra. Unicredito Italiano established itself through the purchase of Pioneer, but tends to be much more protective of in-house funds, believes Mr Russo.