Distribution trends in a vibrant market

Many trends in the German fund distribution market are connected to an ever-increasing number of funds and investment strategies, a phenomenon that confuses both investors and asset managers. Fund ratings play an important role in this context, said Tobias Schmidt, partner at Feri Rating and Research. The EU’s Ucits III directive has increased fund managers’ options for mutual funds, and the line is blurring between strategies for retail funds versus institutional investors. Panellists at the PWM/BNP Paribas Asset Management Conference in Frankfurt agreed the similarity between the two is high. “There is already a multitude of strategies from Spezialfonds-mandates that can be copied for the retail market. However, not everything makes sense, as it might be too volatile or hard to communicate and market in a retail context,” said Michael Grüner, co-head third party distribution Germany and Austria at Goldman Sachs Asset Management. Long/short funds One approach that combines long and short strategies for mutual funds is 130/30 funds. However, due to their complexity, these products will face greater challenges in retail than in the institutional area. “The key is the ability to communicate these products. There’s a lot of work for asset managers here – with consultants, investors and rating agencies,” said Mr Grüner. Josef Altmann, chief executive officer of BNP Paribas Asset Management in Germany, sees a trend towards volatility products for investors, which allow them to gain when it is unclear in which direction markets will go. Mr Grüner thought volatility products were only appropriate in the business-to-business realm, even if Ucits III enables asset managers to wrap up to 30 per cent volatility products into portfolios. Compared with German asset managers, the foreign bank panellists believed satellite strategies were to their comparative advantage as they could offer special expertise for markets that their German counterparts are less familiar with. However, Mr Altmann found clients either wanted a satellite or boutique approach, or were looking for strategic partnerships under a guided architecture approach. His strategy is to work with 10 selected asset managers. These cover the bulk of a portfolio, together with just a few external boutiques. The specialist teams work independently but cooperate. Mr Altmann asked: “Where should expertise for products such as 130/30 funds come from if you only have classical fundamental managers who have only gone long so far?” Guided or open architecture proved to be controversial. Thomas Fleck, head of European institutions at Janus Intech, warned that institutions can limit themselves by choosing 10 to 15 experts: “Just because I cover everything globally does not mean that I use it in an optimal way.” Mr Grüner agreed that the issue was a difficult one but was less convinced by the open architecture model: “If everybody uses it, then all branch offices will need even more marketing material, trainings, and so on. In the end, they will generate fewer assets for more money and give investment advice of lower quality to the client.” Panellists agreed that there is a trend towards strategies that separate alphas and betas. Using portable alpha strategies for institutional investors, most capital will be invested in the beta realm, Mr Altmann said, and a smaller share in leveraged alpha products. Growth market The same mechanism applies for the wholesale area via exchange traded funds: “We have only started a few years in that market, and we have E5bn assets under management already. This is really a growth market.” Mr Altmann also highlighted the growing importance of socially responsible investment (SRI), beyond the traditional client base of foundations and churches. Lifecycle products and multi-asset-portfolios are also promising. Mr Grüner said people were moving away from theme funds towards comprehensive investment solutions: “Many investors are neither willing nor able to judge what they have in their portfolio. They might not even want to think about asset allocation”. This could also be an explanation for the strong reliance on fund ratings, especially by private investors: a survey by Feri Rating and Research revealed 28 per cent only buy funds with top ratings. But even for 90 per cent of distributors ratings are important. Mr Schmidt said fund initiators and distributors used ratings to cross-check fund quality. And if positive ratings are achieved, they serve as multipliers that raise much more capital.