EAST EUROPE PUSH TO BOOST RCM STANDING

Mathias Bauer, chief executive officer of Raiffeisen Capital Management, laments that European fund markets such as the UK, France and Spain are much less open than his domestic Austrian stomping ground. If these countries practised a little more open architecture, then he would be more confident in his ambition to turn his ?40bn Vienna-based player into a ?100bn funds house by 2015. “The Austrian market is much more open than others for third parties,” believes Mr Bauer. His funds unit works in tandem with nine regional retail banks in the Raiffeisen group, to select and create products from external managers. “If you look on a list of funds, there are more foreign than domestic funds registered here,” says Mr Bauer, pointing out of his window, towards the statue of Ludwig van Beethoven. Indeed, like the German fund groups who ply their trade across Austria’s border, the German-born composer also exported his trade to Vienna. “The financial markets authority is very liberal in registering foreign, third-party funds.” While information on the quality of third party funds is shared on a group-wide “guided architecture” basis, RCM packages the funds into a fund of funds, and the regional banks sell the funds directly over the counter. However, this group collaboration does not always extend to such a productive relationship between Raiffeisen’s investment bank, RZB and RCM, despite board-level pressure on Mr Bauer to work on structured products with the capital markets group. Instead, Mr Bauer has decided to create his own capital markets unit within RCM. Clients’ needs first “We are not collaborating with our investment bank on structured products,” reveals Mr Bauer. “We have our own department dealing with derivatives constructions, which are more transparent and cost-effective for our clients.” But it is not the investment bank which Mr Bauer has any problem with – after all it shares strategic intentions common to the group of building strengths in neighbouring Central and East European markets – it is more the concept and performance of certificates and other capital markets products, which he feels are not necessarily suitable for retail investors. Rather than launch synthetic, black box equity baskets, Mr Bauer prefers actively managed funds, backed by a guarantee for cautious investors. And with a striking difference to neighbouring Germany, Austria does not offer favourable tax treatment to certificates. “People like to have those kinds of guaranteed funds rather than structured products from investment banks, because funds are more transparent, and have a better reputation. They have some popularity, but not as much as in Germany,” says Mr Bauer, almost visibly gathering steam as he speaks. “In fact, they are on a path leading downwards, as people are disappointed by the results of redeemed certificates. Most ended up just with the guaranteed amount, as there were a lot of trigger events in the market.” The “free lunch” which had been promised to investors was never delivered, claims Mr Bauer. Experience in the domestic market has not been favourable of late. RCM has lost ?3bn in outflows this year, mainly from Austrian investors. Institutions wary of the quality of instruments have withdrawn money from money market funds, while retail investors have pulled out of bond and equity funds. Mr Bauer says most of the assets leaking from fund groups have gone back into deposits with parent banks desperate to shore up flagging balance sheets. Yet he expects flows to return in the second half of 2008, with an expected lowering in interest rates by the European Central Bank. Any inflows have come from outside Austria, into products such as specialist and emerging market equity funds. For instance, RCM has ?3bn of investments in Central European and Russian equities. A pure Russia equity fund, to be distributed across Europe, will be launched by RCM in May. “We will invest in large as well as mid-size and smaller stocks,” reveals Mr Bauer. “We already know about the larger companies, from our research desk in Vienna. But we need to enlarge this knowledge to the smaller ones, where we have the expertise and help of our Russian friends.” This is a reference to Raiffeisen International’s Moscow subsidiary bank, which absorbed the home-grown Impexbank to achieve a major Russian presence in 2006. Most sales of the funds have been coming from Western Europe, with CEE countries starting to build up momentum. “We would like other countries such as the French, Spanish and UK markets to open up a bit more. They are still very closed for cross-border fund structures,” adds Mr Bauer His philosophy is to use commercial and private banks as key distributors, because he believes they create better long-term relationships. He is not so complimentary, however, about independent financial advisers, who have such a stranglehold of the UK market. “We make very restricted use of IFAs because we believe very good advice is needed, so we would not like our funds sold through a hard-core seller. We believe in long-term advice and sustainability,” he says. “This has to fit in with the distribution network. We believe banks are better than IFAs for funds.” Co-operative bonding As RCM is 100 per cent owned by Austria’s co-operative banks, when the group tackles new markets, it always approaches like-minded banks in other countries for an initial distribution push. It has, for instance, talked to the Crédit Agricole network in France; the German regional Volksbanks, which have a similar relationship to their own proprietary fund manager Deka; and the Italian co-operatives. “We feel more at home with our co-operative friends, but also try to approach these markets on a more general basis,” says Mr Bauer. This has meant securing berths on fund platforms, including Allfunds in Spain and Italy. But there is an animated debate raging within the Raiffeisen group regarding whether RCM can make the jump from a predominantly local to a truly pan-European level. Close to 85 per cent of RCM’s assets are managed on behalf of domestic clients, with ?6.5bn handled for investors outside Austria. Mr Bauer, however, points out that only six years ago, he had no foreign clients. “These targets have been very heavily discussed in the group and people are asking whether ?100bn by 2015 is still achievable,” says Mr Bauer. “I would say yes, personally. Under today’s conditions, a ?100bn target is tough and ambitious, but it is still the target of the company.” Mr Bauer predicts that of the ?60bn needed, ?20bn will come from domestic business, and ?40bn from abroad, with more than 50 per cent of this from CEE countries where Raiffeisen has a strong retail banking presence. Currently, just ?850m is managed for clients from CEE countries, mainly Slovakia, Hungary and Poland. But over the next five to 10 years, Mr Bauer expects this to become the mainstay of RCM’s business. “Russia, Ukraine and Romania are the smallest markets right now, but they have the biggest potential,” he says. While Mr Bauer does not like to use the term “captive distribution” and is adamant that RCM must show local banks in the Raiffeisen group - including those in CEE countries -that it offers better products than competitors, many think this is little more than a cosmetic exercise. According to Peter De Proft, director general of the European Fund and Asset Management Association (Efama) – an organisation which elected Mr Bauer as president last year – the use of proprietary distribution channels is sometimes the only way to acquire market share in new markets such as CEE. “Most of the activity of new groups going into Central and Eastern Europe has already taken place. Banks such as Raiffeisen and KBC are very active there,” says Mr De Proft. “There is still some potential in these countries. But probably at this stage you need captive distribution for CEE.”