Fruits of a beautiful partnership

What makes an investment house work with a distributor for the long term, rather than fly the nest and start again? Yuri Bender investigates.

Europe’s wealth managers are maturing and settling down. Less than five years ago, cross border investment houses were still boasting about how many distribution agreements they had signed in how many countries.

But the realisation has slowly come that perhaps less is more. The new thinking in the big houses is to choose your distributors carefully. Find somebody you like working with and stay with them for the long term. Most importantly, find somebody who can make money for you as well as themselves.

Rather than distributors, the new name of choice is “strategic partners”. Current thinking is that both banks and fund houses need only do serious business with between five and 10 such partners around Europe. By getting to know each others’ strengths and weaknesses, they can leverage a tight working relationship for maximum profit.

“We prefer a partnership with somebody who really understands the clients,” says Stephen Cohen, head of European operations for E240bn US house Putnam Investments.

Stephen Cohen, Putnam

Selected partners

The E12bn which has been sourced from Europe is typically the fruit of a liaison with several selected partners. These include privately-owned investment bank Oddo-Pinatton in France, HDI in Germany, Capitalia subsidiary Fineco Gestioni in Italy, and Austria’s Erste Bank.

“Putnam believes in this as a philosophical approach to doing business. It is an effective way of making sure the right product gets sold to the right client for the right reason,” believes Mr Cohen. He prefers this approach to the expense and uncertainty of putting flags on maps.

“We can make sure that the manager/client service is delivered, and that we can enter the market more effectively with the advice and local knowledge of the partner.”

Eyes open

Both sides should also be prepared for surprises – some of them pleasant. “In every case we went into the partnership with our eyes open,” says Mr Cohen. “Where we are today, is not necessarily where we expected to be when we set up the deal, but in every case we are further ahead and better than we expected.”

Partnerships can be located anywhere in the spectrum. At one end, there is total mutual exclusivity. At the other end of the spectrum is the full open architecture proposition. Then there is every shade and colour in between:

• The operation with Fineco, allowing distribution through 3000 brokers, has progressed in such as way that Putnam owns 20 per cent of the asset management business. Putnam acts as sub-adviser for a variety of asset classes and receives full recognition through branding most of the funds. “Unless there is an asset class that we cannot handle, then Fineco would work with Putnam,” says Mr Cohen.

• At Erste Bank, Putnam simply provides global equities. However, it is free to sell other products in Austria separately.

• In Germany, at insurer HDI’s subsidiary Ampega, of which Putnam owns 30 per cent, the US group is “provider of choice” of all actively managed equity and non-European bond products.

Private labels

While Putnam offers training and helps partners put together literature and websites, alliances can go much deeper than this.

US bank State Street works with advisers, banks, insurance companies, fund platforms and other asset managers in Europe. These are often private label relationships, where State Street Global Advisors (SSgA) works managing the funds behind the scenes. This is the nature of SSgA’s relationship with Italian distributor Mediolanum, which has garnered $4bn (e3.4bn) for the Challenge range. “The Italian client doesn’t know it’s SSgA behind the Mediolanum funds,” says John Hamrock, who runs the European Fund Solutions business for State Street in Brussels.

Lucrative solution

But the Americans’ preferred partnership – known as the “turnkey” solution – is the lucrative arrangement where the bank does everything for its distribution partner.

When German-based bank Union Investment launched Luxembourg registered exchange-traded funds under the Unico brand, SSgA in London was given the sub-advisory mandate, and State Street Bank in Luxembourg won the custody contracts, accounting and transfer agency.

“This fully integrated approach is favoured, as there are benefits for both organisations,” reveals Mr Hamrock. “But it all depends on the needs of the client.”

Mr Hamrock was chosen for the role because he has back office experience, gained working for State Street in Boston, and he is expected to combine marketing the group’s funds with the custody and transfer agency support services.

He says these deeper solutions require much planning and dialogue between the parties.

“Our partners are increasing the emphasis on the back office side to improve business efficiency. They are taking a longer-term view, thinking not just about cost savings today, but how to get the best value from investment.”

Such outsourcing deals can lead to unforeseen problems, says Mr Hamrock, but careful forward planning should always mean contingencies are in place.

“We are integrating three different disciplines. We are focussed on investment servicing, asset management and administration solutions,” says Mr Hamrock. “This allows us to leverage our strength in the market place. We are working towards agreements which are profitable for us and the providers. The focus is on quality, not quantity.”

This idea of a bank or investment manager picking a handful of partners recently gained prominence when the private and business client division of Deutsche Bank in Frankfurt picked eight external preferred providers with whom to do business in the future.

“Deutsche Bank’s philosophy will lead to success for all players in the market,” believes Achim Küssner, head of German sales at Merrill Lynch Asset Managers, one of the selected houses.

“In the US, when Merrill Lynch opened up its private banking channel in the early 1990s to third party products, everyone was a winner – the fund management arm, the bank and the clients.”

Only a large bank or insurance company can afford to make such strategic alliances, as they entail a rigorous selection procedure and a professional asset allocation process, backed by efficient software, says Mr Küssner. “Who can provide such a huge research effort over the long run?

Can you do it on your own or as a one-man show?”

Client commitment

These questions are the reason why Mr Küssner’s team is dedicated to so-called “triple A” clients.

“What’s important is a clear commitment from these clients to us,” says Mr Küssner. “We are concentrating on a small number of selected partnerships and must be recognised as a core partner in order to build a relationship.”

This new world of the beautiful friendship is even cosier than it sounds. Mr Küssner recognises that only a few banks in each country have the know-how to select external investment houses with the required rigour and only a handful of managers have the resources to service the agreements.

“It is almost like a closed shop and we are not expecting any new names to enter this inner circle in the future,” says Mr Küssner, whose firm manages E5bn in the German market. “You have to see it from the bank’s point of view. What would be the point of using 30 asset managers? The costs of sales and redemptions would lead to a very complicated and costly process.”

Two trends

This way of working is echoed by JP Morgan Investment Management, which runs $15bn in Germany.

“We want to make sure we are selecting the right partners who have the potential to grow with us,” says Suzanne Otto, JP Morgan’s head of German wholesale business.

Suzanne Otto, JP Morgan

She draws attention to two trends, which will affect the development of such partnerships. “There is a move away from single stock, single fund concepts, looking at overall asset allocation. Our focus is on long-term client solutions,” says Ms Otto.

The parallel trend is one to outsource non-core capacity. “What we see on the advisory side, and in white labelling, is bigger houses in Germany re-considering their own investment capacities and deciding exactly what they want to outsource.”

However, the jury is still out on whether the partnership approach will be the most successful one in the long term.

“It is not possible yet to draw too many conclusions,” says Alan Ainsworth, deputy chairman of Ł45bn (E64bn) funds house Threadneedle, which has enjoyed success in both the UK and Germany. “Some banks are taking the partnership approach, where they develop strategic links with four or six groups. Others are taking a more open approach at the front end, with more funds available.

Alan Ainsworth, Threadneedle

“There are many things which partners can do together, but even the strongest partnership cannot deal with taxation and regulation issues, although they can sometimes get round them.”