Funds of funds bring in flows for Invesco

It has been a productive year for Invesco’s $20bn (?16.6bn) Continental Europe division, headed by chief executive Jean-Baptise de Franssu, even though things have not exactly gone according to plan.

Mr de Franssu, known affectionately as JB by his staff in his small empire of offices in Brussels, Paris, Milan and Frankfurt, achieved some fame among his peer group of fund manufacturing houses at the beginning of this decade. Indeed, he was the envy of rivals on the European conference circuit.

He did an exclusive deal with Deutsche Bank chiefs in Frankfurt, back in 2002, whereby the German giant agreed to provide Invesco funds right across its private banking and retail client bases. When Deutsche eventually signed up eight strategic partners in a guided architecture system, Invesco was one of them. He also secured a valuable preferred partner berth just up the road at Commerzbank, Deutsche’s once deadly local rival.

But the expansion has not come from these retail and private banking channels, once backed by Mr de Franssu. Although there is some appetite from private banks, with their now-systematic use of third-party funds, it is the fund of fund players who have provided much of Invesco’s $1.5bn (?1.2bn) in net new European money this year. This compares favourably against last year, when net inflows from Europe failed to hit the $1bn mark.

Dented image

What is even more surprising is that the increase in flows has come against a background when Mr de Franssu and his team have been fire-fighting an image dented by both regulatory issues in the US, and performance issues in Europe.

The message his sales teams have been sending out to fund buyers has been one of freshness, of not just dusting down existing products with a cursory spring-clean, but of shining them, and fixing any broken parts. In addition, there have been launches of new products, not necessarily previously seen as Invesco’s core strengths.

“We are taking a fresh look at the market, outside the main fund range, taking fresh ideas, and adding them to our product range,” says Mr de Franssu. “This is made possible due to the quite significant range of expertise in the Amvescap group [which owns Invesco]. At a time when the market is changing, when distributors are asking for more product ideas, it is important to keep delivering what the client wants. That’s very much the mode in which we are operating, and the concept of freshness is where we stand.”

Recent figures from funds consultancy Feri FMI show that much of the flow into mutual funds is going into newly created products, rather than old favourites. “Product creativity is clearly paying off,” says Mr de Franssu.

Although Invesco was always seen as an equities house, and enjoyed a surge of sales soon after its ground-breaking agreement with Deutsche, its equity suite was not up to the mark over the long term. The answer has been both to diversify increasingly into fixed income, once the sole preserve of Continental banks and insurance companies, and to dabble more in alternatives.

Multi-asset funds have been launched in private equity, specifically for private banking clients, and external hedge funds are also used. A cross-border real estate investment trust (Reit) is already off the starting blocks. “There aren’t many Reit products available out of Luxembourg or Dublin,” says Mr de Franssu. “In terms of household names, we are one of the first players to push these funds across Europe and Asia.”

But it is the building up of fixed income assets, which is the greatest driver of fund flows, a trend Invesco expects to continue. Invesco’s performance on this side has been improving steadily, and notable successes have included the Inflation Linked Bond fund, the Global Bond fund, and the Bond Return Plus fund.

Equities have been another story. Mr de Franssu had an internal target of $1bn for sales of products through Deutsche Bank branches over three years. Unfortunately, the figure is still languishing in the hundreds of millions.

Early starter

Invesco has perhaps been the victim of the “early starter” syndrome. Deutsche bought Invesco funds in droves to start with, when it was the only alternative to the DWS own-brand. But a performance of -44.26 per cent in the flagship Invesco GT Pan European A fund, more than 20 per cent behind the index over five years, has not helped sustain long-term sales.

“We had some quality issues with some of the products which Deutsche may have been selling,” admits Mr de Franssu. “We did not have a good product in European equity, when Deutsche was promoting this area, which cost us some market share with them. We are in a business where we only have a short-term monopoly.”

On the bond side, Deutsche has been reluctant to stock Invesco products. “Our relationship with Deutsche is purely on the equity side,” laments Mr de Franssu. “Of course with many distributors of that size, fixed income and related products represent a fair amount of what we are selling. But it is Deutsche’s choice. What they put on their shelves from Invesco is mainly equity product.”

Although Invesco is no longer a preferred provider with Commerzbank, as it was unable to supply a strong enough range for the other Germany player, a relationship with the bank has been maintained.

“That is costly for us when one of our distributors tells you that you are no longer a preferred partner,” says Mr de Franssu. “Performance, probably in European equities, played a role, but the breadth of our product range when they started to review their third party providers, was not what is now.”

As well as looking at performance issues, and the depth and number of funds available in Europe, Invesco has also beefed up its entire marketing and sales support functions across the Continent.

“Everything that had to be done in terms of addressing performance has been done,” stresses Mr de Franssu. “Our European equities fund manager, Jeffrey Taylor, has taken some very specific view in terms of where he thinks the market is going to go. He is sticking to these views and thinks he will be proven right.”

He hopes Mr Taylor will be enjoy a vindication similar to that experienced by the Invesco Perpetual team in 2000, after failing to adequately participate in the bull market of the late 1990s. “The five-year European equities track record doesn’t belong to the current team, which took over 3 years ago. Since then, there has been a significant improvement.”

Although Mr de Franssu prefers to talk about bonds, he pours cold water over any question of Invesco running down its equity operations in order to concentrate on fixed income.

“We don’t want to abandon equities and put more resources into bonds. We have addressed the concerns of our shareholder, and this is a long-term game. Short-term, there are some decisions which have not yet paid off, but will pay off in the future in European equities. There are many ways to approach this area, and we are expanding our portfolio of products.”

One addition has been the Invesco GT European Growth fund. “This tells a completely different story,” says Mr de Franssu. “European equities are a major asset class for us, and we spend a considerable amount of resource to strengthen it and will continue to do so.”

New launches

As well as the recent closure of some sector-specific funds, mergers of funds with falling assets and the broadening of investment universes open to some of its managers, Invesco has been planning launches of new funds in fixed income, European equity and Asian equity. These are expected in coming weeks.

Mr de Franssu is already convinced the broad changes are feeding into increased sales, and the figures are backing him up, even if the early relationships he struck are not bearing their expected fruits. The distribution policy of targeting varied sales channels in the deepest markets of Germany, Italy and France, will continue as before.

“The success of cross-border players is clearly a consequence of open architecture. It did not happen in exactly the way we thought, but it has taken place in a significant way, though not always at the pace we expected,” says Mr de Franssu. “The largest equity fund in Europe is not a local product, it is a Fidelity product. If this is not open architecture, then what is?”

De Franssu: everything that had to be done in terms of addressing performance has been done