GSAM aims to make bond assets sweat

As key cross-border distributors in France, Germany and the UK become keener to look to external funds for fixed income as well as equity strategies, it could be time for institutionally-focused bond players to come into their own. This is the rationale behind the latest assault on global distribution markets by Goldman Sachs Asset Management (GSAM), which runs nearly $600bn (?475bn) globally, with a quarter of this from European clients. GSAM currently has $27bn sourced from distributors in Europe. This is dwarfed by pension scheme assets, but there are clearly big plans for the distribution segment, fuelled by the addition of 14 new Ucits III compliant funds to the group’s Luxembourg range. At least 20 more funds are expected to spring off the GSAM launch pad during 2006. Working assets “In the fixed income space, clients want assets to sweat more, to have more alpha, as investment managers add tools and asset classes such as high yield and emerging markets, lower quality credits, currency, derivatives, mortgages and asset backed bonds,” reveals Ted Sotir, head of GSAM’s business outside the US. “Not every fixed income shop has the knowledge or set of resources to play in those spaces.” The notion of making assets “sweat” is a fitting one for Mr Sotir, an imposing but personable former semi-professional American footballer, still fond of early-morning workouts and sessions on the basketball court. “The fixed income area has become more exciting because the market has started to understand fixed income, in terms of going to managers running a global business for unconstrained portfolios, combining their best ideas,” believes Mr Sotir, whose team struggled to make an impression in Europe in the late-1990s, until they achieved the magic three-year track record. “Many managers can provide benchmark plus 50 basis points in fixed income, but the market place has moved to benchmark plus 150, which has separated out the managers. And benchmark plus 150 costs more, so you can get paid more for more alpha and the greater resources dedicated to the business.” According to Mr Sotir, it is the pan-European Ucits III legislation which has made the provision of these advanced, fixed income funds possible. This has allowed the deployment of institutional instruments for a retail clientele through large banking intermediaries. “Ucits III is one of the most exciting things to happen to the retail market for many years,” believes Mr Sotir, comparing it to huge developments in the pensions industry such as liability matching, use of portable alpha techniques and hedge funds. The top asset managers – he seems to be including Pimco, Western and BlackRock on the bond side – have made sure that talented teams are in place to make the leap from the 50 basis points added value return of old times to the 150 demanded by wily distributors today. “Now we have the potential to use the same set of portfolio management teams and tools in the retail market that we have used for a long time in the institutional market.” Preparing new products Mr Sotir has already presided over the launch of 14 fixed income Ucits III funds, basically higher alpha versions of existing Goldman funds. Further launches during the summer will be in the form of enhanced cash funds, able to compete with the successful VaR (value at risk) funds from Crédit Agricole, which have had the distribution market to themselves until now. There is a realisation within GSAM that many retail oriented players have been involved in distribution for years, while GSAM has had institutional priorities. But whether the full challenge of adapting attitudes, working practices and marketing material for the needs of distributors has really been grasped is another matter. “We are a newer player in Europe, competing with established brands, with 30, 40 or 50 years’ exposure,” admits Mr Sotir. “But Ucits III has enabled us to provide a new set of products, which we believe few others currently have, so we should have some first mover advantage this time.” It is no secret in the industry that some competitors are more than six months behind GSAM in terms of product development for retail distributors. However, speaking to the key distributors which GSAM hopes to bring on side – the likes of Deutsche Bank, Commerzbank, ABN Amro and Fortis – it becomes clear they prefer to deal with manufacturers who have a retail rather than institutional mind-set. GSAM has further to go than many, because it does not own a bank, so has little experience of these sales channels. At Deutsche Bank, for instance, those external managers such as Fidelity and Franklin Templeton, who have a strong retail footprint, have enjoyed success selling funds through the bank’s advisers. But other, institutionally oriented players, who have not been prepared to go out and visit outlying branches, re-model marketing literature, and raise their profile in local markets have suffered. Whether GSAM has a well-crafted plan to attack these distribution outlets – and this is the reason for launching the Ucits III funds – is not yet clear. Mr Sotir says GSAM has been successful in the sub-advisory space – where a tight team led by Alex Fletcher has secured mandates from major distributors including Abbey, Mediolanum, Société Générale, Skandia and Natexis Banques Populaire – but admits that there is no competition here for end clients. “We believe that we are one of the top players in the sub-advisory space, because we do not need to have a retail brand or presence,” he says. And there is no intention to fundamentally change the way of doing business. “We are not going directly to retail. We are a wholesaler of wonderful investment products to bigger institutions across Europe. If those institutions need more retail oriented materials, we need to help them, and be smart, and be more flexible to the needs of clients.” Breaking it down