Goldman Sachs takes a shine to sub-advising

Skandia is the latest insurance group to outsource the management of European equities to US funds house Goldman Sachs Asset Management (GSAM). The Scandinavian insurer is happy rubbing shoulders with an eclectic mix of Goldman clients, including insurers Lincoln Financial and GE, and multi-managers Northern Trust and SEI. Goldman Sachs has also managed money for customers of Scandinavian Bank SEB and the Italian Post Office.

The European business for GSAM divides into two segments:

• Direct distribution of funds through banks with which GSAM has agreements.

• Sub-advisory opportunities where GSAM’s funds are sold through life and pension companies, fund of funds managers and others with distribution to independent financial advisers (IFAs).

  Crucially, the Skandia deal adds assets to both sides of the business.

High expectations

Today, European sub-advisory represents $6bn (e5.1bn) of assets, compared to Goldman’s $39bn of total offshore funds. Bringing the sub-advisory line neck and neck with direct distribution is the task given to Alex Fletcher, GSAM’s head of European third party distribution.

Fletcher: depending on local sales force

As the firm manages $314bn (e267bn) globally, expectations of European sub-advisory success are high. “We are not competing with the same clients as the people we are sub-advising for and we have a strong institutional business, which plays well in the sub-advisory market,” says Mr Fletcher, whose strategy hinges on using locally raised personnel throughout Europe. These sales forces concentrate on winning contracts from the biggest banks and insurance companies in their particular market.

To date, the UK market has proved best suited to the sub-advisory channel, since it is dominated by independent financial advisers (IFAs) rather than bank distributors. The biggest success has been a E3bn brief for Lincoln Financial Group, managed through a range of GSAM’s underlying funds. The Gloucester-based company offers pension and life assurance plans, health and disability cover, investment plans, unit trusts and ISAs (individual savings accounts) direct to customers and through IFAs.

GSAM is also targeting IFAs in the UK through its links with Skandia. It has just started to manage a sterling corporate bond fund for Skandia. The Goldman Sachs global high yield portfolio has also been selected for inclusion in Skandia’s multi-manager bond income fund. This is in addition to the money it already manages in European equities (see box).

Goldman is rolling out a similar strategy in Germany. Michael Klimek, who heads the company’s Teutonic distribution, says that 10 years ago, the only international managers with a serious operation in Germany were Fleming and Fidelity. “Both these houses had a very similar approach to business strategy, which has been mimicked by almost every other entrant into the market since.”

Klimek: reach clients via competitors

As a relative latecomer to the market, GSAM decided to differentiate itself from the competition and rapidly build funds under management. This, he says, led to a concentration on sub-advisory mandates rather than distribution deals. “What we did was to effectively make GSAM’s global expertise and resources available to end customers via our competitors,” says Mr Klimek. This gives his team the ability to leverage the Goldman brand, without investing heavily in “head-on” marketing. This leaves Goldman free to provide its products in white labelled form.

“The end client gets the benefit of GSAM’s skills in investment management even if they are not aware that the product being bought is actually provided by GSAM,” says Mr Klimek, describing the white-labelled solution.

In addition, Goldman is believed to work with seven key players in Germany for direct distribution. In Italy, where the market is less concentrated, five locally based staff focus on maintaining relationships with 20 banks.

Special relationships

In France, a relationship with Natexis Banque Populaire encompasses sub-advisory and direct sales, with Goldman running a fund of hedge funds, sitting on the bank’s roster of preferred fund providers and dealing with fund of funds providers through the bank. Efforts in Spain are concentrated on BBVA and Santander, with GSAM acting as sub-advisor for both.

The attractiveness of the Nordic market is also growing for GSAM.

“There are a number of sub-advisory opportunities in Scandinavia for which we believe we are in a strong position to provide solutions,” says Mr Fletcher.

Education is in fact a key plank of the Goldman proposition. “The education process is something people do particularly badly. We ship out the jargon and instead of presenting the investors with reams of bullet points we use interesting slides and props.” In Sweden, even woolly hats baring the words “obsessed with alpha” were drafted into the campaign. GSAM also helps distributors with the creation of marketing materials.

The firm provides further support for clients requiring large amounts of detail on holdings within Goldman funds. “If a client has bought our US growth fund and is blending it with two other US growth funds and three value funds, they will want to know what their specific holdings are,” says Mr Fletcher.

“Are we within the permitted tracking error, are we holding companies with cash on their balance sheets? They will want to know whether we are doing what we said we would do.”

Institutional pulling power of goldman brand pays off

The investment managers at Goldman Sachs Asset Management (GSAM) are the first to admit that they do not have huge brand recognition amongst the funds buying public of Continental Europe. But recognition of the company’s qualities by professionals used to dealing with Goldman’s investment banking, broking and equity sales arms is another matter.

“When I joined GSAM in 1997, there was talk in the interview process that we could leverage the Goldman brand into the asset management space,” recalls David Dick, managing director of European equity strategies at GSAM. “At the time, I was sceptical about whether we could do this, but after six months, I changed my view. The qualities associated with the Goldman brand among investment professionals could open doors in a way that few other firms could.”

‘People are taking a more rational view of allocating assets to equities’

David Dick, GSAM

He recalls how five years ago, his team won a E200m mandate from a “big German corporation” who did not even meet the fund managers. While he appreciates this pulling power, there is nothing Mr Dick enjoys more than a rigorous selection process. After all, a vote of confidence from a third party is the highest accolade for his team and process, which have been going strong since 1998.

During this time, funds of funds distributors and other sub-advisory clients have been slowly catching up with Europe’s pension funds in terms of depth of due diligence. When multi-manager Skandia came calling earlier this year, before handing over Ł35m (E50m) into Mr Dick’s Continental European equity strategy, it was the toughest test yet.

“I don’t think I have seen this level of research and probing due diligence applied to us by anyone else before Skandia,” recalls Mr Dick. “It was absolutely superb – they wanted to find the reasoning for equity transactions going back to 1999.” Skandia made four visits, attended internal investment meetings, had one-on-one briefings with analysts and a series of conferences with the entire portfolio management team.

This resulted in an exclusive distribution deal for Goldman products in the UK and the relationship is gradually being strengthened. In October this year, the US house added another E45m to the assets it runs for Skandia, this time in corporate and high yield bonds.

And further deals could be just around the corner. “Banks are no doubt delaying decisions to launch pan-European equity products,” says Mr Dick. “But demand is likely to increase coming off a two-year bear market. Last year people were like rabbits in headlights in front of the Great Bear. Now they are taking a more rational view of allocating assets to equities. There is clearly a lot of money out there and eventually, banks and their clients will feel equities are a good place to be.”

The investment process followed by Mr Dick’s team is focussed on performance – ahead of the benchmark over one, three and five years – rather than risk. But the risk characteristics of every stock are closely monitored. “Risk attribution can’t generate a basis point of performance if you don’t have the ability to add value by picking stocks. Where it comes in is how efficiently you can structure the portfolio once you have chosen the stocks.”

– Yuri Bender