ING seeks to become the perfect partner

Michel van Elk, chief marketing officer responsible for European distribution at ING Investment Management talks of a discrepancy existing between his group’s “favoured way of distributing and the way we currently do it”. There is still some way to go, he implies, before Holland’s largest fund house, managing assets of ?358bn worldwide, succeeds in implementing its ideal distribution strategy. “What we are really trying to achieve is to be a strategic partner for our distributors,” he says. “We want to expand our product range on their platforms.” That does not mean that distribution partners have to be the largest players. “Maybe it is better to have a broad relationship with mid-tier distributors, rather than selling one product to the top distributors,” clarifies Mr van Elk. Although over 40 per cent of the ?141bn sourced from Europe is still proprietary insurance company money, flows coming from external institutional clients and mutual fund buyers have increased in the last couple of years. “Third-party distribution is gaining importance and in the future we expect that trend to continue,” says Mr van Elk. At present, around 30 per cent of ING IM’s European assets are managed for institutional investors, mainly pension funds, but also insurance companies and banks. The remaining 30 per cent, or ?43bn, is held in mutual funds, of which ?6bn are channeled through funds of funds, fund supermarkets or advisory networks. “In the third-party space the vast majority, perhaps 90 per cent, of our customers are banks, mainly private banks,” he estimates. ING IM is particularly active in the funds of funds business. With local presence in 13 European countries, they are most successful in Switzerland and the Nordics, as well as their home market, in this product line. “We have been working in the Nordics a bit longer than in the rest of Europe,” says Mr van Elk. “We have been successful in extending the product range that we provide to our distributors.” What is key in the business is to take away the burden of the operational aspects of fund distribution, to service distributors and meet their requirements, explains Mr van Elk. “We make sure that distributors are well trained and educated, that they know our products well. We try to make their life as easy as possible when using our products.” ING IM has concrete plans to open a new office in Germany, following the sale of its investment management company, Frankfurt Trust. But the Netherlands, Sweden and Italy are the countries where ING IM’s deep retail business is strongest. “Deep retail needs more time and effort on branding, so we need to pinpoint those markets where we want to be active”, says Mr van Elk. Mr van Elk has no doubts in identifying straight, third-party fund distribution as the most profitable of their channels. He finds it difficult to compare funds of funds against deep retail, however. “Although gross margins are higher in deep retail, so are the costs.” Funds of funds are not completely safe as a business proposition. “From a business perspective, the good thing about funds of funds is that you gain money quite quickly, it is reasonably profitable. The downside is that it can go quite rapidly as well. It’s often more of an institutional approach than a retail approach,” he says. This is a clear reference to the attitude of funds of funds managers of getting rid of a fund as soon as the performance drops, thereby increasing risk for existing fund shareholders. “What we do know is that fund distribution is more profitable than the mandate business,” confirms Mr van Elk. The reason lies in the necessity of often complex, tailor-made solutions to which outsourcers of investment mandates feel entitled, against the standardisation of relationship and reporting aspects that a fund enables. “If you add mandates you have to start adding new fund managers at some point. We like the mandate business but there are minimum requirements for us to accept the mandates over the funds. It really depends on the asset class, how specific are the requirements, product fee levels and so on,” he says. Supermarkets swept Looking at the future, Mr van Elk foresees that, unlike in the past, fund supermarkets will be most likely replaced by guided open architecture. There will also be a tendency for a polarisation of roles in the fund industry. “Those distributors offering third-party funds alongside their own funds are facing the decision either to become an asset manager or to concentrate their efforts in distribution only, and sell off their asset management arm. Some European distributors are already making a choice of what they really want to be.” The launch of a multi-manager fund in November 2005 clearly states ING IM Europe’s ambition of enhancing its range of products offered to distributors with more comprehensive open architecture solutions.

The fund is a large-cap equity product with a focused core-satellite approach. The portfolio invests around 75 per cent in core managers, currently Capital International, MFS Investment Management and Wellington Management. The remaining 25 per cent is invested with satellite managers, Alliance Capital and Franklin Templeton Investments, who provide a style driven overlay, growth and value-oriented, respectively. “At the moment it is an institutional fund, only open to Dutch pension funds, but it is our intention to get a retail version out there during 2006, for cross-border distribution,” says Mr van Elk. As ex-chief executive officer of ING IM Australia, he has picked up valuable experience of offering multi-management platforms. An increasing number of asset managers, now managing their own funds of funds platforms will decide to outsource, in order to focus on the core asset classes, expects Mr van Elk. “There will be a limited number of funds of funds suppliers offering their services to third-parties and we will be one of them. By definition multi-manager is a scale game. You need real scale to be able to invest in a research platform and to do it at a competitive fee level”. Currently popular, amongst distributors, are fixed income products of which “we have seen a tremendous resurgence,” ventures Mr van Elk. “Mainly high yield products, coming from emerging market debt or high yield type of products are particularly popular. We are talking niche products rather than just plain vanilla government or index bonds,” he adds.