Identifying opportunities in dark times

Even in the darkest of market times, there are opportunities for those who know where to look. With fears abounding of a US recession, climate change starting to bite, and property markets in turmoil, those handling the assets of high net worth individuals (HNWIs) can still make money for their clients.

From the chance to snap up good stocks at low valuations, to the possibility of hiring “good quality people” fired by New York and London investment banks – two of the many openings highlighted by Marc Raynaud, global head of mutual funds, external distribution at BNP Paribas Investment Partners – there is plenty for manufacturers and distributors to be doing. But what are the biggest breaks? PWM has picked the brains at some of the biggest names in the industry, who have identified the openings.

Absolute returns

“Most HNWIs are absolute return focused,” says Gavin Rankin, head of products and services consulting in the UK for Swiss private banking giant UBS. “They have spent a long time building their wealth. The typical clients are those that have been successful in terms of taking risks, and having done that they want to preserve what they have achieved, which tends towards capital preservation as a principle goal.”

Mr Raynaud in Paris agrees. The problem with products measured against a benchmark, he explains, is that “when the benchmark does -20 per cent and you do -10 per cent, you have excellent performance, but the client has lost 10 per cent, and he is not pleased.”

He sees increasing demand for so-called “value at risk” products: “They tell you what risk they are willing to take, but you are judged on absolute performance.”

Sandro Pierri, head of distribution for Europe and Latin America at Pioneer Investments, the funds house owned by Italian bank UniCredito, acknowledges “some disillusion with absolute return and outcome orientated products, given the credit market collapse last year”, but adds: “We still see demand for absolute return products”.

In particular, he reports a trend towards hedge funds, and convergence between the long only and hedge fund arenas – “long only funds going into hedge fund territory through, for example, alpha extension (i.e. 130/30), and hedge funds going into the Ucits III format”.

This last, according to Mr Pierri, has been “one of the greatest trends in terms of client demand”, and Pioneer seized upon it with December’s launch of the Pioneer Absolute Return Equity Fund, which has already netted more than E250m.

Combined solutions

HNWIs demand more of their wealth managers than straightforward provision of funds. As Mr Raynaud of BNP Paribas puts it: “A large part of our distributors are banks and private banks taking care of HNWIs, and what they are seeing is that investors are looking more and more for investment solutions rather than for products.”

Twan Philipsen, managing director, business development, at Dutch house ING Investment Management, agrees. “In the past, asset managers would be given some equity or fixed income and that would be sufficient. That’s no longer enough. People are looking at solutions and how you combine skills to provide them.”

There is a blurring of frontiers, he adds: “You are at an advantage if you have the structuring skills of an investment banks, the balance sheet of a bank, the actuarial skills of an insurance companies, asset management skills and loan capabilities in the same company.

“For example, if someone tells you that they don’t want a lot of risk, but they want a lot of upside and some liquidity, you can structure a note that guarantees the principle, manage the assets underneath that and give people a share of the upside.”

Part of this trend is the evolution of hybrid products, which combine features of both mutual funds and structured products.

“Hybrid products are expected to grow as investors would like to have access to protection on their mutual funds,” explains Mr Philipsen.

Riding the regulations

Regulatory change is central to the burgeoning opportunities in the wealth management arena, and the most important regulatory change of all is, of course, Ucits III.

The Pioneer Absolute Return Equity Fund – which Mr Pierri describes as “a Ucits III vehicle which basically replicates a total return swap” – is just one illustration of how manufacturers have taken advantage of the new opening. According to head of alternatives Reza Vishkai, Insight Investment, the funds arm of UK banking house HBOS, plans to take advantage of changes to Ucits regulations to launch a long short credit fund in August.

Mr Raynaud highlights two key differences between traditional and new, sophisticated funds. The first is in return objectives – traditional funds are managed against a benchmark, sophisticated Ucits funds have an absolute return agenda.

The second is in portfolio positioning: “In a traditional fund, you can have only long positions and can use derivative positions only for hedging. For sophisticated Ucits you can use long and short positions. Funds can be leveraged, like alternative funds. So you benefit from these two attributes, but keeping the security of regulation, reporting, transparency and daily liquidity.”

Mr Raynaud also looks forward to Ucits IV – “what it would have done – or hopefully will still do – is what Ucits III could not do, most importantly open the possibility of cross border mergers” – and sees some advantages in the implementation of the MiFID directive.

Greater transparency will, he says, make Ucits more attractive, although this comes with a caveat: “There is one big problem. The regulator did not put some competitive products on the same level – notes and certificates, which are offered by the banking network to the same type of investor, and with absolutely no transparency.”

Commodities and agribusiness

Hunger for absolute returns has led investors into increasingly alternative alternatives. In particular, according to Mr Rankin at UBS, fund managers are finding more ingenious ways to exploit commodities.

“Commodities have been a very strong theme for a number of years now,” he explains. “Straightforward oil and gold plays have been very successful but they are probably coming up against the ceiling of what they can achieve.”

One long term opportunity, he suggests, lies in coal. “In the short term there will be some substitution from oil at the margin, but in the long term substitution will increase as we become more creative in the products we can use.”

Another potential winner is agribusiness – “companies involved in agriculture, production or manufacture of products which enhance yields in agriculture, and identifying companies who can benefit from higher food prices in the long run”.

Insight’s Mr Vishkai adds: “There are a lot of opportunities in buying farming assets, but it is difficult from a structural standpoint, as on a global basis you are looking at exposure in Latin America, emerging Europe, Australia and New Zealand, and it is a structure looking at illiquid assets. There are not a lot of entities with the global infrastructure to do that. So those who are working on it are doing so through partnerships.”

Emerging opportunities

It is no secret that emerging markets provide huge investment opportunities. But now they are being tapped in increasingly esoteric ways.

Firstly, as Farley Thomas, head of wholesale at HSBC Global Asset Management, explains, the frontiers are being pushed back, with significant opportunities in the Middle East and Africa, in particular. “Last year we launched a new frontiers fund for our own private bank, and we plan to launch one for external distribution channels.”

Secondly, Mr Rankin of UBS is enthusiastic about second generation themes. “One is how developed market companies can benefit from emerging markets growth, so we are looking at the Caterpillars, the General Electrics – companies with a large proportion of sales coming from emerging markets.”

Mr Thomas anticipates similar opportunities, which he classes under “globalisation”. “I’ll give you an example of an innovative product we took to the market early this year,” he says, “the Emerging Wealth Fund. We are interested in the increased levels of affluence in countries like China and India, the increasing cross border trade allowed, and the ability of increasingly wealthy middle class individuals to buy foreign goods.”

But arguably the biggest global level investment opportunity, according to Mr Thomas, is climate change. HSBC’s Climate Change Fund, launched last year, continues to see inflows, “which is quite interesting given that the last six months have been unprecedented in terms of outflows from equity products, especially relatively risky ones. People are thinking long term.”

Where the clients are…

Western Europe, once a booming market for purveyors of funds to wealthy individuals, is seeing dramatic outflows, and those in the know are looking East.

“Europe is pretty gloomy,” says Sandro Pierri, head of distribution for Europe and Latin America at Pioneer Investments. “If you take out money market funds, I think something like E150-200bn has been taken out in Europe over the last six to nine months.”

Marc Raynaud, global head of mutual funds, external distribution, at BNP Paribas Investment Partners, is similarly pessimistic about the more developed European economies. “You know the market conditions,” he says. “Italy is a good example. It’s a market in which we saw assets under management increase by 100 per cent each year from the mid 1990s to early 2000. After 2002, the rate of growth was slower but still positive. Now, it’s the country with the highest rate of redemptions.”

These, he explains, are down to market drawback following rapid growth, and liquidity-hungry banks offering more favourable interest rates than those on mutual funds. However, Mr Raynaud expects emerging Europe and Asia to make up for this slump closer to home. There is, he says, “huge potential” in the new EU members, which have high savings rates, a very small investment culture and limited diversification.

He is not alone. Mr Pierri sees “significant opportunities” for distribution in Central and Eastern Europe, while Farley Thomas, head of wholesale at HSBC Global Asset Management, describes the huge growth of wealth in Asia as presenting a “phenomenal” opportunity.

Twan Philipsen, managing director, business development, at ING Investment Management, adds: “For the longer term Central and Eastern Europe are important and companies are now jockeying for the best position. It is important to secure your position in these markets sooner rather than later.”

BNP Paribas is already doing so: “We have decided to have our funds, mainly our Parvest registered in all these new European countries,” Mr Raynaud explains, “and we have already started to appoint distributors.”

Further to the East, Mr Raynaud sees enormous potential in Asia ex-Japan – “already more mature countries like Hong Kong, Singapore and Taiwan, but also Malaysia.” He is also optimistic about Korea, where BNP Paribas has a joint venture with local player Shinan, India, where it has teamed up with Sundaram, and Indonesia.

Mr Pierri and Mr Philipsen take an even broader view, anticipating demand not only from Asia but from Latin America. “There’s a general trend of increasing wealth in emerging markets,” Mr Pierri. “Asia is probably ahead of the rest because of the strongest growth there. They started their economic growth sooner than other countries, but we are also optimistic about Latin America.” ING’s Mr Philipsen says the “biggest opportunity” for European asset managers in the long term will be “expansion into Asia and to a lesser extent Latin America.”

That is not to say, however, that fund manufacturers and distributors should give up on Western Europe altogether. Mr Raynaud identifies two exceptions to the theme of drawbacks: France and Benelux. “We see a lower level of redemptions in these countries,” he says, “I think mainly because there is still a lot of liquidity in the corporations, and they still invest in money markets.”

Mr Pierri also sees some opportunities in France, which he attributes to “a good equity and mutual fund culture” and in Germany, thanks to the tax advantage for mutual fund investors to be introduced in 2009. But this, he stresses, requires “at least a perception that interest rates in Europe will start to decline”. He is also more optimistic about progress in the UK, which is traditionally closer to the US, than on the other side of the Channel: “In Continental Europe, where third party distribution is smaller than in the UK, it will be a bit harder to recover.”