Practical planning gives form to progress

• Giordano Beani, chief investment officer, Banca Nazionale del Lavoro (BNL), Milan
• James Bevan, chief investment officer, Abbey, London
• Philippe Couvrecelle, deputy chief executive, Natexis Asset Management, and chief executive officer of Natexis Asset Square, Paris
• Beat Egger, head of cross-border sales for Europe, Asia and Latin America, Julius Baer, Zurich
• Alex Fletcher, managing director responsible for third party distribution, Goldman Sachs Asset Management
• Borja Largo, investment consulting director, Allfunds Bank, Madrid
• Frank Monier, managing director, FundQuest, multi-management arm of BNP Paribas, Paris
• Furio Pietribiasi, general manager, responsible for product development and manager selection, Mediolanum Asset Management, Milan
• Panel Moderator: Yuri Bender, editor-in-chief, Professional Wealth Management, London

Yuri Bender: Welcome to the third annual sub-advisory roundtable organised by Professional Wealth Management magazine and supported by Financial Times Business. Today, we hope to determine the effect of regulations on the business of sub-advisory across Europe, especially regarding the emergence of new asset classes. We also hope to talk a little about the evolution of partnerships.

Philippe Couvrecelle of Natexis, your company has been involved in merger discussions to form what will become Europe’s largest funds group with IXIS Asset Management. I am sure you are sworn to secrecy about the details. What I would like to find out from you, if this is not a trade secret, is whether, within the ?100bn you manage, the share of sub-advised third-party money is growing faster than the proprietary internally managed money and, if so, why?

Philippe Couvrecelle: The answer is yes, because we invested in multi-management four years ago now. If we analyse only long-term assets, we are growing faster on third-party funds through multi-management than internal funds. It is difficult for a group to create alpha in all asset classes, as we know, especially for a big commercial group like us. We now have 6.8m clients in the present group. We need to have a very diversified product. Even for institutional clients, a multi-management approach is really more efficient than a single internal approach. In fact, we need both in our group.

Yuri Bender: I am very keen to learn about your approach to partnerships. Am I correct in ascertaining that things are changing?

Several years ago, you said, ‘We are not involved with any institutions’. I think the words used were, ‘We are not pregnant with this institution or that institution. We are independent. We work as we please. We choose funds. We appoint them one day and we sack them the next day.’ You have also denied that you are in any deep partnership with anybody. However, the latest developments seem to be that you have appointed two US groups as partners.

Philippe Couvrecelle: Yes, Delaware Investment and Metropolitan West.

Yuri Bender: Your chief investment officer is talking about deep partnerships with a shared ethos and similar investment culture. This suggests that, for a specific specialisation, you are now prepared to have a much deeper partnership, so the sub-advisory model is really evolving.

Philippe Couvrecelle: We are very pragmatic and we are starting to develop multi-management capability. This capability has to select very efficient partners in the US, because we need direct US equity funds. However, it is not, of course, a partnership for life, as you know. Nothing is for life. Yes, it is an evolution, linked, again, to our pragmatic strategy and our capability to select good managers for deeper relationships.

Yuri Bender: Will regulations such as Ucits III make any difference to the breadth of products that customers will be offered in your bank’s retail branches, or does this just make the asset allocation lifestyle type products easier to construct now that you can have the use of derivatives, or will you just use French local funds?

Philippe Couvrecelle: Today, we still use only French local funds. Of course, with Ucits III, now we can have funds of funds which are Ucits, which was not the case with Ucits I. I think it is a good evolution. However, we are still very focused on French funds for French clients. I do not know, but I feel it is the same in the UK market: UK funds for UK clients.

It is very difficult, in fact, to develop a European range. We can do that with a Luxembourg range or an Irish range, but when you are in a retail bank, when you are working with a lot of institutional investors, the local regulation is still very strong. You have tax issues. Who are the distribution centres for the UK market? If you are not in UK funds, it is very difficult. It is complicated. You can do it, but it is always complicated. I think there is a working party on market efficiency and there are a lot of issues.

Frank Monier: What we do is have two types of wraps: the funds of funds and the mandates. With the mandates, it has always been easier in France or other countries to access many types of third-party funds. The problem is funds of funds, where you fall under the regulation of the country. In France, it is quite tough. Even if you have a Ucits III sub-fund, it is not that easy to put it in one of your portfolio funds of funds regulated by the French authorities. It needs to have the French authority stamp.

European regulation is going in the right direction, definitely. However, you see that local authorities, especially in France, want to retain some say regarding the introduction of third-party funds in our asset management industry.

James Bevan: There is another, rather different issue, which is that regulation will permit broader engagement in markets, but the customer appetite to take advantage of those changes may be slower to catch up. Therefore, we will still, I suspect, see local market appetites for different funds and fund specifications, even when potentially more efficient mixes of assets and strategies will be available.

Frank Monier: It is true that customers may not have the appetite for certain products, because they do not know them. However, if banks like us are allowed to offer that, we will create the appetite. To what extent, I do not know, but if you are blocked from buying this product, then of course you do not have appetite for it, because you do not know it exists. You do not feel the advantages for your portfolio.

Yuri Bender: In Italy, there seems to be quite a hard sell coming from the intermediaries. Can you create an appetite for a product? Customers do not necessarily know that they want to buy something, but you tell them, ‘This is what you need’.

Furio Pietribiasi: To a certain extent, for sure, you can push, you can try to educate the sales force, but I think that we have reached a stage where the education is required to move onto the next type of products, which is basically the Ucits III type ones.

If I look at the more sophisticated products, the most complicated products, which are incredibly good from the manufacturer’s point of view, they are not very much sold. It is not really due to the final client, because the final client, at the end of the day, does not have a clue what they are buying, but it is really due to the financial advisers. That is the impression that I have, particularly in markets like Germany or Italy.

Giordano Beani: The Italian market in asset management is controlled mainly by banks. On the retail side, where you sell a fund of funds, it is more a push product. The request for multi-management is not coming from the mass market. On the other hand, with private banking clients, there you get pooled product in terms of multi-management, because the client is sophisticated enough to ask the bank for products with less conflict of interest or perceived conflict of interest with the captive product of the bank.

For example, in our experience in this field, we launched back in 2000 a non-harmonised fund of funds, so pretty much open also to the use of Sicavs that were non-Italian based. After five years – and I would say that in the last three at least, thanks to the market, the performance was very good, both in absolute terms and in terms of selection – these funds of funds raised, with eight sub-accounts, just ?200m. That was because the distribution network of the bank really does not understand exactly what the product is and the mass market is not yet prepared for this sort of product.

On the other hand, I was thinking about our wrap accounts for private banking clients. We just launched a new line of pure multi-management wrap accounts, because the demand is coming from the clients and from the private banking network. I see, of course, a difference in approach to the multi-management business, depending on the knowledge of the final client and on the knowledge of the distributor, which is different between bank branches and private banking branches.

Yuri Bender: When your retail customers approach your organisation, how do you guide them in terms of the in-house or multi-managed product set?

Frank Monier: Up to now, in our organisation, the retail branches were not open to multi-management, so it is difficult to answer you. They were selling primarily in-house funds. We were selling multi-management to private banks, third-party distributors and the pure retailers that we have. Now, since six months ago, we have been able to manage two funds of funds with pure external sub-funds that are solely in the branch network, so it is brand new for us. It is positioned within the range of balanced funds that we have.

James Bevan: One can anticipate within a private banking arena that the adviser wants to sit on the same side of the table as the client. Therefore, selecting third-party sub-advisers or funds is emotionally very comfortable for both the customer and the adviser.

In the retail branch network, I suspect that the amount of time that is taken to familiarise the customer with the choices and the implications of those choices is necessarily limited by the economics of distribution. Therefore, there is, in a sense, a visceral perspective that, if the house says, ‘Would you like us to manage the money or select skilled third parties to manage on your behalf?’, that is reasonably confusing unless you are laying out why you are offering two choices.

Frank Monier: If I take the example of multi-management in our organisation, private bank or elsewhere, I think selection is the key. We try to position ourselves like gatekeepers and not, in our network, to sell everybody else’s funds, but just a few selections. I think it is quite interesting to say to the client, ‘Here are our best funds internally, but we do not do everything. We do not have expertise in all asset classes. Here is where we are good. On other asset classes where we feel we do not have the top quality, here is a selection we made for you.’ I think that makes sense.

James Bevan: I absolutely agree, if you are keeping the two propositions separate: here are the assets managed in-house and here are the assets that are sub-advised. There is real clarity in that you have put your hand up and you have said, ‘These are the areas where we believe you are best served by third parties.’

Frank Monier: To understand more precisely, we never offer only one asset class or one type of product with two possibilities. The two funds of funds that we have, have benchmarks and profiles that are not being offered with pure home products, because otherwise it would be more confusing, you are right. It has to be managed in an intelligent manner, because it can be confusing.

In our Luxembourg Sicav, of 66 compartments, 11 have been outsourced. Clearly, we outsource what we do not do have at home: the two foreign small caps. We selected a US equity manager value, because in-house we have a process, which is more growth-driven. I am not going to buy a growth manager, otherwise it would clash with what we do internally.

The third party offer can be very interesting for the clients, but, as you mentioned, you have to be very careful about not confusing the clients. What is sure is that you must not offer two products, one internal and one external, on the same asset class, the same thing.

Furio Pietribiasi: What you were mentioning, I see more as an outsourcing. I am outsourcing what I cannot manage internally, because I do not have the skills. Then, we were talking about the multi-managed products – the funds of funds, third-party funds, wrappers, even individually managed accounts, which have been very popular in Italy, wrappers with third party funds – to get rid of the conflict of interest. Then, there is a third one, which is multi-manager as defined by groups like Northern Trust or SEI, which is much closer to what you do and what we also do, to some extent.

I think that everyone has a different reason behind it. In our case, the vast majority of assets are outsourced, because we do not have the correct internal skills. We do have skills, and they are very good, but they are good in just some specific areas. That is a business-driven solution, where you want to go with somebody else because you need performance, you need to sell in the market, because you are an intermediary.

Yuri Bender: Alex Fletcher, when we speak to Goldman’s competitors, Ucits III does not really seem to be any big deal for them at the moment. But when we speak to anybody within GSAM, from the lowest foot soldiers to the chief executive, this seems to be the message for the coming years. You have vastly increased your product range. You have not launched anything for three or four years. Now, 20, 30, or, as some people are saying, 50 new funds are to be launched. Could you let us know more about why GSAM is exploiting this liberalisation of the rules in terms of expanding its product range and why other managers are not so interested in doing this?

Alex Fletcher: I do not know why other managers are not interested, but I think we are interested because we had some good success in our institutional business selling to pension funds, for example, where we have been able to sell, for example, relatively unconstrained fixed income portfolios. Previously, we were not able to do this in the fund arena, or at least not in the Ucits fund arena, and now we can.

We just think we can deliver a better product and, over time, we believe that will produce more alpha, and we think that in turn will produce more sales. It is not that complicated, in a sense. Unconstrained fixed income would be one area. We have also run quite successful enhanced index products. The same engine that produces that can now be relatively unconstrained in a fund format and, I believe, produce much higher alpha. We have a lot of confidence in the engine, so why would we not take advantage of the rules? That is how we see it.

Yuri Bender: GSAM traditionally are specialists, possibly more in this sub-advisory field. Is it the case that you are launching the new product range more to target the off-the-shelf fund distribution and the guided architecture partnerships with Deutsche Bank and Commerzbank? Maybe your product range has not been deep enough to work with people like that. You see that as a lucrative opportunity, more so than the sub-advisory side. Would that be the case?

Alex Fletcher: I continue to see them both as good opportunities. Ucits III may help on the sub-advisory side over time, for example in currency. We have run a good currency strategy for 15 years and we have not been able to offer that in Ucits form until now. There will be a group of managers around Europe or a group of banks who might be interested in selling a currency fund and are not able to manage it themselves. Given that that is now allowed within the regulations, why might that not translate into business in the future?

Furio Pietribiasi: I slightly disagree with what Yuri was saying that only Goldman Sachs is looking at Ucits III. I think there are a number of managers who are – particularly the fixed income managers who are exploring the unconstrained mandates, and with the use of derivatives are fantasising about adding more alphas.

Ucits III will not completely change our approach to selling the funds, or our product offer. What Ucits III represents for us is what hedge funds were a few years ago. Basically, all the proprietary accounts or institutional funds we ran were set up by the different asset managers, and many other organisations in the market like Crédit Agricole are coming in. Therefore, it is a big opportunity to have a completely new type of strategy. The problem is, this could be a big issue for the intermediaries. If you want to source these types of skills to a third party, it will be difficult in terms of costs. The costs remain very high and the attitudes of these people are the same as the attitudes of the hedge fund managers – they are prima donnas. I had tough negotiations with some of them, and can assure you they were unmoveable and managed to get anything they wanted, and four of the deals did not go through. The problem is, there is a risk that this type of product would be limited just to the asset managers who have that.

Giordano Beani: Ucits III opens up a lot of new opportunities. If Italian asset management companies are not quick enough to adapt to the opportunities, then foreign asset managers will encroach upon the Italian market’s turf. Already, part of the asset management business is being sold abroad, such as Crédit Agricole who bought Nextra Asset Management. BNL has been bought by BNP Paribas. Some people are saying that San Paolo might outsource its asset management business to Santander.

In Italy, there is a gross disconnect between the asset management and the distribution sides of the bank. I have a lot of doubt that the impact of Ucits III is fully understood by the distribution side of the commercial banks in Italy. So there might be a delay in adopting these new regulations, because the thinking head lies within the distribution and not the asset managers who actually know, or pretend to know better, what Ucits III implies for the business.

Yuri Bender: It is no secret that some of Mediolanum’s partners like SEI and SSgA want a deeper relationship where they can help train the advisers, produce literature and influ-ence your distribution, whereas you always want to control the distribution. Is there not an inherent conflict here?

Furio Pietribiasi: What I always say to all the partners that we have, having been in charge of developing this since the beginning, is that the relationship is like a marriage.

The truth is that we believe that every organisation is successful particularly for its own specific skills. I am not going to say to Goldman Sachs – which is one of our partners, because we are buying their funds and even gave them mandates – how to run the money. They do not have to tell us how we want to sell the product through our sales force. I realise that it is not going to work. We have built up the experience in our distribution over the last 25 years.

Sometimes, even if a company is a big distributor, a successful distributor, it does not mean that they know how to walk in and do your job, particularly because maybe their attitude is completely different. The names that you quote, they have a completely different attitude from us. That said, they are great partners and we want to leverage on the relationship, because if we can learn something we are more than happy, but it is upon request. ‘I need something like this. Can you help me out? Do you have some information on this?’ That is different from saying, ‘Implement your model within our organisation.’

James Bevan: I think there is a subtle but significant difference between a distribution partnership, where one entity is seeking to distribute the product of another entity and where one may frequently observe considerable cooperation in the training of sales forces, and the alternative model, where a manufacturer’s competence may be but a small part of the customer’s proposition, in which case support on sales and distribution is likely to be very modest. These are two different models.

Yuri Bender: Basically, is it the case that asset managers want to get into your branches to train your advisers and you are not going to let them?

James Bevan: The simple fact is that our sub-advisers’ products are but a part of the product that we vend to our customers. In terms of customer primacy, we think that is the way it should be. For instance, we see GSAM as hugely competent in some areas, but not all areas. We will complement GSAM with other mandates and other manufacturers.

Alex Fletcher: We would certainly try to take people onto our team who we thought would be able to try to explain complicated things in a simple way. Ultimately, that is going to be helpful whether we are dealing with a pension fund or a bank or an insurance company or in a distribution relationship. It is going to be helpful, full stop. However, how much we are called on is entirely the choice of our partners.

Where someone has done a total outsourcing and they do not have so much of a fund management team left or no fund management team left, then we are called upon a lot to give information, clearly, because we are then fulfilling the role that the in-house fund manager was fulfilling. Where someone has set up a multi-manager product and they are using a variety of different managers, I would say we are not called upon so much, frankly.

Clearly, in a standard distribution arrangement, yes, we are going to be called on in the same way that all the other distribution partners are.

Yuri Bender: Is it a very dangerous situation in Spain where all the distribution power is controlled by two groups: Santander and BBVA?

Borja Largo: It is very similar to Sao Paolo in Italy. Banks really have the power there. The main thing is to be able not just to sell the internal products, which is important, but to preserve the margins. The real thing that we have seen is that nobody is selling entirely third-party funds; hardly anybody is sub-advising the management of the products because the margin that you are sacrificing is really important, and you can easily guide the customer to buy the product. There is not really a push from the customer point of view. The main use of third-party funds has been through wraps, fund of funds, and in Paribas’ case discretionary portfolio funds. It is always a combination of third-party funds and domestic funds.

James Bevan: There is the question of margin of product. If one thinks about the wholesale price of alpha, I suspect that we are being asked to pay, roughly, 20 per cent of the reliable target alpha of the manufacturer. Given that you therefore do not have to pass on the 80 per cent of alpha that is available to the product, and a portion of that can be passed through that at a higher charge, it is not clear to me why groups fight against the premise that they can raise margins in an outsource model.

Yuri Bender: How does that affect your model and the way you select managers?

James Bevan: We are very interested in the forward-looking performance and risk characteristics of the sub-advisers and candidate sub-advisers that we monitor. We are interested in both the gross return characteristics, but also net of cost characteristics because it is the cost characteristics that identify for us the residual that may be passed onto the customer, and after all it is the customer who drives business ultimately, and that which can be retained by the business. I would argue that as a principle, reliable alpha is a better way to build a performance-driven business than low cost of manufacture.

Borja Largo: Some years ago, Santander group and its Banif subsidiary did some outsourcing of classes they could not manage internally: US equity and Japan equity. What we saw during the process was that the time it took to put in place the investment decision of outsourcing to the manager, was between six months and one year. You have to deal with all the legal issues, sign the contract, and administrate all the accounting and evaluations of the funds. It makes it complicated compared to the easy thing, which is selling third-party funds.

If you arrive at an agreement with a platform like Allfunds, in two months’ time, you can have access to 140 asset management companies, thousands of funds, and you can take your investment decision from one day to the other to buy this fund and sell the other. I think that this implementation, which is more complicated in the sub-advisories is also what makes the Spanish prefer the model of buying and selling a pre-manufactured fund, and putting them into their wrap. It is the wrap where I take the asset allocation and final investment decisions.

Yuri Bender: At Allfunds, you may have 6000 funds you choose from for the platforms. If you look at the sub-advisory side, the number of groups you can use is very limited. If a client, such as a private bank, comes to you when you are working on a consultancy basis and wants a choice of strategies, how many serious candidates would you be looking at for a fairly specialised strategy?

Borja Largo: Let us say we are talking about a very concrete asset class, say we are looking for US equity money with large cap value, we will try to present no more than three or four candidates to help the institutional make their final decision. We would review many more managers to arrive at this number. As for the sub-advisory experience that some banks entered into some years ago, if you ask them to repeat this model again, they may be reluctant.

We started a similar process to see whether it was worth outsourcing the fixed income management of some products, which is something new because the with the US and Japan equity that I mentioned, no one in Spain had the capability to manage these asset classes. But fixed income is traditionally where the local managers have had their own space, and now there are some entities who are looking for externalisation of this management.

This is related to the multi-strategy, very flexible fixed income funds, which raised much money last year and are now seen as a very important asset class. Some companies wanted to internalise the strategy already outsourced to a sub-adviser, but in the end, what happens is that the process gets so complicated that no one really has the administrative resources or the platform to do this effectively. In the end, it is not an option. The size of the mandates that we have seen is ridiculous compared to what you are thinking about. The largest mandate we have seen is around ?100m-?150m, and it is not growing. It was a defensive proposition, and at this stage, no one is thinking about going through this model.

Yuri Bender: With the recent advent of the hedge fund regulations in Spain, do you see hedge funds suitable for sub-advisory assets? It has already been said that hedge fund managers are prima donnas who can be very difficult to negotiate with. Would you be happy contracting assets of your clients to some of these managers?

Borja Largo: Hedge funds is the operative example. No one has the expertise to manage a hedge fund. I would say that we are similar to the Italian model, we hope that this year Spain will have its local fund of hedge fund industry. I think that 90 per cent of the products would be fund of funds. Few domestic asset management companies would try to launch their own products, and fewer would be successful. Fund of funds would be the vehicle. What everyone recognises is that there is no expertise in the fund of hedge funds selection advisory business, and every institution is looking at externalising the advisory of this business. Some institutions, like Santander, already have their Optimal, which is the internal manager for fund of hedge funds. BBVA also took the decision to partner with a British adviser, but every other institutional is looking to hire a sub-adviser who is going to give them commercial credibility to present to their clients that they have the capability to select a manager from thousands of managers with all the associated risks of selecting a hedge fund manager. Not only the investment risk, but the operational risk also.

We also recognise that there is a difficulty with fund of hedge funds, which is the administration part. Buying a portfolio of 30-40 names is different in terms of execution characteristics. We see that the sub-advisory of the investment capabilities and the externalisation of the administration capabilities are going to be necessary for the development of the onshore hedge fund industry.

Yuri Bender: James Bevan, you have previously said that hedge funds are not appropriate for retail investors. Has your view of this changed in light of the UK regulator’s recent work in this area?

James Bevan: My issue is that hedge funds lack a clear and concrete definition, and are an umbrella of strategies rather than an asset class. I think that the private or retail investor must be very clear that when they are buying a hedge fund, they are buying something that may have very little homogeneity of characteristics. Therefore, real care would need to be taken in contrast to buying, say, a US equity fund where the underlying linkage to an asset class is well recognised.

I see hedge funds now as active strategies in common with the sorts of techniques now employed by traditional managers at the vanguard of exploiting Ucits III regulations, and, therefore, I suspect that there will continue to be a blurring of what is a traditional fund and what is a hedge fund. In years to come, I certainly anticipate that retail investors will acquire funds that we will label as traditional but will be perceived as historically classified as hedge funds.

Yuri Bender: If we look at the Julius Baer asset management range, which has absorbed the GAM multi-manager hedge fund range, how will this outsourced model now be positioned?

Beat Egger: GAM belongs to Julius Baer Asset Management, and will be seen as every other Julius Baer Asset Management product. However, we keep a dual brand strategy. I think GAM is an outstanding brand and they produce outstanding results. They have a well-recognised process on how they select third-party funds in their multi-manager programmes, which is run out of London by David Smith’s team. I think we have already had a lot of interest internally from private bankers looking at this fund range. Externally, it will be offered selectively. There is also always a commercial aspect to it. GAM does not pay high retrocessions like many other fund producers, and for this reason, GAM was not able to access some of the channels that are out there. It is definitely something that we are thinking about, and you may see more of the GAM products out there in the future.

Yuri Bender: Is it also the case that you somehow want to restrict the distribution to preserve the caché of the GAM brand to make it appear as something very high quality for the discerning investor?

Beat Egger: Certainly for some of the products it is not only about preserving the caché, but about capacity. If you have good products, and you can sell them in-house, why would you go externally? That is one thing. The other thing is that I do not think we will see GAM products everywhere; it will always be something special. That is definitely the goal – to preserve that cache.

Yuri Bender: Abbey had put the brands of their boutique and large houses that they outsource to on posters in underground stations. The posters displayed logos of BGI, Western, SSgA etc. James, what has been the reaction to highlighting the names of your sub-advisers in mass-market advertising?

James Bevan: I suspect that we have two rather different sorts of customer. We have one that anticipates that we have full accountability to advise them where they are not familiar with investment markets and therefore our accoun-tability to tell them what we think is in their best interests. Those people are not primarily interested in the identity of the underlying managers. We have other investors who are clearly very aware of investment markets and want to have a very clear understanding of who will be managing their money on their behalf. It is wholly appropriate that we give them full and sufficient information so that they can arrive at a decision as to whether they want to go forward with us.