Preparing for the future

Although the pace of new product introduction has slowed down significantly in Europe because of the credit crisis, fund managers are actively working behind the scenes to enhance their product range. Innovative solutions aimed at meeting evolving private investors’ needs and designed to take advantage of new opportunities in the market place are on their launch pads. One of the areas on which asset managers are focussing their product work is in the multi-asset space. “We do observe the greatest demand for multi-asset products,” says Gavin Ralston, chairman of Emea and global head of products at Schroders. In the past, there was little demand for these solutions from wealth managers, says Mr Ralston, as they generally preferred to combine individual building blocks in their in-house asset allocation models. Although this type of approach will continue to exist, wealth managers are now also looking to use external providers’ capabilities as a complement to their internal asset allocation strategies. This is because “nobody’s model predicted the scale of moves in asset classes in 2008,” according to Mr Ralston. In the second half of this year, Schroders is looking to launch a broader version of its diversified growth fund, a four-year track record product investing in growth assets. “The idea for our first product was to put together a portfolio of growth assets, which give a similar return to equities but with a much lower level of volatility and it is intended as a complement to fixed income, mainly for institutions,” he says. The new solution for distributors will encompass both bonds and equities and other growth asset classes. “We are still believers in the power of diversification,” he says. “The level of alternative asset classes in this product is going to be higher than it is conventionally seen in multi-asset products,” anticipates Mr Ralston, explaining that infrastructure, real estate and hedge funds, to the extent that they can be in a liquid format, as well as private equity will be included. Although the demand for multi-asset solutions has come from the bear market in 2008, “this new product will be an all weather sort of solution, that is designed to offer competitive returns in different parts of the market cycle,” he says. UCITS WRAPPERS Another new development area is in the alternative space, reveals Mr Ralston. The firm is looking to offer a platform that gives access to hedge fund managers in a Ucits wrapper, convinced that there are “terrific opportunities” for those hedge fund managers that survive. “The combination of deleveraging and redemptions from the industry means that there is less money chasing good investment opportunities and we will identify strong hedge fund managers whose strategy can be implemented within Ucits rules,” he adds. Ucits wrappers are being pushed by groups, including Schroders, as high-quality containers for any investment strategy for investors concerned about the huge dislocation in the industry in the past 12 months. The idea is that the brand and reputation of the wrapper gives greater confidence that these instruments are more liquid and transparent; they are subject to Ucits rules on leverage, for example. The main purpose for this platform is to sell these products as individual building blocks in clients’ portfolios, explains Mr Ralston. For firms like Schroders, which try to sell investment products across borders, anticipating future product demand is the key to success. The timing is almost as important as the product content. BNP Paribas Investment Partners – accused of fuelling market turmoil by temporarily closing three funds exposed to US sub-prime in 2007 – was one of the first asset management companies to realise the world was facing a credit and liquidity crisis, maintains Anthony Finan, head of marketing at the French firm. “We started to refocus our product range quite early [in the crisis] to meet what we anticipated to be future clients’ needs. For example, we totally rearranged our short term product range, which paid off in 2008,” he says, highlighting the performance of its flagship Luxembourg-domiciled triple A rated money market fund InstiCash. “We believe that in 2009 there will continue to be demand in fixed income and we continue to make our range evolve,” he says, explaining the firm is also planning to offer a range of bespoke credit products, which take advantage of market dislocation. “The new market conditions give new opportunities for asset managers who have the expertise and the ability to manage risk”, explains Mr Finan. “You need to be able to identify who the best issuers are, how to combine them together and how to deliver to each specific client the level of return to the level of risk that he is able to bear,” he says. Quick thinking “If you are good in your business you have to react rapidly to a changing environment,” reinforces Mr Vincent Camerlynck, head of global business development at BNP Paribas IP, reminding us that “the speed of the deterioration in the markets has taken everybody by surprise.” But you also have to be continuously on the lookout, trying to forecast what your clients might need tomorrow, he adds. Last year the French firm launched an absolute return range of products. “I think that in 2009 we will reap the benefits of having put that range in place during the course of last year,” says Mr Camerlynck. Enhancing a product range, in truth, is part of any asset manager’s responsibility, to make sure that internal resources are allocated appropriately. Enhancing can include adding, updating but also reducing the product suite. “You have to make sure that you are not held back by funds that have finally passed their time,” says Mr Camerlynck, adding that some country or sector funds may no longer be relevant. Merging funds is also on many asset managers’ agenda. For example, convertibles may become an interesting class globally over the next 12-18 months and BNPP IP is considering consolidating its regional convertible funds in a global fund. “In this environment it is absolutely crucial that asset managers make sure clients understand exactly what they are purchasing, that they understand the risks they are taking but also the opportunities that that particular fund can generate,” he says. “Whatever level asset managers were on in the past, we will have to exceed that level going forward again,” says Mr Camerlynck. What could also have been potentially a major product range enhancement for the French firm – through the acquisition of Fortis Investments, the Belgo-Dutch institution severely weakened by the credit crisis – has been put on hold for the time being. Fortis shareholders voted against the sale of 40 per cent of their bank to the Belgian Government. As a result the sale of Fortis shares to BNP Paribas cannot proceed for now, reveals Mr Camerlynck. Another area of product innovation is in the types of solutions that generate income.“With interest rates being so low, savers are looking to alternative sources to maintain their income,” says Michael Clark, portfolio manager at Fidelity International. “We are entering a period of time when dividend income will be a crucial component of shareholder returns,” he explains. In the UK, Fidelity has just recently launched an enhanced income fund, which has an estimated yield at launch of 7.1 per cent. The core portfolio of this new product will be based on the Fidelity Income Plus fund, an equity income fund investing in 40 to 60 high yielding stocks. Both products are managed by Mr Clark. In addition to the base dividends, which are available to traditional equity income funds, the fund will generate additional income from writing covered call options. Transparent and simple solutions What is increasingly clear is that investors will demand simple and understandable solutions, and currently fixed income is very much in demand. “There are two products that are currently being demanded by the European by private and retail banks,” states Ric Ford, managing director in Morgan Stanley Investment Management’s fixed income team. “The first is a product with a low likelihood of default but yet yield pick-up over both government bonds and cash,” he says. “It is a safe heaven product. “I would deem that the solution to that is a fund which focuses on credits which are systemically important, so likely to receive governmental support during stressed periods,” he explains. This means buying financials but only at the senior level, or companies that are large employers, firms that own strategic technology, or utility companies that provide the everyday services, such as electricity, gas, water for example. But it is essential to understand the different legal structures in different companies. The legal structure is more bond holder friendly perhaps in the European culture than in the US culture, and as such, the likelihood of default is lower in European countries, he explains. “We always aim at creating products that meet clients’ needs. Clients told us they have demand for high quality credit but low likelihood of default and we are exploring opportunities in that space.” The second product European investors are looking for is at the other end of the spectrum. “The European private investor has identified the valuations of stressed and therefore sees opportunities in high yielding assets,” he says. Here, what is important is the ability to “pick the winners,” says Mr Ford. Investing in high yield bonds can also be seen as a good stepping stone back into equities. Michael Jones, head of European financial institutions at Janus Capital Group, having just recently joined from Fidelity, confirms the positive trend, stating that Janus US high yield fund, which is “yielding 10 per cent currently and has a very good capital performance,” is attracting a lot of interest from European wholesale distributors. “High yield have equity-like characteristics and unless you believe that there is going to be a massive rise in defaults, of companies going bust and not paying their yields on their bonds, investors are getting access to equity-like returns,” says Mr Jones. “And you are getting a yield of around 10 per cent to wait for the equity market to bounce” he adds. The US-headquartered firm, which sources about $10bn (E8bn) from European investors, has also seen demand for its absolute return type of solutions. “Clients have moved away from high alpha generation to capital preservation and consistency and repeatability of performance,” says Mr Jones. “This is indeed a very noticeable trend across Europe.” While a year ago European investors were really keen on Janus’ aggressive growth equity products, most of the interest over the past 3-4 months has been in the capital preservation orientated approach used by Perkins, the US value manager under the Janus Capital banner, and in the predictable long term returns delivered by Intech, the mathematical investor also part of the group, which manages US and global equity products. But in some European markets, like Switzerland and France, investors have returned to the firm’s US high alpha products, states Mr Jones. “Investors believe that the market may be near the bottom and if the equity markets are going to recover, the US will lead us out of the crisis and so they are buying aggressive concentrated funds.” Janus Capital International also recently launched a European sector neutral research strategy which will be managed by the firm’s research team and is modelled on Janus’ existing US and global research platform. “In this product, investors will be able to buy the best research ideas of the firm, which is one of the top global players in fundamental research,” explains Mr Jones.