Rearranging resources

Asset managers and private banks – stung by a shortage of new assets flowing into traditional products and markets – are being spurred by the current economic and financial crisis into reorganising their priorities in terms of distribution channels, geographical targeting and product promotion. Goldman Sachs Asset Management, which runs $780bn (E530bn), is a good example of a group shifting its resources in the distribution arena to make sure no time is being wasted by sales staff in targeting distributors which may not generate profitable business. Under the stewardship of Nick Phillips, responsible for GSAM’s third party distribution business in Europe and the Middle East, there is a new concentration on establishing deeper relationships with smaller numbers of distribution partners. “In order to be successful, we are working on a few, very deep relationships, where they become partnerships, rather than a large amount of very narrow relationships, where we are just another house, which wants to sell products,” says Mr Phillips. Rather than the not exactly scattergun, but wider net of old, Mr Phillips is directing minds, resources and sales efforts to target key outlets in Germany, Italy and the global distribution warehouses which operate in several countries. Currently, GSAM has strong partnerships with Dresdner and Deka banks in Germany, and is expecting to add two more in the near future. GSAM runs $17bn (E12bn) for German clients, split fairly evenly between alternatives, fixed income, equity and quant strategies. But just $3bn is managed for wholesalers, with the lion’s share handled for German pension schemes, corporates and insurance companies. Mr Phillips acknowledges there are no easy markets in today’s tough environment, but he will rise to the challenge by hiring another five staff to try and boost wholesale clients’ assets to the institutional level. One of the main problems in Germany, which GSAM’s Frankfurt office is facing, is that major retail and private banking groups such as Deutsche Bank, are critical of Goldman’s brand, or lack of it. GSAM is seen as an institutionally focused house, with little understanding of the customer-facing issue interesting the more retail focused German banks. “We take the criticism of the wholesalers seriously and we are addressing it,” says Axel Hörger, head of Germany at GSAM. “We will never be a retail house like Fidelity, which is a different kettle of fish. The question we have to ask ourselves is: ‘what are wholesalers really looking for?’” Reliability The answer, according to Mr Hörger, is solid, reliable partners and products, backed by a defined investment process, which not only generates performance, but recognises the demand for reliability and risk management and encapsulates these qualities in the brand. The brand, and all it means, is particularly important to wholesalers in the current financial crisis, believes Mr Hörger, with groups able to prove they have maintained their process in difficult years likely to prosper. “Some providers cannot secure the backbone of what they have built. They might have had great products three years ago, but their process can become diluted,” he adds. “There is a risk for retail clients that the company might suffer to a severe extent. This is different to just talking about performance and distribution support. We are talking about the whole foundation, the blueprint of a business structure, not just the front office, but the backbone, how you can leverage it and make it sustainable,” says Mr Hörger. This distributor’s focus on brand, clearly intensified by the credit crisis, is one of the current pre-occupations for Mr Phillips, at the helm of the European sales machine. “This is not a Germany specific issue, but something that goes across all our third party distribution growth plans,” he says. It is vital for groups such as GSAM, with big aspirations for brand enhancement, to take full account of their prospective clients’ business models when designing products, believes Mr Phillips. “One of these [different models] is to have a steady supply of very tangible products, so the private client adviser can talk to the client about something very topical – an infrastructure fund or a water fund. It is part of our plan to have these tangible products which people can understand. “As we come to market with these products, the perception [among some retail banks] of us being very institutional will gradually change as we appeal more to their distribution,” says Mr Phillips. Overseas diversification The good news for GSAM is that the type of distributors they are targeting in Germany are also diversifying their business abroad. This means a strategic partnership in Germany is often replicated in other jurisdictions, giving asset manager partners access to more clients in more countries. Dresdner and Deutsche, for example, now sell products on a global basis. Even the privately owned, independent banks such as Sal. Oppenheim are increasingly looking abroad. Currently 35 per cent of the E152bn in client assets managed by Sal. Oppenheim are sourced from outside Germany, with growth coming particularly from Switzerland, Austria, Luxembourg and Hong Kong. “Our target is to reach 50 per cent of profits from outside Germany within the next five years,” says Christoph Hott, chief investment officer for asset allocation at the German private bank. While the group is currently in the process of opening up a Luxembourg office, it is Asian economies, especially China, where most growth will be expected in the long-term. Asia is also among the key targets for Philippe Couvrecelle, chairman of the board at Edmond de Rothschild Asset Management in Paris. While Mr Couvrecelle’s asset allocation and stockpicking unit currently runs E12bn split 80 per cent equity and 20 per cent balanced strategies, he believes the company’s diversification plan could lead to an optimal AUM of around E30bn within 5 years. “Our aim is business diversification, not building up size,” says Mr Couvrecelle. Currently 85 per cent of his assets are with French investors, with the balance mainly in other European countries. But the diversified business model which he is developing assumes a much broader eventual spread of assets to cope with an uncertain climate. “We can also do better here in France, but a lot of the work has already been done. It will be good to have 50/50 [French/international split] in the next few years, and if we have 80 per cent outside France, then it will be a big success.” Edmond de Rothschild already enjoys an Asian bias in its portfolio management, but it hopes this culture will eventually extend to securing of new clients in Hong Kong and China. But efforts to expand in Europe are also in Mr Couvrecelle’s diversification blueprint. “We also need to be more present in Europe, as that is our market, in the countries around France – Benelux, Germany and the UK.” The first stage in Germany will be to try to convince funds of funds about the quality of its products, as this area is growing fastest in Germany for tax reasons. “It is much easier for us to speak to 100 fund of funds managers rather than all the banks,” confides Mr Couvrecelle. “It takes longer to convince commercial banks to implement our products in their range. They already have partnerships, but some day they will need to change them, and then we will be there.” Such a business model needs “deep roots”, he says, and it normally takes a fund house at least 5 or 6 years, to plug into a bank’s distribution network. He also hopes that the Asian equity products his group manages will find favour in the UK, where many French groups have set up shop, although some have floundered in a tough market with many local idiosyncracies. “The UK is a very competititve market, but we can find a way to be there – I am sure about this,” says Mr Couvrecelle. “We will not have people in London managing billions, but we will find a very specific approach, such as Chinese equity or long-short European equity.” Organising the sales effort of a business, to priorities opportunities correctly, has become the key challenge of Laurent Bertiau, recently appointed as head of global sales at Société Générale Asset Management which runs close to E310bn. “I want to identify the right pocket of business and then allocate reserves,” says Mr Bertiau, previously chief executive of SGAM’s huge Asian operation, where he turned round the business from losing $4m a year to making $5m a year in a three year period and almost doubled managed assets to $43bn. Now he faces a similar challenge with the global operation, where he needs to stem the E10bn net outflow which left the group in the first half of 2008 alone. “We are pushing a client driven approach. We need today to understand deeply what customers are planning to do. And once you know what customers are doing, then you can implement and go in as strong as possible,” he adds. Since his appointment, Mr Bertiau has been mapping 50 markets which SGAM wants to work in around the world, against 20 selected parameters. Now his is revisiting every strategy in each preferred market to decide which market segment to focus on. “We need an efficient process going forward. Within SGAM, we can no longer follow a ‘do it and see how it goes kind of strategy’,” says Mr Bertiau. “We need to know what we want to do and which kind of product to sell. As Napoleon once said, strategy only exists with execution – without it, it is meaningless.” Every product range has been revisited by Mr Bertiau. But he also wants to make sure there is a consistent approach to all of SGAM’s distribution partners. “With a very large bank like HSBC, SGAM has 37 agreements around the world. What I want to implement today is to have connection, not 37 agreements, as maybe we are selling different products at different prices, not tapping the right selection team. “Maybe one guy is selling Indian and one Chinese equity to the same people. So HSBC might look at SGAM and say it is a messy organisation. They will ask, ‘how is SGAM serving us in private banking? Are we making or losing money with SGAM?’ And I need to know if we are making money with HSBC,” says Mr Bertiau. But despite his close study of product ranges and distribution channels, he is as yet loath to identify any new product trends, saying most participants are currently studying equity markets before deciding where to invest. Real assets Ian Barnard, chief investment officer at Capital Generation Partners, which evolved from a Swiss family office in 2003, is not so reluctant to nail his colours to the mast, however. “The great theme is to invest in real assets; resource exploitation, energy generation products, playing on the huge rises in spot commodity prices. We have not advised people to buy spot futures in resources or commodities, but to buy assets such as oil fields and wind farms, which have benefited from these rises,” explains Mr Barnard. Mr Barnard, whose firm manages $2bn for wealthy private clients, believes in looking at ideas that are either new, or old and gone out of fashion. This means revisiting the technology sector, which has been out of favour since the tech bubble burst. “Nobody has spoken for a while about the attractiveness of technology. Technology has been an ugly duckling, but we are looking at this.” Most importantly of all, believes Mr Barnard, clients should be taking advantage of the tough credit environment, re-organising their portfolios in such a way that they become providers of liquidity. Investments in sectors such as distressed debt and high yield need to be made today in order to profit from market movements in the next 12 to 18 months. “Nobody is providing liquidity in financial markets, so in any asset class where liquidity is important, there is a great opportunity for those willing to provide it,” says Mr Barnard.