Slot your perfect product into place

The concept of filling gaps in an existing product range has gradually broadened to embrace the more comprehensive, and perhaps commercially appealing, theory of designing, or finding, business solutions for clients.

Most asset management companies would claim to bring “solutions” to meet their clients’ needs, not merely to add yet another product to their extensive array.

Magnus Björkman, head of partnership management at SEB Wealth Management in Sweden explains how such a “gap” can be filled.

A gap may exist in a product offering because the company does not have expertise in a particular asset class, or, more commonly, because the product does not exhibit the right characteristics within that particular asset, says Mr Björkman. Also, the product may not be consistent with what clients want, or being poorly defined, it does not deliver what it is supposed to.

The deployment of external managers for filling gaps in a product range is important at groups such as SEB, which is making its mark in the wealth management world. At the end of last year, SEB Asset Management merged with its private banking business to create SEB Wealth Management, running more than $150bn (e116bn) of assets. In its private banking offering, SEB-branded funds which are sub-advised by others on a white label basis and managed assets in third-party funds represent approximately 25 per cent of assets. Outsourcing is implemented by the partnership management group, headed by Mr Björkman, in collaboration with the manager selection division and product specialist team.

Last year the firm decided to address its in-house managed US equity fund’s “lack of breadth” by awarding two different types of large cap mandates to external sub-advisers. One was given to Wellington, for the SEB North America core fund, and the other to SocGen subsidiary Trust Company of the West (TCW), for an additional North American active fund, which complements the company’s core business.

In addition to addressing the SEB range, the Stockholm-based European funds house revamped its third-party fund offering in this asset class, by adding two “strong and highly consistent style managers”, Eaton Vance, for US large cap value and T.Rowe Price for US large cap growth.

‘We view it as important to bring well managed and designed products to clients – equally important is what we choose not to bring to clients’ - Magnus Björkman, SEB

Responding to specific requests from large clients can also lead to the decision to give the research department a clearly defined mandate research, if the product is not managed internally by SEB. “Most of our product designs stem from dialogues with clients and client executives,” says Mr Björkman. That is a great testing ground which may, if successful, lead to a fund offering. But that decision is a matter of scalability and product definition.

When SEB clients expressed interest in a Balkan equity fund, for example, the firm decided that the product was not defined enough clearly (“is that a separate asset class, is that a sub-set of emerging equities?”) and could suffer from capacity issues “as managers serving that segment may not be in the position to make strong competitive advantage”.

Not considering the business opportunity “large enough to respond to it”, the firm decided against sub-advising the management of a fund on a white label basis, and believed it more appropriate to simply distribute a third-party Balkan-themed product.

“Professional and insightful advice regarding manager and product selection is a key part of our value proposition to clients. We view it as important to bring well managed and designed products to clients – equally important is what we choose not to bring to clients.” By doing that, the firm is adding real value, says Mr Björkman.

EXPLOITING MARKET TRENDS

But how difficult is it to spot and exploit new market trends in terms of products or solutions?

Brandon Sharrett, managing director at SEI Investments EMEA says the US group employs a number of different sources to identify market needs, including, first and foremost, clients, but also industry consultants, primary and secondary research.

“There is no perfect formula for identifying trends,” says Mr Sharrett. “You go to all those different sources and the sum of the parts gives you the answer.”

Mr Sharrett is convinced that it is unrealistic to assume that an industry player can regularly discover a gap in the market that has never been spotted before. “There is no secret out there. It is an exception, not the rule, if somebody identifies a trend, a gap that is so unique that nobody else has ever thought about it.”

‘There is no secret out there. It is an exception, not the rule, if somebody identifies a trend, a gap that is so unique that nobody else has ever thought about it’ - Brandon Sharrett, SEI Investments

What is important is the company’s ability to execute and make decisions, he says. Discipline and focus are key factors, according to Mr Sharrett. SEI has been as a company very disciplined in offering its “turnkey solutions”, ranging from client acquisition to back office and custody, to financial intermediaries only, with a focus on the private client business. This has enabled the company, which is “very much an open architecture provider”, and eager to make an imprint in wealth management and private banking markets, to become a global asset management company managing more than $200bn. Like its key manager-of-managers competitor, Russell, SEI has had some success in shaking off the spectre of its previous incarnation as a consultant to pension schemes.

Equally important is the ability to look for opportunities to help distributors differentiate themselves in terms of the type of services offered to their clients. “The financial service is moving away from a product business to a services business. Financial intermediaries are trying to organise themselves better around clients, aiming to execute a services values proposition, rather than a product proposition,” says Mr Sharrett.

Within this framework, SEI decided to tailor its manager-of-managers investment programme specifically to meet the needs of HSBC’s private bank for a product offering compliant with Shariah Islamic law. The product is geared towards very strict investment principles – relating for example to the types of companies in which it is possible to invest – that correlate with the Islamic legal framework.

SEI had to hire a Shariah-compliant investment board, and employ managers able to invest in Shariah-eligible securities. It will be launching this programme into the Middle East through HSBC in the first quarter of 2008.

HSBC’s private bank, which employs SEI as a global asset manager partner, is one of the leading private banks in the Middle East, explains Mr Sharrett. “These are the types of opportunities that banks and intermediaries are looking for to differentiate themselves,” says Mr Sharrett. “And this is an example where we have been much in tune with listening to the client, recognising a certain trend in the market, enhancing an existing set of services to deliver against both an intermediary’s needs and client’s needs. This is a growing trend for a very specific but large and growing marketplace.”

Andrew Speers, who heads the financial institutions group at Barclays Global Investors (BGI) comments on the importance of scalability and repeatability. Finding new ideas which can attract and develop sales activities is one of the internal dilemmas that wealth managers constantly face, he says. The risk is to end up with supporting “a lot of activities and products that are sub-scale”.

Mr Speers comments that the challenge with the Shariah interpretation of investment, which is the “classical example” of product development for wealthy individuals in the rich Middle Eastern market, is that there is not “one size fits all”. “Even though the market is so large, there might be no single product delivery mechanism or interpretation, so it ends up being fragmented,” he says.

Through this dedicated financial institutions group, set up two years ago, the previously institutionally-focused BGI has made a long-term pledge to serve the wealth management space.

In fact, thanks to the widespread adoption of open architecture by wealth managers, institutional investment managers are now able to focus on solutions for the rapidly growing wealth market, without worrying much about building a distribution network. More and more large and medium-sized wealth managers have closed or significantly scaled back their in-house management over the last five years, observes Mr Speers. “Wealth managers are looking to managers like BGI and other investment management firms to help them provide products that meet customers need. The real skill [for wealth managers] is to understand what the customers want; it is the reach and breadth of distribution and delivering client service. That feels like a much more robust and sustainable business model,” he says.

‘Even though the Middle Eastern market is so large, there might be no single product delivery mechanism or interpretation, so it ends up being fragmented’ - Andrew Speers, BGI

But the notion of identifying gaps in the product range is not a key priority for BGI, says Hugh Cutler, managing director in the strategic solutions group. “The central question is to understand what issues clients are facing and whether we are able to help them solve those issues,” he says.

MIND THE GAP THEORY

Specifically targeting the wealth market segment, the international fund house recently launched a “diversified market strategy”, aiming to achieve around 10 per cent annual return, with an expected volatility of between 8 and 10 per cent a year. The product has been built explicitly to address the issues that high net worth investors are facing. Difficulties arise from a low bond yield environment, low expectations of equity return and growing concerns about hedge funds being sustainable delivery mechanisms, says Mr Cutler.

The Ucits III-compliant fund has embedded in it multiple forms and types of asset classes, such as equities, commodities, bonds, high yield bonds, emerging market debt, infrastructure, private equity and property. “Unlike absolute return, which is associated with high quantity of alpha, we are aiming to get these returns by using the market as well as skill,” says Mr Cutler. “These are not market-neutral type of absolute return strategies.”

BGI has been offering this type of strategy to its institutional clients for a number of years, but only in September last year did the firm get the regulatory approval for wrapping it in a way that is suitable for high net worth investors. For example, it is possible to deliver the product in a structured or guaranteed format and wealth managers can distribute it on a white labelling basis.

BGI aims to make available to wealthy investors other strategies originally developed for the large and most sophisticated institutions, particularly pension funds, says Mr Cutler. So rather than finding the gaps, the philosophy here is to take something you already have in the armoury, and re-package it for a new, growing and lucrative marketplace.

Big predictions for capital guarantees

Modern technology has an important role in product research and development, says Eric Barnett, group head of private banking at SH Hambros, the UK private bank which comes under the Société Générale umbrella. And product development is a key factor in creating demand for something that does not yet exist.

One example is VolCap, which is a technique for providing a capital guarantee around a client’s bespoke managed portfolio. Capital guarantees attached to a fund have been around for long time, says Mr Barnett. But it is through much more sophisticated hedging techniques and option pricing analysis that managers can now provide an active management of investments, within an overall umbrella of capital guarantee. That is driven by a mixture of technology and increasing knowledge and sophistication of the institution doing the pricing. The resulting product will be a managed portfolio, holding a variety of investments, just like any other portfolio, but with the insurance policy of the capital guarantee after a period of time. “In other words, if the markets collapsed and the underlying performance of the portfolio was less than the initial value at the end of a certain period, the client would still get 100 per cent of its money back,” says Mr Barnett.

This technique, which is only in its infancy, will change the way clients look at bespoke portfolio management, predicts Mr Barnett.