Something for everyone

If there is one theme being pursued by investment product manufacturers in 2007, it is diversification. Ask fund managers in Continental Europe how their sales strategy is working, and there appears to be a common trend. When markets jolt or particular strategies fall out of favour – do not just give up the chase and let your competitor, specialising in another niche, steal the client. The best thing to do, is either offer them something else, more suitable instead, or change the investment policy of a white-labelled product in order to keep the client.

“Three or four years ago, in the fixed income world, we had funds – each of them serving a specific purpose, like different parts of an engine, and we had those parts,” says Geraud Dambrine, head of French sales for Goldman Sachs. “Today, in the fixed income world, to counterweight the rising interest rate environment, clients are clearly no longer asking for those specific funds, but for a combination of them.”

Multiple engines

For example, Goldman Sachs Asset Management (GSAM) has been running high yield money for private banking clients of HSBC’s Paris based multi-manager operation (formerly owned by Banque du Louvre) since 1996. But last summer, HSBC’s portfolio management staff became worried about excessive valuations in high yield, and there was some talk about closing the vehicle.

“We said that instead of closing it, why don’t we turn off the high yield engine and turn on a number of new engines in sub-strategies not correlated to interest rates. So we looked at including currency, duration, country and govies decisions,” adds Mr Dambrine.

“This means we went from a specific tool to something much broader. We could deliver on a much wider mandate to help them increase performance in an environment not favourable to bonds, with several engines working at the same time. We would no longer be confined to just one engine. Our products are now benefiting from a variety of sources of potential alpha in fixed income, not just one source.”

While the thorough processes behind the construction of Goldman products are generally admired by Europe’s fund selection houses, some distributors were turning away from the group’s Core equity, quant-led range, because they felt tracking errors were too low. They are now presented with 130/30 style Flex funds as an alternative.

“Under European Ucits rules, we weren’t allowed to short stocks before,” says Mr Dambrine. “But thanks to Ucits III, we can now express negative convictions on a stock to a certain limit through the use of derivatives, and generate alpha in a way we could not before.”

Dambrine: several engines working at the same time

Indeed, it was difficult for groups such as GSAM to deliver more alpha in a long-only environment, until the rules were relaxed. This new route to flexibility, through use of Ucits III compliant derivatives, is also confirmed by other managers. “It is impossible to put this trend back into the box again. This is the equivalent of Big Bang for the long-only industry,” says Guy Monson, chief investment officer for Switzerland’s Sarasin group. “The reality of OTC strategies embedded in mutual funds is moving across Europe with quite phenomenal rapidity.”

Mr Monson has been managing money for Sarasin since 1984, but is now able to add funds investing in classes such as real estate to his umbrella of thematic funds, by using a wider armoury of instruments allowed by EU regulations. “Options strategies will eventually be embedded in all regulated products,” believes Mr Monson.

Real estate funds are also being added to latest offerings distributed across Europe by Paris-based BNP Paribas Asset Management (BNP PAM).

“In their portfolios, people are not diversified enough, but our offer as fund managers is also not diversified enough,” says Marc Raynaud, head of third-party distribution at BNP PAM. The group has developed real estate funds in France, which will also now be distributed through the Parvest umbrella fund in Europe.

But is this a responsible time to market real estate funds to retail clients when many are already overexposed, and when institutional investors may have already taken the best returns from an over-heated market?

“A lot of retail investors are already exposed to real estate directly, through a house or an apartment,” admits Mr Raynaud. “Getting exposed again through mutual funds may amount to over-exposure. But not all of them are already exposed.”

‘We don’t hesitate to close products which are not sold or don’t interest the client any more. It is very important to have a range of funds and always be moving ahead’ - Marc Reynaud, BNP Paribas Asset Management

It is not the job of the manufacturer to guard the interests of the retail investor – this is a role for the distributor, believes Mr Raynaud. “There are reasons you should provide a client with what they are asking for,” he says. “When we receive a request from a distributor for retail funds, if we don’t have it, they will go to a competitor. When a private bank sets up a global product, it needs top check if the end investor is not over-exposed.”

The current situation may be dangerous, because, as is often the case, investors want to buy those products, which have already performed well, says Mr Raynaud. “We could be creating more danger, but as an asset management company, we are a producer, not a retail distributor. [Product selection] remains the responsibility of the private banker or entity managing the portfolio of a client. As a producer, we should answer to the requests of our distributors. Of course, we can tell a distributor to be careful, but [how the product is sold] is not our responsibility.”

A commercial case

Mr Raynaud enlarges on the commercial case for product diversification by a manufacturer. “If we don’t do it, somebody else will, so we will be stupid not to do it. We will recommend real estate funds if we think there is still growth potential. The same is true also with emerging markets.”

A constant diversification pipeline of new products is vital for business success, states Mr Raynaud. “Innovation necessitates contact with sales teams and distributors to make sure we are always updating and fitting in products with clients’ requests,” he says. “We create 20 or 30 new funds each year, and close the same number of funds. We don’t hesitate to close products which are not sold or don’t interest the client any more. It is very important to have a range of funds and always be moving ahead.”

This move towards diversification is also demonstrated by BNP Paribas’ French rival funds house, Société Générale Asset Management. SGAM has already sold ?1bn of funds into the German market, having set up a Frankfurt office just 18 months ago. Although the bulk of sales have been into standardised products in the Luxembourg-registered SGAM Sicav fund, particularly US relative value equities and a series of niche fixed income strategies, future sales may be in other products.

“We have very good structuring capabilities to sell notes with underlying funds,” says Dirk Todte, who runs SGAM’s German operation. “We have done three deals in the past, and would like to push this kind of product much

more. Many people here look at the convergence between derivatives and funds. We want to play in this league, and diversify into other new products, but the bulk of our assets are still in the SGAM fund.”

Germany’s largest fund house, Deutsche Bank subsidiary DWS, has been experiencing good inflows from its domestic market, but the outflows have been even larger, as twitchy investors have been keen to bank gains after a run of good performance. Market crashes at the end of February have shown there is certain wisdom to their strategy. This means that market conditions have forced DWS to diversify its range, as well as its distribution channels, rather than concentrating on selling a small handful of ‘blockbuster’ products as in the past.

‘We want to play in the derivatives league, and diversify into other new products, but the bulk of our assets are still in the SGAM fund’ - Dirk Todte, SGAM

“Part of our first strategy is to diversify our client portfolio,” says Jens Kassow, responsible for German distribution at DWS. Not only is DWS making a deep footprint in rival networks, in addition to its own Deutsche branches, but it is broadening its base to include groups of advisers and regional savings banks. This is vital, as there are business risks in the next five years, which the group must face. For instance, DWS is the leading seller in Commerzbank branches, which initiated open architecture almost five years ago. It also has an exclusive agreement with financial advisers’ network DVAG. Strategists at Commerzbank are currently discussing whether to concentrate on selling their own Cominveset funds, while observers are wondering if DVAG will eventually offer a more broader palate then just DWS funds. These are currently two of the most important distribution channels for DWS. It is therefore vital to diversify these channels, and not to become too reliant on any single outlet, says Mr Kassow.

Commercial challenge

“Part of our second strategy is to diversify our product range,” he says. “We have more than 400 mutual funds in Germany, and on top of that we now have the certificate business.” This is a reference to the DWS GO certificate platform set up in October 2006, to head off the massive commercial challenge from German investment banks issuing capital markets products to retail investors.

According to Bob Parker, deputy chairman at the asset management division of Credit Suisse, which has just come out of huge and tricky restructure along product lines, investment diversity must always be maintained. Although there are some specialities in his huge operation, he is keen for Credit Suisse to remain a multi-asset provider rather than a filler of a small number of niches.

Rather than just focus on equities, bonds, alternatives or structured products, Mr Parker’s group continues to sell them all, but has redeployed resources within the divisions. This means that within equity management, Credit Suisse has switched to a much less labour intensive quantitative process, concentrating on monitoring small and mid-cap companies in developed markets. In emerging markets, there is an emphasis on sectors such as infrastructure and equity. “We no longer run traditional core management in developed markets, as you cannot add value that way,” suggests Mr Parker. “Over the last five, ten and 20-year period, median asset managers in US equities have underperformed, with 75 per cent of active traditional managers proving unsuccessful, including us. The mantra of [our restructure] was ‘let’s do things we’re good at, and stop doing the things we’re bad at’, and that’s why we moved towards quants.”

This means clients in particular strategies have been told not that Credit Suisse is pulling out of a strategy, but that they are changing the way that discipline is being managed. Client reaction to this change has been positive, insists Mr Parker. And he is adamant that a full menu of products must be maintained under his watch, with a diversity to match the tastes of an eclectic client base.

“The most horrible way of running a business is a dictat in January telling employees: ‘This year, we will sell alternatives,’” comments Mr Parker. “This will not only demoralise those people not working in alternatives, it will completely irritate a client base who feel they are just being sold the flavour of the month.”