Spreading out in new directions

Despite the wealth and asset management industry having suffered a drastic time in 2008 and at the beginning of 2009, when redemptions, falling profits and customers’ rising suspicions of unorthodox products became the norm, key players are once again talking about ramping up their operations in 2010.

“We are very much in expansion mode,” confirms Giles Keating, head of private banking research for Credit Suisse in Zurich, although the quest for new clients is likely to be selective. “We are enjoying a good inflow of net new assets and the plan, on the private banking side, is to continue promoting that.”

The role of governments, becoming tougher in keeping taxation revenues for themselves, has been a key structural development of the last decade, leading Credit Suisse to concentrate on accelerating the gathering of assets in major onshore, regulated markets, rather than purely in more controversial offshore jurisdictions, claims Mr Keating.

Credit Suisse has already put in place a substantial infrastructure to prepare for this, although officially there is a ‘multishore’ approach, servicing clients from wherever is the most efficient base, but the development has accelerated even faster after the pressures from the US on the Swiss government and the country’s banks during 2009.

Resources are being allocated to attract private clients in so-called emerging markets, such as China, where the bank’s business is growing up to 10 per cent annually, says Mr Keating. But he also sees strong growth and expansion of activities in India, Indonesia, Brazil and Turkey.

These views are confirmed by Bob Parker, long-serving vice chairman of the bank’s asset management department. “When we visit Brazil, Turkey and Asian countries, there is a huge contrast with the struggle to get out of the crisis in the West,” he says. “If you stand in Tiananmen Square in Beijing and talk to people about the recession, they will ask: ‘Who is this stupid Englishman?’”

Part of this strategy in asset gathering, says Mr Parker, is concentrating on distribution in those countries which have already suffered a serious crisis previously, and have been able to cope with the current economic difficulties a lot more comfortably. He cites Indonesia, which defaulted twice in the 1980s and once again in 1997, and other former “economic basket cases” such as Brazil and Turkey as particularly lucrative hunting grounds.

Traditional hunting grounds

Yet there are other groups stepping up their scouting for assets in the once vibrant European heartlands of asset management. Schroders, until recently, was suffering a gloomy spell in the Benelux region, seeing little appetite for banks selling third party funds. But this is slowly changing, reports Fred Van der Stappen, Amsterdam-based Benelux intermediary sales boss at Schroders, who has just secured the group ‘strategic partner’ status with regional banking group ABN Amro.

Schroders’ products, in particular its investment grade and high yield offering within fixed income, will receive prominent exposure on ABN Amro’s shelves, alongside funds managed by Fidelity, BlackRock and JP Morgan.

“We can see now that on the advisory side – but not in discretionary portfolios – private clients are making their first small steps, coming back into the arena,” says Mr Van der Stappen. “What helps is that interest rates on deposits are in free fall and clients are looking for alternatives. Clients are thinking: ‘what should I do?’ Depending on markets, the retail investor should become quite important again.”

Jörg Brock, the man who introduced guided architecture – the system where banks recommend funds and structured products managed by series of ‘preferred partners’ to retail and private clients – at Commerzbank, has recently set up as an independent consultant. Despite a reported recent retrenchment by banks, many of which have concentrated on house products to improve margins, Mr Brock has already been retained by several institutions who wish to proceed down the ‘guided’ route.

At the same time, he is working for family offices, looking for guidance in terms of which banks and asset managers to place their portfolios with. “One of my clients – a European bank – has traditionally had a closed shop, but is about to introduce open architecture, and needs advice on how to open up and sell third party funds,” confirms Mr Brock. “The situation in Europe has been changing quite dramatically. The EU regulator will take a much greater interest in recommendations being made by banks to private clients and open architecture must be taken into account.”

He also believes wealthy private clients are becoming increasingly suspicious about the financial link between a bank and its asset management arm, leading to greater pressure on banks to open up their product offering. “There is a perceived impression that the company’s interest and the bank’s interest come first and that customers’ interests are only secondary,” states Mr Brock.

“Most of our family office clients are telling us that the majority of products in their portfolios, they don’t understand them any more, as they are typically black boxes and hedge funds. But also in terms of cost transparency, they don’t know what a manufacturer or distributor is making from a fund, even if the regulator is telling them to show the cost.”

He is also keenly aware that third party managers, particularly American groups, are tailoring their product, marketing and distribution effort to target exactly the type of European bank looking to open up its product range.

Typical of these manufacturers is Goldman Sachs Asset Management (GSAM), which has made a huge investment in its German distribution team, based in Frankfurt. It has identified this highly regionalised, unglamorous market as Europe’s most lucrative for the years to come, citing figures from cross-border consultancy Feri, which show German mutual funds to have expanded by 8 per cent each year for the last five years. The investment in staff to cover the country’s regions, also co-incides with newly enacted German regulations requiring more rigorous documentation of investment recommendations from banks to private clients.

Building strong partnerships

According to Michael Grüner, head of German distribution for GSAM, these developments makes the biggest distributors such as Deutsche Bank, the newly amalgamated Dresdner-Commerzbank franchise, and Goldman’s existing partner DekaBank – keener to work with stronger partners, now that they must officially document investment recommendations, making them potentially liable for any mis-selling.

“They want to be sure the product they select, the investment process within the product is risk-managed and controlled, so that there is no problem with any given partner,” says Mr Grüner, adding that although solid performance is important, banks are increasingly looking for strong compliance and back office competence within their partner institutions. “Only groups with a backbone can provide this. That’s why we will see a move away from small boutiques to larger groups, who alone have the resources.”

Although it is in expansion mode, GSAM has also been closing down funds which are sub-scale, out of favour and inefficient to run, such as its technology sector fund. “It is a time for housekeeping,” confirms Rainer Schroder, a Frankfurt-based consultant who has previously held leading roles at Threadneedle, WestLB Mellon and Invesco. “Deka, Union and DWS are busy shutting down retail and institutional funds which are inefficient. This reflects higher cost pressures on one hand and lost assets on the other. If Audi finds out that its A2 model doesn’t sell, they need to close it down. The few buyers who like the car just have to accept it.”

Asset managers must adopt a strategic, rather than opportunistic approach, if they are to succeed, he believes. This means assessing why people might buy particular branded funds, when most products have become commoditised. Once the “hard” criteria of performance, reporting and risk management have been satisfied, it is the softer attractions of trust and innovation which will win over the clients, he believes. It is important for asset managers to choose their position and niche and then market themselves effectively to exploit it.

He cites the example of Capital International, which in the past achieved huge inflows into equity products, despite a period of poor performance. Although performance has improved significantly, the group’s image now lags the funds’ improved returns. The Lupus Alpha boutique in Germany, for instance, has captured the imagination of investors as an “innovative” player, “whether people understand what they are doing or not,” claims Mr Schroder. “When there are no significant differences between products, it comes down to gut feeling and fund buyers in the asset management industry are just as irrational as car buyers.”

Amin Rajan, CEO of the Create consultancy, who has issued a report, Future of Investment: the next move, backs the belief about asset managers becoming known for particular strengths, but believes preparation must go further than brand building, with manufacturers having to change their structure and strategy in order to succeed.

He is much more cautious on the industry’s future, and believes it is now ‘do or die’ time for fund groups in terms of deciding their future direction. Certainly by 2015, he expects successful managers to belong to one of three groups.

In the first are the big-brand asset gatherers, such as Fidelity and Goldman Sachs, who will concentrate on developing and marketing their asset allocation skills and techniques rather than pure investment performance. The second category will consist of alpha generators, predominantly boutique groups. The third element, predicts Mr Rajan, will include partnership organisations such as Baillie Gifford and T Rowe Price, able to choose sub-advisers and parcel up money for their clients. “No longer can you be a jack of all trades and master of none,” believes Mr Rajan. “Under the new model, you need to be master of something.”

Credit Suisse, which has admittedly enjoyed little stability in terms of top staff, has however been moving to this specialist model over the last ten years, under the guidance of Mr Parker. The Swiss asset management group has already left many parts of the active management spectrum, switching to enhanced indexation in the US large cap arena and selling most of its traditional long-only capacity to Aberdeen last year.

The new focus is on asset allocation, through the multi asset class solutions (macs) group, high-fee alternatives including real estate, commodities and infrastructure, and the recently launched exchange traded funds (ETF) business, currently rolling out products through Italy, Germany and other European countries.

“We are in a slightly crowded space, but have to re-organise in order to meet client demands,” admits Mr Parker. “One needs economies of scale in low-margin products.”

Although the wealth management market in the US has embraced ETFs to a much greater extent, European packagers of passive products are encouraged by latest trends. “There is a huge network of European IFAs [independent financial advisers] using ETFs almost exclusively for their asset allocation,” comments Konrad Sippel, head of business development at Deutsche Börse’s Market Data & Analytics division in Frankfurt, which boasts of 550 ETFs listed on the exchange.

“People in Europe are beginning to realise this is not the worst thing they can do, as they offer a lot of flexibility and liquidity and provide building blocks to cheaply, efficiently explore all types of strategies. You no longer need to worry about how to replicate the core of a portfolio.”

The next trend

Mr Sippel is hoping to further meet clients’ needs for new generation ETFs, even if it means cashing in on the loss of faith in active management. “Our laboratory is open all year round,” says Mr Sippel. “We are continuing to expand our range of global emerging market products and increasingly themed products, according to industry trends. These trends – what is hot and what is not – are catching a lot of attention from savy investors. We have a number of things moving in parallel and hope to extend our range of strategy indices for a broader range of risk/return profiles.”

Global bank HSBC, which has also recently launched an ETF range, is another group hoping to profit from these trends, particularly in its multimanager arm, where CEO Joanna Munro is responsible for $50bn in assets.

The focus on profitability in a business polarising between high alpha and indexed products will lead to the outsourcing of active management on an open architecture basis, she believes. “The caveat is that outsourcing can’t be done casually,” says Ms Munro, stressing that hiving out funds is demanding in terms of resources and processes. “Asset managers can outsource products and services, but they can’t outsource their reputation or responsibility to investors.”

While Janus Capital is similarly positioning itself for growth, particular in the multi-manager arena, where it provides investment strategies, the effects of the financial crisis may continue to overshadow enthusiasm for third party products during 2010, believes Michael Jones, head of European financial institutions. “A number of institutions are still more focused on fixing their balance sheets than sorting out possibly less important strategic issues around their internal asset managers,” warns Mr Jones.