Sub-advisory fills expertise gap

In Malaysia, since the market liberalisation in mid-2005 allowing the introduction of offshore funds, many domestic asset managers have established feeder fund structures or sub-advised to external managers, to gain the investment expertise they do not have in-house. If funds feeding into existing funds investing overseas can tap into the know-how of an established brand and enjoy the benefits of a long track record, fund management delegation or sub-advisory allows tailoring the product to the specific distributors’ requirements, and it gives more control on the management of the fund. Alliance Investment Management (IM), a subsidiary of Alliance Bank Malaysia, recently awarded a mandate to Singapore-based Fullerton Fund Management to manage an Asian focused bond fund, which aims to provide investors with regular income fund distribution. “Rather than feeding into an existing fund where we have no say whatsoever in its management, a direct mandate gives us the opportunity to add value,” said Nik Azhar Abdullah, head of the investment firm. “If there is already an existing fund which meets our requirements, we straight away feed into it, because it is a lot faster, more efficient and to some degree fees are lower, but otherwise we will go for direct mandates.” In recent years Alliance IM launched two Asian-centric feeder funds with Fullerton, covering global bonds and global equities, and a global property fund with Fidelity. Last year, in collaboration with HSBC bank, the Malaysian firm sub-advised a quantitative global emerging markets fund to Sinopia, the quantitative specialist of HSBC Global Asset Management. The fund was the first of its type in the country. “Instead of feeding into existing equity quant funds, we tweaked the asset allocation to include a bond element. Last year, when the whole equity market suffered, we pushed a lot of our asset allocation into global bonds,” said Mr Abdullah. The firm is also looking to launch the Islamic version of this fund with Sinopia over the next few years. seeking knowledge To meet demand from HSBC bank, which is the largest distributor of mutual funds in the country, another investment management firm, Pacific Mutual Fund, appointed HSBC Global Asset Management to run the equity part of a global balanced mandate, with the local fixed income part being managed by Pacific Mutual itself. The firm, which manages around R1.8bn in unit trusts and whose ultimate holding company is Singaporean bank OCBC, earlier this year launched a greater China fund, awarding the mandate to group company Lion Global Investors. “If there is a demand for a particular product, which we feel we may not have the expertise for in-house, we will look at awarding mandates,” said Gary Gan, general manager of business development and marketing at Pacific Mutual. “We wanted this fund to invest in Chinese companies listed not only in the Greater China fund region, which the mother fund may not be able to do. With our sub-adviser there is dialogue and constant communication. If you delegate you are more responsible and accountable; the crisis has really shown the importance of accountability,” said Mr Gan. CIMB-Principal, the joint venture between the CIMB Group and the Principal Financial Group, also offers feeder funds, such as the Mena fund managed by Société Générale, the greater China fund (Schroders), the climate change fund (Deutsche AM), and the infrastructure fund (Invesco). It also employs Principal Global Investors as sub-adviser of its global and Islamic global funds.“We tend not to delegate because we want to see a track-record for a particular product, minimum three years, and feeder funds do allow that,” said Munirah Khairuddin, deputy chief executive at the CIMB-Principal. Moreover, global managers tend to have a minimum requirement of $50m on a discretionary mandate, which may be quite difficult to fulfil, she said. Currently, externally managed funds represent a small part of CIMB-Principal’s total R21.8bn assets, but it is important to make sure to “have all the necessary investments and expertise in monitoring and evaluating third-party fund managers and new comers to this space,” said Ms Khairuddin. “Our main strategy is to consolidate ourselves as an Asian regional house, but we are still a small local boutique in the international landscape and we have to be realistic about what we can manage and what we can’t.”