Unmasking new year favourites

At the beginning of each year, heads of business development at Europe’s major investment product manufacturers brief their distribution teams on new concepts to be unveiled for the market. At the same time, distributors put final touches to products they have been developing with their manufacturing partners for retail and private clients.

During this annual unveiling of investment themes, there is always compromise involved on both sides. Manufacturers claim to only develop products requested by distributors. Distributors say they only release products requested by customers. Neither claim is strictly true. Most organisations will bring a new product to the shelves on two conditions – that it looks good, and that it is easy to sell in large quantities.

As such, the hedge fund theme, due to its conceptual complexity and poor performance during the last 12 months, is no longer such a strong one. The latest hot topic is the BRIC story, based on investments in Brazil, Russia, India and China.

The other big story, touted by manufacturers, but yet to capture the imagination of many distributors, is the absolute return concept. In a similar vein to hedge funds, this is designed to make money, whatever markets are doing. It has been given added impetus by Europe's Ucits III regulations, which permit the use of new instruments such as derivatives, allowing more efficient and precise allocations between assets.

It is usually the thematic ideas, such as emerging economies, single country funds or industrial sectors such as energy or commodities which can attract the largest inflows.

Having such a strong investment idea, with a back-up story, which helps you to renew communications with clients and customers, is always a good start to shifting products.

Luxury goods

Burkhard Varnholt, head of a 130 strong Zurich-based financial product creation unit for the world's largest wealth manager, Credit Suisse, sends regular e-mails to his army of advisers, updating them on the latest themes which his team has identified.

For 2006, many of his recommendations will centre around emerging market economies, and the demand that their aspiring middle classes will generate for European luxury goods such as German sports cars, Swiss watches and Italian designer clothes. To benefit from these trends, Mr Varnholt recommends actively managed thematic funds for private clients, including the Clariden Luxury Goods fund, the HSBC Greater China fund and the Merrill Lynch New Energy fund.

But where consumers can benefit from a growth story in a more liquid market such as Japan, Credit Suisse prefers structured products to mutual funds, although the latter are also on the menu. “CSAM [Credit Suisse’s asset management division] has some great funds that a lot of investors haven’t really been aware of,” says Mr Varnholt. “They have a superb Japanese mega-trend equity fund, which I only recently analysed. If I had only invested in that three years ago, it would have been the single best investment I could have made.”

But what he is really pushing for clients convinced by the Japanese renaissance story is the New Bull Certificate Plus, a product structured on the Nikkei with 150 per cent participation. This means that provided the Japanese market is going up, a client invested in this passive product is always guaranteed 50 per cent outperformance. Investors with a longer time-horizon are pointed to these structured products, while those looking for short-term gains are offered Japan funds managed by RMF, Clariden and Axa Rosenberg.

Emerging markets are also a key theme for DWS, Europe’s largest cross-border mutual funds company. The company’s BRIC Plus fund, launched in Germany in March 2005, has enjoyed ?1.1bn in new money and made 26 per cent for investors. Now it will also form the core offering for European investors.

“This fund makes more than most fund companies make in one year for all their products,” says Thomas Richter, a director at DWS Investments in Frankfurt. “Every year we have a blockbuster product. Before, it was the dividend income fund. Today it’s BRIC Plus.”

DWS hopes another, less glamourous, but more flexible innovation will capture investor’s imagination, not just for 2006, but for the rest of the decade. The DWS ZukuntftsFonds will offer clients capital growth and a pension solution by investing in a combination of global equities, bonds and real estate through a lifestyle product, asset allocation structure, made possible under European Ucits III legislation. “This type of business will be the driver of not just DWS, but the whole industry for years to come,” believes Mr Richter.

BNP Paribas Asset Management will also be unveiling a BRIC fund in 2006, with a minimum target of ?1bn for 2006. The launch was delayed from 2005 so that the group could concentrate on closing its Indian acquisition. “With operations in India and a strong franchise in Brazil, this now gives us huge credentials in this area,” says Vincent Camerlynk, head of global business development for BNP PAM.

At BNP’s French rival, Ixis Asset Management, head of French distribution Sebastien Masson expects 2006 to be the year of high alpha products among his distributor clients.

“Absolute return products will be more in demand than in previous years,” says Mr Masson. “Equity markets in 2005 rose more than 25 per cent. Everybody is aware this will not be the case in 2006, so it is important to have a substitution product with absolute performance, not necessarily 10 per cent, but 5 to 6 per cent is a must for all clients.”

This approach is also shared by Société Générale, another French group enjoying strong new business figures. “For 2006, total return strategies, in my understanding, should be the top priority, as the potential of demand is absolutely amazing,” says Jerome de Dax, head of global distribution at SG Asset Management. He also sees niche areas such as Indian equities as important. SGAM is about to launch a new fund, through its partnership with SBI in Mumbai, investing in this asset class.

SGAM also expects traditional balanced management to come back into fashion this year. “Portfolios will become less and less a melting pot of theories, but more a combination of specific, sophisticated strategies with very close control of risk,” suggests Mr de Dax.