Willing the unwilling

In today’s investment industry, dominated by the ­concept that ‘distribution is king’, the idea that asset managers could unilaterally create new ­products and push them to clients, without the buy-in of the ­middlemen, would seem somehow anachronistic.

Working in partnership with distribution channels to make sure there is a market demand ready to absorb the new products is a common-sense strategy that fund houses have learned to implement.

In retail banking, where the product range is usually quite limited and investors are perhaps less demanding or easier to sell to, there is still space for this product-push approach, demonstrated, for example, by the high level of non-transparent and expensive structured products ­regularly sold to this market segment in some European countries. But things are different in the private banking world, where steering unwilling clients’ advisers towards new product areas is not normally a successful practice.

High energy

Philippe Marchessaux, head of wealth management at BNP Paribas Investment Partners, explains that the joint venture created between the private bank and Mr Marchessaux’s portfolio management team in 2000 does not mean they can exert any influence on the advisers.

His team of 150 investment professionals, who are paid by the private bank, is responsible for devising asset-allocation strategies and running discretionary accounts for private banking clients, ranging from the mass affluent to the ultra-high net worth investors.

Private bankers are presented with new product ­solutions, says Mr Marchessaux, but ultimately they are free to invest in those products – or not.

A significant intermediary role between asset ­management and private banking is played by the ­marketing team. Sitting within the private bank itself, the team is composed of 30 people in Paris covering the French market, while there are 200 people worldwide.

In France, especially, the relationship is very close. “It is a case of us working closely with the marketing department, trying to identify sellable investment themes. We design and package the products and build the story around the products. Then the marketing team tries to integrate our offer within their offer.”

This approach represents a constraint but also an ­opportunity, says Mr Marchessaux. “The team can say, for example, that our products are not completely suitable or that they would prefer to use another asset manager or try another investment bank for a particular theme that we have identified, so of course it is a constraint.”

Private bankers are presented with new product ­solutions, but ultimately they are free to invest in those products – or not - Philippe Marchessaux, BNP Paribas

On the one hand, being challenged, says Mr Marchessaux, has helped the French firm to develop its external distribution, the team also being an important source of information about new products and investors’ needs, given the worldwide exposure of their clientele.

The opportunity, on the other hand, lies in the fact that when they are convinced of the suitability of these products, a big part of their job to get these products into clients’ portfolios is done.

“The marketing team provides the necessary support and training forces that help us to liaise with the private bankers, which is important,” says Mr Marchessaux.

Product appeal

So what is the attribute that a product needs to have in order to encounter the favour of the marketing experts? “When the product exists, it is performance and ranking,” says Mr Marchessaux. When it does not exist yet, the asset management arm’s commitment to help marketing ­professionals sell and train advisers, the ability to ­demonstrate that the product is well adapted to the market conditions and clientele needs, and that it can help the bank to differentiate itself from the competition, all assume a prominent importance.

In Italy, for example the French firm is relying on a new alternative range of products to differentiate the BNP Paribas-ex-BNL network from the competition. Italian clients are very risk-averse and very cash- and fixed-income oriented, he says, and the two low-risk hedge funds ­products – one multistrategy and one long-short equity – from the BNP Paribas Fauchier Partners range, which will be launched in March 2008, will be well adapted to the Italian market, says Mr Marchessaux.

A product might even be performing well, but in order to sell it, it is important that it meets the dominant market sentiment. Anton Simonet, Dresdner Bank’s head of private wealth management, explains that three years ago the research department at the bank came up with a new ­product to take advantage of the falling prices of the US housing market. “It was the right product, it was having a good return and it was launched exactly at the right timing, but we could hardly sell it,” remembers Mr Simonet. “Everybody was bullish at the time and did not believe there was going to be a fall in US house prices.”

The problem there was that the bank did not liaise early enough with the private client advisers to understand if clients could be interested in investing in such a product.

But is it not the role of a private adviser to gently steer the correct product towards the client? It is impossible to force one specific product to the client advisers, says Mr Simonet. It is important to provide a range of products for each particular theme or market, he says, and it is up to the client relationship manager to decide whether he recommends investment in stocks, in a mutual fund or in a certificate. “It is not as if we are closed in the ivory tower and say to advisers, ‘You have to sell 5 new ­certificates every Monday morning,’” he says.

An investment department within the bank, liaising with the investment banking side of the Allianz group, its asset management arms and third parties, is responsible for keeping the communication flow going with the client advisers. “There is a close link between distribution and factory,” says Mr Simonet.

Old ideas, new products

Packaging old or unfashionable themes in new types of fund, to take advantage of different market conditions and new investment tools, provides the possibility to channel investors back into those ideas.

For example, the real estate fund market has been tough this year, but that has not affected the intense production activity in this area. The difference from the past, explains Mr Simonet, is that these new funds include European or international portfolios of properties. Investors are very much drawn to the idea of investing in properties in ­emerging markets, for which now there are certificates, mutual funds and indices, and generally a trend to move away from single-country property funds, as well as from single-country equity funds, he says.

German real estate properties, which came under ­pressure in the recent past due to the poor conditions of the national economy but have recovered, have therefore found a new outlet in these international property funds.

Old ideas, new structure

Ucits III regulation is a key driver in helping turn an old idea into a new structure, meeting client demand, says Guy Monson, chief executive officer, at Sarasin Chiswell. Sarasin has deployed its real estate investment trusts in global property companies in a long-short Ucits III ­structure. “So we have turned an old idea designed three years ago into a regulated long-short product,” says Mr Monson. “Investors see real estate companies in Honk Kong, Singapore and China hitting new highs, and real estate companies in London and New York hitting new lows. What private clients want is a product that can long Asia and short America and the UK,” says Mr Monson. The ­regulatory toolkit has made this possible, he explains.

It is impossible to force one specific product to the client advisers - Anton Simonet, Dresdner Bank

“There is a lot of value in repackaging and remodelling old structures, but you need to innovate continuously,” explains Mr Monson. For example, at Sarasin they have been great believers in the theme of corporate restructuring. That has evolved from targeting privatised UK public companies in the late 1980s to today’s IPOs of Chinese companies.

A theme brewing

There are new, continuous challenges to develop new investment solutions and themes, says Mr Monson, who particularly emphasises the opportunities offered by ­emerging markets. For example, Sarasin has created a structured note to invest in 6 emerging markets’ currencies, to capture the appreciation of the underlying currencies.

Another new theme has translated into stock-selection techniques and products focusing on the so-called ‘security of supply’. Emerging world countries compete on the same level as developed countries to secure supply of scarce commodities, such as energy, water and agricultural ­produce, which fuels prices to rise to a ‘false’ level, explains Mr Monson. A third theme is looking to get ­exposure to agricultural land and soft commodities.

Once themes have been identified and translated into new financial products, the next step is to steer private advisers and clients towards these new opportunities.

“The most obvious thing to do is embed them into ­existing products that clients already hold,” says Mr Monson.” Sarasin’s GlobalSar IIID funds, Ucits III multi-asset class funds using active asset allocation, ­portfolio insurance strategies and global thematic equity selection are able to serve this purpose, especially for smaller private banking clients. “This is a much more ­efficient way to operate. It is like a highly ­regulated unleveraged on-shore hedge fund that can be the master vehicle of the underlying asset strategy.”

The discretionary model that Sarasin runs in London enables changes to be made in a timely fashion, says Mr Monson, and the secret to make it successful is “to keep private bankers believing in Sarasin’s vision of the world”. It is paramount for clients that the manager sets clear ­management ­objectives, particularly in terms of tracking error, volatility and the degree to ­which capital protection is deployed, as well as benchmarks. Today, there is a big move to set target returns, which is something between absolute and relative return benchmarks, says Mr Monson. “At Sarasin, we have seen a lot of mandates being set to meet a target return over inflation – in our case between 3.5 and 6 per cent over inflation.”

Education on new themes

An asset manager wanting to sell new themes to external distributors, in addition to its own network, sees things from a different perspective. Establishing a partnership, understanding the distributor’s asset-allocation models and how they work with their clients is the first important step, says Fairly Thomas, global head of sales at HSBC Investments. “Once we understand that, we are able to ­recommend individual funds and strategies that fit with their overall approach and, secondly, provide them with tools, such as training on asset-allocation models or research into different markets, which can help them work much more productively and holistically with their clients.”

One of the major emphases of HSBC Investments is to try to guide distributors towards emerging markets. “We believe that emerging markets are still under-understood and under-owned,” says Mr Thomas.

“There is a stigma that has been attached to emerging markets in terms of risk, which we are really trying to change.” Mr Thomas says that if investors were more rational and were advised in a more neutral way using ­current sophisticated asset-allocation model and risk-­profiling tools, there would be much stronger investment in today’s emerging markets, many of which have better ­fiscal policies, and much better return profile than more ­developed countries.

Typically in developed markets, emerging markets assets should represent around 10 per cent of an investor’s portfolio. But for most investors they represent 1 or 2 per cent at most, says Mr Thomas.

HSBC Investments, which has just under 20 per cent, ­equivalent to $85bn (?58bn) of its global assets invested in emerging markets, is looking to launch a “cutting-edge new frontiers product” early next year, says Mr Thomas. This product will be a single global ­strategy, but it will invest in some of the less-popular emerging markets that are thought to offer interesting ­risk-returns characteristics.

Investors see real estate companies in Singapore and China hitting new highs, and real estate companies in London and New York hitting new lows. Private clients want a product that can long Asia and short the US and UK - Guy Monson, Sarasin Chiswell

Many of these will be in Africa, which is one of the last frontiers for emerging markets investments, says Mr Thomas. The new frontiers countries present far more local opportunities that are consumer-driven, as well as ­commodity-driven, than the more developed emerging markets such as Brazil or China, which have a strong ­international dimension, he says. “This means you need to have much greater resources to analyse the opportunity and manage the risk,” says Mr Thomas, emphasising that this new product demonstrates just the breadth of products available in emerging market investment – from the traditional all the way to the esoteric.

Green Investments

“There is a huge demand, and we are pushing against an open door,” says Mr Thomas, when talking about his ­expectations on the new HSBC Climate change fund. Launched in November, the fund, which will be managed by Sinopia, the active quantitative specialist of the HSBC group, will aim to outperform the HSBC global ­climate change index, which was launched in September this year. “It is the world’s first active quant climate change,” claims Mr Thomas.

He explains that it is also the first fund to use one of the broadest indices available for climate change, including 300 companies that generate “some meaningful level of ­revenue from climate change-related activity”, such as those commercialising low-carbon energy technologies, or those managing pollution or waste-management issues, or trying to be more efficient in the use of energy.

These companies are spread over 34 countries, including 11 emerging markets, he says. “This really demonstrates that climate change is a universal topic.” Mr Thomas says that HSBC aims to raise $1bn in 2008, selling this fund globally. “I would definitely not emphasise that this fund is only for people worried about climate change. I think this is one of the biggest investment themes for the foreseeable future, and that means investing for attracting returns.”

Cédric Anker, chief executive officer at Vontobel private banking in Geneva, explains that private banking has never been as diversified as it is today, and indeed there is a huge interest from the investors in areas such as sustainable investment management or microfinance.

Intelligent investments

In the first quarter of 2008, the bank will be launching the first discretionary sustainable investment mandate, which will exist alongside Vontobel’s mutual fund range in this area. In terms of income generated for the bank, it is going to be similar to existing mandates, explains Mr Anker. But the real value it offers is in terms of image, in terms of capacity to respond to client needs, he says.

Twenty years ago, it was only “money, money, money”. Today’s investors would still like to make a profit, but if they can make a sustainable investment a way of achieving the profit, they would be even happier - Cédric Anker, Vontobel

“We will make sure relationship managers ­understand that today, a large number of our clients are willing to invest in an intelligent way,” says Mr Anker. “Twenty years ago, it was only ‘money, money, money’. Today’s investors would like to make a profit, that is for sure, but if they can make an interesting and sustainable investment a way of achieving the profit, they would be even happier.”

It would be wrong for private bankers, however, to ­promote all these new areas just on the basis of the returns they offer. “I have not found any micro credit fund delivering more than 10 per cent return on a yearly basis,” says Mr Anker, but clients, especially women, are still very interested in this concept, as they see this way of investing as an indirect donation towards reducing poverty around the world.

Remuneration model

“What is important in private banking,” says Mr Anker, “is giving long-term value to clients, whom I value on their net present value of the future cashflow they bring to the bank.” The remuneration model for private bankers, ­consequently, reflects this concept and does not leave space for any specific product push.

Pieter Wind, recently appointed head of investment ­services at ING Investment Management after heading fund distribution at ING private bank for the past four years, believes that ING private bankers are not incentivised to sell specific products to clients. But what the Dutch bank values in private bankers is their ability to increase the ­percentage of funds in clients’ portfolios. That is one of the skills the bank evaluates at the end of the year, when the time of assigning the bonuses arrives. Dutch investors tend to have limited diversification in their portfolios, which are oriented towards investing in large-cap Dutch companies, says Mr Wind. There is plenty of space for increasing the ­percentage of funds in clients’ portfolios. Naturally, the bank’s margins also benefit from this higher percentage of funds.

In the past four years, ING introduced the highest amount of funds in the Netherlands market, selling between ?150m and ?400m per year to its private and retail networks, states Mr Wind.