Sub-advisory to help realise AllianceBernstein’s ambitions

AllianceBernstein, the US-headquartered global investment management and research firm with $540bn in assets under management, may still be small relative to its size in the wholesale distribution business in Emea, but its focus on large intermediaries and the broad range of investment strategies, offered through the Luxembourg domiciled Ucits funds and the sub-advisory approach, certainly make it a player to watch.

“Our market share is quite small in the wholesale framework, and we are not a massive distribution organisation in Emea,” admits Jose Cosio, an affable Cuban-American, who oversees the global intermediary business at the firm, which he joined in 2010.

After moving from New York to London in 2016, he also gained responsibility for the UK, Middle East and Africa wholesale business, as well as the Southern European market.

Expansion plans

Of the $70bn assets distributed in Emea, around $20bn are wholesale assets, with the remainder coming from institutional clients. 

The distribution team in the region numbers 30 people, following a hiring spree in the UK, Germany and Italy, with Spain to follow. “Most competitors are easily double that size, so we focus on clients with whom we can engage effectively, which lean more towards the bigger firms, even if they are more demanding. That has been an area of growth and focus for us for a long time, and we continue to expand off that.”

Clients are comprised of the top 20 global conglomerates, states Mr Cosio, rattling off a list of names including HSBC, Standard Chartered, UBS, Citi Bank, JP Morgan, Goldman Sachs and Deutsche Bank. 

“Every major bank has a few of our funds in their recommended list, because we distribute through those banks in other markets, too,” he explains. 

While big global accounts having presence in the US, such as Citi or JP Morgan, fall under Mr Coso’s responsibilities, AB’s Emea assets do not include assets distributed though global banks in other markets, even if they are booked in the continent. This differs from the typical approach taken by most of their competitors.  

“If UBS sells one of my funds, and is recommended from Switzerland, there is a chance that 70 per cent of their sales will come from Asia, but that will fall under Asian assets,” he says, adding that the firm’s Asian business, headed by Ajai Kaul, is one of its “most powerful” components. 

“We view the client as a single client, who has to be serviced based on their needs and the biggest opportunities. At certain levels within the firm, the protectionism stance does not infiltrate,” he says.

Asset managers liaise with banks, in particular global institutions, through the “narrow funnel” of the funds selection or discretionary teams. 

“Understanding the selection process is not difficult, but figuring out where the asset flows are coming from is harder, but it is important because it impacts the way we service them in different regions of the world.”

Global institutions have different aspirations and growth patterns across countries, he explains, and the aim is to help them locally in the local language with the service requirements they need to grow their business.

Being proactive is paramount. “You don’t want people chasing you down every time something strange is happening in Italian politics. You should have an opinion and be able to deliver it as fast as possible to them, particularly if you have a strategy that may be impacted by that.” 

In the fixed income space, which represents more than 50 per cent of global assets, the firm is best known for multi-sector portfolios, having provided outcome based products “for many decades”.

“This is our DNA, and we became very well-known and successful in the flexible multi-sector space in fixed income before launching all of the individual pieces underneath, unlike most managers who became very successful for short duration, or US yield, or emerging markets and then launched multi-sector products later in life,” claims Mr Cosio.

In the past, the absolute return concept has attracted the majority of asset flows, in lieu of traditional duration interest rates. “But as interest rates start to finally normalise you will see more traditional, more moderate duration type fixed income product become the norm, with clients starting to use fixed income as a more traditional source of return rather than the catch-all which it is today.”

But fixed income has been “a bad place” to be, in the current low, gradually rising, interest rate environment. “Our biggest growth in the past few years has been in equities, even if the recognition of our fixed income business is very strong and wide,” he says.

In active equity, more than 70 per cent of assets have outperformed their benchmark over the past five-year period, he reports.

One of the firm’s differentiating factors, he says, is its ability to foster a diversity of opinions within a collaborative framework. The equity business, which represents 37 per cent of total AuM, houses several portfolio managers, with different views and styles in how they run money, while at the same time they collaborate across primary initiatives, including ESG research, factor assessment, risk management and trading. 

AB’s equity products tend to be high conviction vehicles. Some portfolios manage just 20 stocks, with the more global and international portfolios containing 60 at the most. The firm’s “prima alpha” analysis articulates what percentage of the relative performance comes from actual research and stock selection versus other more replicable factors in the market, such as value, small cap, quality or momentum tilt. 

These are all factors which exist in some form of cheap, ETF format. “When clients come to us, they will know that we purposely try and suppress some of those factors in our portfolios, because we don’t have control over them. What we do control is the research we carry out and the companies we select.”

Sub-advisory channel

While some US firms see the sub-advisory approach as a cost-effective way to enter the European market, for AB it is “just another wrapper for good ideas; a delivery mechanism”.

In Emea, the sub-advisory channel currently accounts for roughly $7bn, and is a growing share, driven by the demand for equity strategies. 

Both the Luxembourg fund platform – comprising 60 funds across equity, fixed income, multi-asset and alternatives for a total of $80bn – and the sub-advisory business in Emea, were developed in the early 1990s. 

“For most mutual fund distribution organisations, being overly customised is a challenge but our international legacy is so big and our institutional history so spread out that doing this is second nature to us.”  

The operational system for managing a sub-advisory relationship with an existing client is no different than opening a separate account for a mandate, he adds, and the delegated approach is a growing area of interest for private banks.

Markets such as the UK and Italy lend themselves better to sub-advisory than others, thanks to the significant size of their local asset managers. Scale is a key prerequisite for awarding investment mandates, as it brings the benefits of lower fees, akin to institutional levels. 

In Italy, new firms have embraced the delegated approach recently, such as Fideuram, whose funds of funds business has traditionally been its primary distribution channel. Fineco too is launching a new asset manager in Dublin and looking to sub-advise. And this approach is going to be an even bigger focus for long standing users of sub-advisers, such as Mediolanum. 

In the UK market, Brewin Dolphin and Sandander AM, as well as JP Morgan AM, are all new entrants, while in Switzerland larger banks such as UBS have developed internal capabilities to handle mandates over the past three years. 

“In private banking, sub-advisory is still dwarfed by traditional mutual fund sales. It is going to take many years to swell, but is definitely growing,” he says. Regulations such as MiFID II will fuel this growth, as transparency increases and clients become more savvy with regards to what they are paying for and the value they receive, he expects. 

The rebates that private banks used to get from asset managers may have been higher, but what private banks gain is a “more trusted relationship” with the client, as the solution is directly owned by them. 

 “Wealth managers have to find ways to add value and earn a living at the same time, and sub-advisory is a good way, because no longer are they going to be getting paid by the asset manager and their value proposition to the client has to strengthen.”