SEB using sub-advisory to go beyond Ucits universe

The sub-advisory activity at SEB Wealth Management, the Nordic firm with €142bn of assets under management, has evolved in the past few years to become a two-speed business. While mandates given to external managers on behalf of its institutional clients are growing in size and number, the white label funds offered to the retail segment – and managed on a segregated basis by third-party managers – are likely to decrease in the future.

The large institutional clients in particular, are driving the sub-advisory growth, explains Mattias Hagen, head of manager research at SEB Wealth Management in Stockholm. To meet their demand, in the past 12 months the firm awarded a number of mandates in US equities and Asian equities for a total of around $600m (€436m). Total assets in institutional mandates amount to approximately $3bn.

In the retail space, where currently white labelled sub-advised funds amount to $2.2bn in total assets split across 13 different managers, is a different story. A number of mandates in emerging market equity, which have been managed since 2001-2002 by a large asset management firm, are going to be brought back in-house within the next couple of months, as SEB is building its internal capability in this space. The new team will manage funds for the captive retail distribution, at least to start with.

There are a number of reasons for building resources in this area. Cost is definitely a key factor. More importantly, the firm has identified emerging market equities as a strategically important area to grow into in the future, says Mr Hagen. Moreover, it is important to build expertise in this asset class to be able to discuss with authority about trends and developments with retail and private banking clients.

More than 10 years ago, the business and product strategy at SEB was pretty different.

Back then, the firm did not have the manager research capabilities it has today and it made sense to have a good quality one stop shop for a large number of strategies. That approach also ensured significant marketing support from the sub-adviser and an attractive fee level.

Over the years, the manager research team at SEB has gradually expanded, including half a dozen people today; the selection process has strengthened, and every mandate is treated individually. The level of assets the firm is able to raise in funds and the increased competition between sub-advisers on the market ensure an attractive fee level.

“The number of retail sub-advisory mandates that we set up in the last five to seven years is quite limited, whereas the growth has been on the institutional side,” says Mr Hagen. On average one or two managers are changed each year in the 25-30 total mandates the firm has, combining the institutional and retail space. “Going forward, our business model will probably be off-the-shelf Ucits funds in the retail and private banking segment.”

However, some mandates in the pipeline for institutional clients could potentially become retail mandates, if they are successful in attracting institutional money.

A high alpha global emerging market equity fund is likely to be the first in the line, although no final decision has been made on the structure yet. One of the options is to ask the selected manager to set up a Ucits fund and give SEB clients some kind of exclusivity. The firm already opted for this solution last year when it got two US managers, CRM and William Blair & Co, to set up respectively a US value equity fund and a US growth equity all-cap fund in a Ucits wrapper. While CRM did not have a presence in Europe before then, William Blair is a well known manager in the continent but did not run that particular strategy. The products were marketed as a package to institutional clients and raised a total of $800m in four to five months.

This solution, as opposed to a mandate, tends to be quicker and, more importantly, the fund is seeded by the sub-adviser.

There are some areas where it is hard to find good Ucits funds, and one of the benefits of sub-advisory is to gain access to some talented managers that cannot be accessed through Ucits. For example, the universe of US managers in the US is completely different from the universe of US managers in Europe, says Mr Hagen.

“We are bringing managers here, asking them to set up Ucits funds, offering them a distribution network, and they are offering us something unique, which we can’t buy on the European market today. This could be the next development of sub-advisory or white-labelling.”

Mattias Hagen, SEB Wealth Management