Natixis spreads out from Franco-American roots

From Wealth Management / Profiles 31 January 2013

Pierre Servant, Natixis

By Elisa Trovato

Natixis Global Asset Management will invest in new product ranges or buy in expertise in its push to be a truly global player, according to chief executive Pierre Servant

Holding court in his office in quai d’Austerlitz overlooking the Seine, Pierre Servant, chief executive of Paris and Bostonheadquartered Natixis Global Asset Management (NGAM), does not hide his concerns for the fund industry, but he believes the firm’s multi-boutique business model is well suited to drive his ambitions for global expansion.

“In this kind of slow growth, low yield environment and with very volatile equity markets, the key challenge for our industry is to generate performance,” he states.

Moreover, investors have become highly risk averse. “Risk is becoming a big part of the sales process. People feel they have a lot more to lose than to gain. That is new, before it was all about returns,” he states, noting this investor attitude is now spreading from continental Europe to the US and all over the world.

The typical long-only product expertise, which until recently generated most of the fund industry revenues, has lost most of its appeal, as investors prefer to gain exposure to the equity market through cheap products such as ETFs. On the active management side, people look for “distinctive expertise, local products, high alpha equity or alternatives”.

For a generalist player like NGAM, with around €570bn in total assets and more than 1000 funds, the top priority is to adapt its product range to this new client demand.

“The advantage of having a multi-affiliate organisation is that you can offer a very distinctive type of expertise,” maintains Mr Servant. The expression “multi-affiliate” is more appropriate than “multi-boutique”, he says, as the company includes some very big asset management firms amongst its 20 affiliates, mainly US-based, such as Loomis Sayles in Boston, with more than $180bn (€136bn) of assets.

Twelve years ago, the French asset management company, then named CDC Asset Management, purchased Nvest, a US holding company comprised of 11 asset management firms including Loomis Sayles, the largest manager and main objective of the acquisition.

All the affiliates rely on a central distribution platform, which gathers around $50bn of gross inflows every year, representing around two thirds of total inflows at NGAM.

The relationship between the holding company and the affiliates is based on a profit or revenue sharing deal made at the moment of the acquisition. This scheme has proved very effective in aligning interests, says Mr Servant.

NGAM has continued investing during the crisis, bucking the cost-cutting trend.

“When we identify a gap in our product range, we first look at our existing affiliates and see if they can fill it. In that case, we can provide support and seed money to create a new fund until this is marketable. Otherwise, we will be looking for acquisitions.”

The latest in a series of acquisitions took place in October last year when NGAM purchased Chicago-based McDonnell Investment Management, a $13.5bn firm specialised in municipal bonds. “The US municipal bond market is tax free, it is a very big asset pool and is very interesting for our US-based high net worth clients.”

Other additions included Cincinnati-based Gateway Investment Advisers, specialising in hedged equity, in 2008. “This product generates an equity return without the risk of an equity product, and is well suited to this very volatile market,” says Mr Servant.

The year before, NGAM had acquired US Cambridge-based Alpha Simplex, specialised in absolute return/hedge fund investment strategies offering daily liquidity. In Europe, recent additions included London-based global bond manager H2O and Ossiam, a Paris-based smart-beta exchange traded fund manager.

“ETFs give the possibility to fill an expertise gap very quickly. If you have an idea for a smart index, you can have a product ready in two months, whereas if you want to fill a gap through an active manager you need to create a new product, seed it, generate a track record and maybe after three years you will sell it.”

GROWTH PLANS

Global expansion is firmly on Mr Servant’s agenda. Although NGAM ranks 13th in the list of global asset managers, according to Cerulli, it is very much a Franco-American firm. “We need to become a truly global company operating all over the world with a very diversified book of business. And in Europe we are very French, we need to become a true European player.”

Fifty per cent of the firm’s total assets are manufactured and sold in Europe, with the large majority, around 95 per cent, being distributed in France. The remaining 50 per cent of total assets are manufactured and sold in the US and internationally. Profits sourced from the US have increased to reach more than 60 per cent, and the importance of the US is growing.

Although investors’ interest in the eurozone is now starting to come back, it has been challenging for European asset managers to sell their euro expertise outside of the eurozone because of the crisis, he says, explaining that any global product manufactured in Europe will have a rather strong European bias.

“The first step for European or American asset managers is to sell their products in the emerging world, but the second step is to manufacture them locally. This is one of the challenges we are facing in the coming years.”

Today, the firm’s focus is mainly in Asia, where NGAM has sales offices in several countries including Japan, Hong Kong, Taiwan, Singapore and Australia.

However Asian headcount, of which a quarter is in Japan, accounts for just 3 per cent of the global and NGAM manufactures only $1bn of its total investments in the region, which rise to $7bn when including the joint venture in India with IDFC Asset management finalised in 2011. NGAM is now starting to distribute an Indian equity fund managed by the Indian firm through its Natixis’ Luxembourg Sicav. Mr Servant hopes that when the Indian market opens up to offshore products, the firm will have the possibility to sell some of its international funds, at least to institutional investors.

“Targeting the retail segment is expensive, you need to build first a good institutional base to pay for the investment,” says Mr Servant.“We are timing our investments, we are raising our headcount, but it is a balancing act. The objective is to grow profitability. The only way to accelerate the growth process is through acquisitions, but it is expensive and more risky.”

In Europe, asset managers owned by banking networks, which dominate fund distribution in the continent, experienced “massive outflows” in the past few years mainly due to the banks’ preference to attract deposits rather than selling off balance sheet products, because of liquidity constraints imposed by Basel III. “In France in the past funds were sold to mass retail clients, with little advice. This kind of business is gone,” he says, with distributors having to justify the fees they charge their affluent and high net worth clients.

NGAM also suffered outflows, mainly from money market funds, which have reduced from a peak of €85bn to less than €40bn.

But the firm is enjoying inflows in higher fee products such as equities, fixed income and in alternatives. “Our revenues are going up, because the asset mix is changing in the right direction,” he states.

Despite strong competition, Mr Servant sees growth potential in Europe. In Italy the company has won some mandates from private banks, such as those in insurance-type products from Carige Bank recently. NGAM has a wealth management business in Switzerland and in the UK the firm is setting up a team to launch and distribute local funds managed by the affiliates.

“We see the RDR regulation in the UK as an opportunity for new entrants. The market is being re-organised, investment advisers are looking for new expertise and new products. It is a fresh new game and fresh new rules.”

Also, large fund firms used to dealing with cost conscious institutional investors will have the upper hand on smaller players, he believes.

These used to thrive on high product margins, which allowed them to pass on retrocessions to their distributors, but adapting to the new rules will be tougher. “For the bigger players that have the capacity to position themselves well and deliver good solutions to clients at the right price, regulatory change is an opportunity.”