A fussy partner

Having set up stages one and two of its distribution model across Scandinavia, T. Rowe Price is now looking for the right associations for the ‘instividual’ stage to be pursued in the rest of Europe. Yuri Bender reports. Examine the structure of your target market, assess its potential growth and decide how easy it is to access. This is the initial process used to identify opportunities for selling investment products in Europe laid down by Christian Elsmark, recently recruited from JPMorgan to head up sales and distribution on this side of the Atlantic for US powerhouse T. Rowe Price. Currently, under E2bn of TRP’s E122bn comes from European clients, but head office in Baltimore wants to nudge this closer to E20bn by 2007. More partnerships T. Rowe Price has completed stages one and two of the model building process, having secured 65 mandates from 40 Nordic clients in just two years. Now the challenge is to secure more partnerships outside Scandinavia and to gradually roll the model out across Europe. Poor performance, manager instability and lack of client satisfaction has created a demand from potential partners for fund managers who can demonstrate longevity, low turnover, greater consistency in performance and understanding of risk, believes Mr Elsmark. Feeding this demand means designing products that are practical and efficient, rather than glittering and fashionable. “In the past, if you were sexy, you won a lot of money. But now, we are not in the business of excitement,” says Mr Elsmark. “We want to work with a partner for at least three years, not just sell products.” Entering a strategic partnership gives access to a new distribution channel in every case, where T. Rowe Price provides investment expertise and the distribution partner provides brand recognition and affinity to clients. The two existing partnership agreements, signed in April last year, are both in Northern Europe. Tapiola Fund Management, a subsidiary of Finland’s largest insurance company, markets six T. Rowe Price Luxembourg funds under its own brand for retail distribution. Under the terms of the distribution agreement with DAB Bank in Frankfurt, which acts as a funds supermarket for independent advisers, nine T. Rowe Price funds registered in Germany are available to private investors. “We are quite picky as to which partners we choose, but there will be more alliances going forward,” reveals Mr Elsmark. Product selection T. Rowe Price’s partnerships co-operate on a small selection of products, all using its trademark research-based investment process. But there is a need for strength in depth to achieve a sustainable business model. “Diversification remains important in fund management. A successful player in Europe needs to provide large caps, mid-caps, growth and value. Many people forgot about this in the bull market,” says Mr Elsmark. T. Rowe Price now runs nine open-ended Luxembourg-regulated funds available to the “instividual” market. Two more – US mid cap equity and US dollar investment grade – are about to go live. “We are slowly building up this business due to client demand,” says Mr Elsmark. “But we will not launch 25 pooled funds in one go, as then you would have a very expensive cost-structure.” Funds have a E50,000 minimum investment. Higher charges are levied on private investors than on institutions, due to the higher cost of administrative back-up, education and monthly reports. The new business will encompass private banks moving towards open architecture and the less-travelled channel of European family offices, increasingly consolidating into multi-family offices. But numbers of partnerships need to be limited to be effective, believes Mr Elsmark. “It is better to work closely with one partner in each country than to have five or six partners,” he says. “Otherwise there are no true partners, just clients.” Target Markets The Scandinavian region, serviced from Copenhagen, has been targeted first because it is seen as open-minded compared with potentially more lucrative areas such as Germany, which are next on the list. The small size of Scandinavian bond and equity markets means investors need to look overseas to achieve respectable returns. Mr Elsmark himself is half German, half Danish. Future efforts will be targeted at Switzerland, the Benelux countries and eventually the UK. “While Germany’s size will make it an important market to any asset manager, you have to be very optimistic to believe it will suddenly open up and offer significant wealth to any players,” says Mr Elsmark. Germany’s loss of faith in equity culture, and an expected consolidation of retail distribution channels means only a limited number of institutions are targeted by Stephen Matter, who heads T. Rowe’s Teutonic push. French banks, which run money for wealthy clients on a fund of funds basis, are identified as keener to enter into a dialogue with foreign managers such as T. Rowe Price. The belief is that Europe’s highly fragmented markets require a much more diversified business model than the US, where T. Rowe Price enjoyed huge success in mutual funds due to performance, stylistic offerings and no-load fee structures. But in Europe, Mr Elsmark prefers select partnerships to the more expensive strategy of mass distribution through independent financial advisers (IFAs), which he employed at JPMorgan. His experience is that IFA-style distributors push fees downwards, leading managers to offer products on non-commercial terms. He believes competitors, who used to spend huge amounts on the administration needed to service an IFA sales force, no longer find this route cost-effective. Consultative selling While admitting that T. Rowe Price suffered poor relative performance just prior to the tech crash in 2000, when the company avoided dot-com stocks, Mr Elsmark believes performance and risk monitoring are overtaking brand strength as the reasons why European banks select external funds partners. Skilled servicing staff – recruited because they understand client’s needs – are the key to the “consultative” approach to business development advocated by T. Rowe Price for the “instividual” distribution channel. Key to developing these relationships is quality rather than numbers of salesmen. “We have hired professionals – not sellers – who can consult clients on not only what they do, but also on some changes in the business,” says Mr Elsmark. Consolidation ahead The industry move to consultative selling reflects a practice long the norm at T. Rowe Price, claims Mr Elsmark. He believes this shift, combined with reactions to the mis-selling scandals plaguing financial services will lead to huge consolidation of European distribution channels. “Competitors are rebuilding their distribution models, reducing sales personnel and increasing client services providers, who can formulate advice. In Europe, consultants have moved to become fund managers, while fund managers are moving into consultancy. At T. Rowe Price, we have always been both.” This consultative model includes a strong concentration on risk monitoring. “We have a focus on risk management rather than risk measurement. There is currently too much obsession around tracking errors and Sharpe ratios. Clients are not using these measures as a tool to ask questions about the style of fund managers. We are expecting much more discussion this year around the corporate governance elements of risk management, not just the numbers.”

Model building Once openings have been spotted, the distribution model is constructed through a “lego-block building” process: 1. Personnel are recruited for the target market through an incremental, cost-efficient approach. “Much over-investment breeds failure in the future,” warns Christian Elsmark. 2. Sustainable assets are built up from large institutions, which appreciate longevity and low turnover of fund managers. It is vital to complete this initial stage to get a base of assets, believes Mr Elsmark, rather than be distracted by “golden nuggets”. 3. A small number of institutional partners are sought, who package up the products for distribution to wealthy individual clients. At T. Rowe Price, this is known as the “instividual” channel.