Alliance banks on deutsche’s european reach

Mark Luning, head of international retail sales at Alliance Capital Management (ACM) is a patient man. He joined Alliance in the early 1990s, at time when American groups were only interested in marketing funds to wealthy expatriate customers of private banks, registered in tax havens. He oversaw registration of ACM funds in Luxembourg and domestic European markets, after convincing his bosses this was the way to go. After having secured a distribution deal with Deutsche Bank in 2003, he is witnessing the slow emergence of guided architecture in Europe, where banks are partnering with a limited number of fund groups. Progress in this area is slow. But the most difficult wait of all, which has made the days Mr Luning spends gazing out of his Mayfair office across London’s Green Park particularly long ones, is the wait for markets to improve. “When European investors become more risk-tolerant in equities, they will see some of our products are more than competitive,” says Mr Luning, with just a hint of frustration.It is the domestic investors of Germany, Italy and France whom he hopes to convince. “All of these countries in the next five years are facing the sort of pension reform that might lead to more investment in FCPs and Sicavs,” says Mr Luning, referring to the two Luxembourg-registered fund structures which international groups use, to varying levels of success, for European distribution.“I know we were saying exactly the same thing five years ago, and we did have high hopes that this would begin. But it hasn’t, and it’s all due to the markets.” Governments around the world are cautious about investing in equities in the current environment, he believes, as they don’t want to be accused of misleading their electorates. But he sees the type of reform promised for so long by Italian Prime Minister Silvio Berlusconi, German Chancellor Gerhard Schröder and French President Jacques Chirac as inevitable.“People in the eurozone already have a high savings rate,” says Mr Luning. “The real question is whether we should wait for tax incentives to boost investment into mutual funds. When we got the 401(k) legislation in the US, we saw evidence that it promotes huge growth into this business.” Groups such as ACM will be well-placed to distribute funds to individuals through their employers, who will be making fund picks for defined contribution schemes, often with the aid of consultants, believes Mr Luning. He paints a picture of banks co-operating with employers to create funds of funds, and Italian-style GPF mandates for individual investors, mixing fixed income and equity allocations in lifestyle packaged savings plans.“Europe’s fund markets will grow once more. Of course they can,” says Mr Luning, with the sparkle of a veteran remembering several bull markets, but he comes quickly back to earth. “Recently, people buying their first equity funds have gone through a terrifying experience. They didn’t think about the risks. But now the banks have started to address this.” While it is all very well to dream of a revolutionary new distribution model which will work in the currently murky zone between institutional and retail sales, Mr Luning is aware that there are distribution issues in the current system that must be addressed.The problem has not necessarily been one of educating investors, but educating the all-powerful branch staff, who have monopolised the sales of mutual fund products across continental Europe. “Banks have to educate people in branch networks as well as customers, and are beginning to allocate considerable resources to this. That is probably as big an undertaking as educating clients,” says Mr Luning, with a wry smile.Deutsche gambleHe knows he has been under fire from competitors for investing significant marketing costs to secure the Deutsche deal, but has it been worth it? He will not be drawn as to how much it cost to get on the list of eight preferred providers, and if any funds have been garnered from Deutsche sales staff as a result. What is clear is that he has tremendous regard for the potential power of Deutsche’s distribution machine in Germany, Italy and beyond, that he believes in the guided architecture system, but that he knows the game is a long one. “It’s still too early to tell what will happen with the Deutsche Bank relationship. But there are ground-breaking things going on in Germany and Italy, and these things don’t develop over a year or so,” says Mr Luning. “That’s why we are happy to be in the programme early. Activities in Deutsche’s branch systems will mature over time, and then we will see,” he adds, commenting on the current state of play where most of the funds currently sold are manufactured by Deutsche’s in-house funds arm DWS, and big brand groups with big local, loss-leading, advertising budgets such as Fidelity and Invesco. “When you are a strategic partner, this doesn’t mean that nobody else can do anything with the distributors, as they need a latitude to buy the best funds. I would certainly rather be a strategic partner than not be one. But there are huge efforts in building products for branch network people and the work needed is enormous. “I’m not really sure how many ‘real’ managers there are out there with a sufficient range and replicable process to build business with European banks,” says Mr Luning. “Banks have to do their homework in terms of selecting groups, as networks can vary in size from containing 10 to a couple of thousand branches.” ACM is channelling products through every major bank in Europe, claims Mr Luning. Although there are only a handful of groups using a guided programme to sell single funds, off the shelf at branch level, the selection process is identical, no matter how the fund is delivered to clients, so the sale remains the same. It is the after-sales service, which operates on a different scale. “We are still dealing with the same due-diligence team at the bank, whether we are talking fund of funds or guided distribution of individual products, but we need the resources to match up to the banks’ demands.”

Luning: ‘people buying equity funds have gone through a terrifying experience’