Big bad wolf insists he won’t blow houses down

HSBC has long been seen as the big bad wolf of the funds industry, a mega-group that can take over small, specialist investment houses and eradicate a boutique culture overnight.

When HSBC swooped to purchase Banque du Louvre, a highly regarded French private bank with a successful 15-year multi-manager franchise in 2003, many of the Louvre investment team fled in panic, fearing their ?7bn worth of relationships with 50 external fund groups would go up in smoke.

“It’s a lot about perception,” says Alain Dromer, a bluff Frenchman who has been at the helm of the HSBC’s asset management business since he crossed over from sister company CCF in 2001. “When you have started in a particular model, and it changes, there are fears. Some of the fears may be the product of your imagination, but sometimes you cannot change that.”

But although there appears to be a stark choice for the boutique groups swallowed up by the HSBC empire, there is some room for accommodation, says Mr Dromer. “We tell people: ‘This is the brief.’ If they are uncomfortable with us, they should not join. But they can compromise. We tell them our back office is run with all the efficiencies HSBC can develop, and we have excellent branding for emerging markets. We ask them if there is anyone else who demonstrate a stronger presence in these markets. Can you make this a winning proposition? Those who say yes, end up joining us.”

Unfortunately, such a compromise could not be reached with many staff at Louvre, or with Framlington, a specialist manager running £4.5bn (e6.7bn) in predominantly UK retail funds, sold to Axa Investment Managers during the summer.

“The main reason for the Framlington sale is that we needed to create the management culture to generate alpha,” reveals Mr Dromer, in an interview held in his high-tech new offices overlooking London’s Docklands.

“It’s fair to say that the people who have come into Framlington over the last 30 years are people who have endorsed dual ownership with our American partners,” says Mr Dromer, referring to a stake held by Comercia of the US. “They are not people who wanted to work with HSBC, but with Framlington.”

The development of this new culture was one of the reasons behind Mr Dromer’s restructure of HSBC’s funds business into two distinct units earlier this year.

HSBC Investments will be the group’s global investment solutions platform, managing $156bn (e129bn) in retail mutual funds, private client portfolios and institutional money market funds. It will also include the multi-manager business, which has been earmarked for expansion. Halbis Partners, currently running $71bn, will encompass high-alpha seeking equity and fixed income strategies, in addition to alternative products.

The disdain with which Framlington was treated by its erstwhile parent contrasts sharply with the affection bestowed on Mr Dromer’s favoured French child, Sinopia, which now manages nearly $19bn in quantitative strategies. Alternatime, its long/short fixed income strategy, has attracted £7.5bn. Much of Sinopia’s work involves designing and managing quantitative investment products for retail banking networks.

“Sinopia has a very different mindset to Framlington,” says Mr Dromer. “We discussed our strategy with Framlington, and they felt it was better for us to leave them well alone. But Sinopia felt that for HSBC to sell [their products] worldwide would be the most successful route.”

After a small capital investment in 1989, Sinopia was partially listed in 1999, before being totally absorbed by the HSBC group in 2002. “We delisted them, made them 100 per cent part of the group and launched them under different ownership. We told them: ‘You are now the HSBC group’s quant business’ and the story has been unbelievable since,” says Mr Dromer, adding that Sinopia’s assets have trebled since 2000, and profits have more than doubled year on year.

“It was an immediate positive story, despite the change in culture. Not all companies have the same reaction to the same story.” The HSBC restructure, with HSBC Investments providing a one-stop access shop to all manufacturing capabilities, but with Halbis managing the “high conviction” investment business, where managers must really work for returns rather than just following the index, is based on a broader trend.

Mr Dromer is a firm believer in open architecture, selecting only the best strategies for customers and, by extension, separating distribution from manufacturing. He was involved in a working party, which discussed the merger of private banking and asset management responsibilities, a change implemented by groups such as Société Générale and BNP Paribas, but decided against it.

“A more fertile approach involves distancing those people managing money from those servicing clients,” believes Mr Dromer. “If you are a private banker, you must provide the client with the best asset management product. If you merge with asset management, but you have the vested interest in selling your products to clients, it’s difficult.

“We thought it’s better when you have a clear open architecture concept in mind, which is what we have for our private bank and retail branch networks. It is better to create a healthy distance between manufacturers and those who sell the funds.”

The fact that the HSBC brand is not well known by many wealth managers, private banks and insurance company distributors was a big advantage rather than a handicap, claims Mr Dromer.

“In an open architecture environment, we must take into consideration the starting point. HSBC does not punch its weight in the distribution of investment products. That’s why we can have ambitious plans, as many clients, internally and externally, are just discovering HSBC as a provider of investment products. In effect, we are a start-up with history. We have the excitement and activity of a start-up, but with the track record and backing of HSBC.”

HSBC’s UK retail banking network recently agreed preferred provider status with five external fund groups, Fidelity, JPMF, Gartmore, Schroders, and Invesco Perpetual. It has been selling their funds in addition to HSBC products since depolarisation regulations were introduced in February 2005. “It may look in the short term as if we are putting internal manufacturing profitability at risk by cannibalisation from third-party managers, but in the long term, we will survive this way,” says Mr Dromer. “Guided architecture is a very powerful proposition that many new clients will find attractive.”

Even before the depolarisation regulations, there has been a “very healthy” system of fund sales in the UK, believes Mr Dromer, with retail investors going to brokers or independent advisers, and making an educated choice of investment product.