Dexia to branch out from belgium in third-party push

Dexia Asset Management, the investment arm of the Belgian banking and public finance group, is making a concerted push to swing its business away from predominantly internally demanded product construction to the scarier world outside. This is despite the fact that the group remains structured, even more tightly than local rivals such as Fortis, to exploit as many synergies as possible between retail banking, private banking and asset management. In fact, under the latest re-structuring, the business heads of all three units report to the same board member, Hugo Lasat. But external growth is key to Dexia’s ambition to become a big-brand, global competitor to the more well-known asset management names. Five years ago, just 25 per cent of assets were sourced from outside the group. But today, the Dexia group represents just 50 per cent of the ?111bn managed by the funds arm. “Third-party distribution is a very important topic for us,” states Naïm Abou-Jaoudé, appointed as chairman of the executive committee of Dexia Asset Management at the beginning of 2007. “But the question for us is – how do we tackle it?” What is certain is that despite the desire to be a global, much less Belgo-centric player, Dexia AM will not be turning its back on the retail banking branches which gave it its original rationale for existence. In fact, these will increasingly be used as a testing ground. If new products fly off the shelves in Belgium and Luxembourg, then they can be rolled out with greater confidence through third-party distributors. “We are a manufacturer of investment products, with a very specific relationship with our internal distributors,” concedes Mr Abou-Jaoudé. “What we are doing is leveraging this knowledge, developed within our branch network, to develop business with other distributors. In fact what we are doing with our network is a test for us.” Cash cocktails Typically, this is done through development of a multi-management process, which allows a carefully mixed cocktail of products, including long-short equity, commodities and fixed income to be wrapped into one fund for distribution through both internal and outside private and retail banking networks. For this task, the group employs 20 people – evenly split between selection of traditional investments and hedge funds – running ?5.6bn in diversified products. Third-party distribution funds overseen by Dexia have grown from ?4bn in 2002 to ?14bn today. “This is a big leap for a group like ours, where historically, the biggest chunk of assets came from our network,” says Mr Abou-Jaoudé. He admits that selling simple funds to a captive Belgian audience was in fact “very easy” compared to the challenges he now faces in expanding the group. Tough targets have been agreed with fellow board members. For one, Mr Abou-Jaoudé is expected to grow funds garnered through third party distribution agreements by more than 10 per cent to ?20bn in 2009 and ?28bn by 2015. The concept of creating funds in Belgium for delivery across the globe has become a “real topic” insists Mr Abou-Jaoudé, in an effort to silence the critics who always snipe that Belgian fund management is purely about high pressure sales of structured products to unquestioning retail clients. “The market is really opening up for us now, in the retail, private banking and wealth management sectors. With open architecture, different distributors are opening their networks to the more sophisticated type of product, which Dexia Asset Management is offering.” These specialist, centrally-produced products include alternative investments, currently worth ?10bn, generated in the group’s Paris factory. Socially responsible investment (SRI) products, which have been big sellers for Dexia AM, are made in Brussels, alongside equity, fixed income and balanced funds, while multi-manager activity is concentrated in Luxembourg, where many targeted private banks are based. “SRI is both an institutional and wholesale retail story,” says Mr Abou-Jaoudé. “In the beginning, it was more concentrated in retail. Now there is more interest from institutions, and a lot of interest is expected from third-party distributors with retail clients.” Currently, around 11 per cent of assets supervised by Mr Abou-Jaoudé have some sort of socially responsible content or filter, but he expects the European market, estimated at ?40bn for institutions, “and more for retail” to take off, as distributors demand SRI filters not just for equity products, but for those investing in fixed income, global balanced and even humble money markets. But it is his specialisation in hedge funds – Mr Abou-Jaoudé has been responsible for Dexia AM’s alternatives arm for the last 10 years – which he believes will pay dividends for the group in its ability to exploit current market trends. “My time in alternatives allowed me to gain more experience of derivatives, CDOs, swaps and options in equity and real estate,” confides Mr Abou-Jaoudé. “This technical ability helps me to develop products on a convergence play. Ucits III allows shorting and cross-fertilisation of products such as 130/30 funds in equity. Traditional players are also moving into fixed income, using a long or short bias on traditional assets and moving beta from 1 to a more active level. These are all innovations coming from the alternative side of the business.” Mr Abou-Jaoudé, and the operation he heads at Dexia AM, is highly respected by the opposition. “I think their strategy will be successful. He is clearly a very competent guy,” says a senior manager at a rival group in Belgium. No weaknesses “Dexia is very ambitious and Hugo Lasat still has overall responsibility for asset management. The pair of them have the capabilities to realise their ambitions, and I can’t see any weaknesses in their local product ranges. But then again, there are always the markets.” These words are a reference to the sub-prime debt crisis, which also hit equity markets during the summer. While BNP Paribas was forced to freeze three funds exposed to the US sub-prime mortgage market, leading to an initial 3 per cent drop in the French bank’s shares, the share prices of Commerzbank, Natixis and Dexia were also hit. A report issued by Dexia Asset Management, however, sought to calm equity markets, which it claimed were being driven by sentiment, not fundamentals, as global fears about the credit market spilled over into shares. Despite comparing the apparent credit crunch scenario to the conditions existing in the ‘LTCM summer’ of 1998, Dexia says “it is healthy to have correction and make sure that those who abuse risk are paying the bill.” However, Dexia’s asset management strategists remind us that we are still in a bull market, and any crash can represent a historical buying opportunity.

Abou-Jaoudé: how do we tackle it?