Fortis builds assets outside Benelux haven

As open architecture becomes more important in countries that until now have been reluctant to open up to third parties, the potential for further growth is significant.

The firm already has a solid network of internal distribution channels within the Fortis group (see box), including retail arm Fortis Bank, private bank MeesPierson and insurance companies present in different European countries, but especially strong domestically.

“Fortis is a Benelux company and in this region internal sales remain strong,” says Thomas Rostron, managing director for distribution partners at Fortis Investments. “We are seeing that the group is increasing its asset gathering capacity and we are selling more and more mutual funds every year. But at the same time, we know we have a good range of products attractive to distributors outside this region.”

Today around 65 per cent of inflows from fund sales come from the group’s internal channels and 35 per cent from external distributors. When it comes to assets under management, around 90 per cent comes from within the group and 10 per cent from third parties, says Mr Rostron. “But the growth rate is now stronger on the third party segment.”

At the end of 2003, Fortis Investments managed assets of €77.95bn, with 44 per cent of this coming from institutions and 56 per cent from distribution partners. The distribution partners division manages more than 300 sub-funds accounting for around €43bn. The forward focus is on sales through intermediaries in ‘core’ European markets, including Austria, France, Germany, Italy, Ireland, Scandinavia, Spain and the UK.

“Outside Benelux we are very much focused on those who use mutual funds as building blocks for their portfolios because we really believe this sector will grow very strongly,” says Mr Rostron, whose division boasts 200 distribution agreements with financial institutions across Europe. These include fund of fund managers, private banks, insurance companies, independent financial advisers and retail distributors.

“Retail banks in Europe are not very open and they are not going to open up very quickly,” he says. “There are some exceptions, but in general we don’t think retail banks will sell mutual funds very actively.”

For its expansion in Europe, Fortis counts on its Luxembourg-based Fortis L fund that has over 80 sub-funds and around E18bn under management. Currently, the only drawback is performance, with the E340m equity Europe tranche lagging behind the MSCI index over one, three and five years, according to S&P.

Suitable strategies

The firm is using different strategies and partners in each market. In France, clients seems to be more interested in structured products and absolute returns. “They are interested in products that are a bit more mathematical, where you are adding value in relation to cash,” reveals Mr Rostron.

“There is a lot of competition in the French market but also a lot of creativity and new ideas. It’s a great market for new products, because it’s a large and wealthy country where the banking sector is still very fragmented and there is a lot of scope for third party distribution.”

Mr Rostron adds that for cultural reasons some Anglo-Saxon firms have always found France a very difficult market to enter. “But I think they are wrong. For us it’s a very important market and we are now one of the largest foreign players there,” he adds.

In Italy, the gestioni patrimoniali in fondi (GPFs) represent an interesting distribution channel for Fortis funds. These multi-manager-style private banking vehicles are now starting to consider absolute return funds in their asset allocation. “This is a new trend and we have just launched four absolute return funds that we hope will be successful in Italy,” he says. “Italy is very competitive because at the end of the 90s everyone entered the market. But it is also a very lucrative one.”

Future growth will also come from greater presence in the Spanish market, where Mr Rostron finds a huge demand for absolute return products and hedge funds. Agreements with local distributors like Allfunds are already in place. Fortis is hiring a head of Spain and Latin America to be based in Madrid.

Spain is the last major European country where Fortis is opening a sales office. This will mean a better presence in the market, but will also act as a bridge for more exposure in Latin America, where Fortis has already found good business opportunities, including a potential agreement to sell the Fortis L range to Chilean pension funds.

Mr Rostron also mentions the UK as an important market to consider in the near future, especially after the Chancellor’s recent announcement of proposals for a tax change that could benefit Luxembourg funds currently sold or wishing to distribute in the UK.

Under current law, Luxembourg funds distributed in the UK, wishing to have the most favourable tax treatment upon redemption, are required to apply every year for a certification from the Inland Revenue as a ‘distributing’ fund. In order to get that status the fund would have to distribute at least 85 per cent of net income and satisfy several investment restrictions.

Certification needs

Because all sub-funds and shares classes within umbrella funds need to satisfy this requirement, achieving the certification has been extremely difficult for Luxembourg funds.

Under the new proposals, sub-funds or share classes of a Luxembourg fund will be allowed to apply for the distributor status on an individual basis.

To date the Fortis Investment presence in the UK is small, basically selling funds to offshore clients, but things could change in the near future. “The announcement means important changes for distributors and it is very important for us to focus on the UK,” says Mr Rostron. “We are very likely to get our Fortis L range registered in the UK and we will be far more proactive selling into that market soon.”

This is how the dutch do it

The strong presence of the Fortis group in the Netherlands means that most Fortis Investments funds are distributed through internal channels.

According to Mark te Riele, director of sales to Dutch partners, 70 per cent of sales are through internal networks, with the balance through third party arrangements. But this is changing: “We are seeing an increase in inflows coming from external clients, so that 70/30 proportion is changing towards 50/50,” he says.

The internal distributors include not just the banks, but insurance companies AMEV and Stad Rotterdam, with a different model applying to each one.

‘Here you really need to have your funds quoted on the stock exchange’

Mark te Riele, Fortis

“The way we service Fortis Bank is different to the way we serve MeesPierson,” says Mr te Riele. “Whereas the relationship with Fortis Bank is a tight one, MeesPierson operates in a more independent way and when it comes to choose funds they look at the best products taking into account other providers. “We serve them just as we serve other external private banks.”

Although Fortis Bank is starting to distribute external funds, this is still very low key. Mr te Riele explains the bank is considering the distribution of third party funds, thinking of the needs of their high end clients.

Private banks in the Netherlands were the first to use third party funds more than 10 years ago, and only a couple of years ago retail banks joined in. “Now the larger banks are all working on third party projects and for us and our competitors it’s very important to be there.”

Private and retail banks differ in their approach to choosing funds. “In private banking one of the most important factors is performance, whereas in retail the brand name, marketing materials and presentation are key.”

Mr te Riele explains that the demand from private investors for different fund products is rising. “Investors used to invest a lot in shares as opposed to equity funds, but now they have realised they need to diversify their portfolios, resulting in a more important inflow into funds.” For him, product development is the key for success. “You really need to innovate and come up with new products to help your clients to diversify their portfolios,” says Mr te Riele. Although European equities continues to be one of the most important asset classes, Fortis Investments has been focused on innovation in bonds and now offers a whole range of products including corporate, high yield and convertible bonds.

Fortis has just listed two new bond funds – Fortis Convertible Fonds and Fortis Credit High Yield Fonds – on the Amsterdam stock exchange. Quoting funds on the stock exchange is part of the Dutch way of distributing funds. “This is not the case in other European countries, but here you really need to have your funds quoted on the stock exchange to serve your clients in the most appropriate way.

“If we mention stock quotation in Belgium, for instance, they don’t know what you are talking about. It’s a Dutch thing.”

‘Retail banks in Europe are not very open and they are not going to open up very quickly’
Thomas Rostron, Fortis