Goliaths have their way on the distributor scene
Distributors and manufacturers have described some clear-cut patterns which emerged during 2004 and 2005. Both have talked about a strong investor appetite for structured products, a keen interest in hedge funds and absolute return concepts, a gradual move to liability-led investing, and a growing awareness of risk limitation and capital preservation issues.
But there has been no real empirical evidence of investment product purchasing and distribution patterns across Europe. That’s why we have been delighted with the positive co-operation and contribution which our friends in the distributor community have offered to the first European Fund Buyer (EFB) Survey, initiated by our sponsor Credit Suisse Asset Management (CSAM), aided by numerical analysis from funds consultancy FERI FMI.
Many of these household name distributors have been hand-picked by PWM for the survey because they set the agenda for selection and dissemination of mutual funds in Europe. We have long believed that private banks, retail banks, insurance companies and fund of funds operations control Europe’s financial industry in terms of volumes of funds placed. The evidence collected has proved us correct.
TRINITY OF PRODUCT LINES
The attractiveness of guaranteed products, hedge funds and absolute return products – the three areas on which most manufacturers have been concentrating – was highlighted by distributors responding to the EFB survey. Those manufacturing groups with their own private banking channel have been particularly successful in developing and marketing this new generation of products.
Hard to sell
SGAM Alternative Investments, for instance, was set up by the funds arm of French bank Société Générale in 1998, and already runs ?34bn in hedge funds and structured products. “We had a feeling at the time that the market would not go through the roof, and that it would become very difficult to sell equity products,” says Philippe Collas, who is responsible for both asset management and private banking at SocGen. “Therefore we employed 250 people over two years to set up products for alternative investments. When the market collapsed in 2002, we were very pleased to sell products and were one of the few asset managers to carry on making profits as before.”
Credit Suisse has also been well placed to profit from the product development trends highlighted in our survey. Last year saw the bank place SFr31bn (e20bn) in structured products, which have been one of the drivers of group profits. But as managed funds become more important to clients in a more positive market environment, it appears that private banking clients will increasingly be channelled into the innovative total return strategies developed by CSAM.
GUIDED MODEL
Credit Suisse was one of the first banks which began to put rivals’ products on its shelves when it announced an open architecture structure back in 1999. Since then, leading banks have been moving to a “guided” distribution philosophy, pioneered in Frankfurt by Deutsche in 2003 and Commerzbank in 2004. The apparently successful model has since been copied by banks including ABN Amro and ING in Holland, HSBC in the UK and SanPaolo IMI in Italy.
This trend towards each fund buyer maintaining links with a more limited number of five to eight fund producers, and displaying their product ranges in its branch outlets or brochures, has also been highlighted by our survey.
It is the groups such as JP Morgan and Fidelity which typically monopolise the manager hot list for equities. For bond funds, Allianz, JP Morgan, Crédit Agricole, CSAM, and DWS are all being chosen as partners across Europe.
The restricted number and scope of products on offer means that in theory client advisers can be up to date on all products which they stock. In practice, the advice appears to be even further restricted. Those groups with strong local advertising budgets and sales forces – whose brand images penetrate deep into the minds of branch staff – are most likely to sell products.
“I get several sales calls from one particular group every day, more than every other fund group put together,” reveals the bewildered head of fund selection at a major French retail bank. “It would be possible for me to eat at a restaurant with a different member of Fidelity’s sales team every day of the week, the invitations are certainly there.”
This deep penetration of the market, by a limited number of manufacturers, is demonstrated by the fact that many of the 130-plus distribution warehouses from 15 different markets whom PWM conducted interviews with have opted for the same “preferred providers” in each asset class.
The manufacturers put onto the platforms also tend to be those who pay the highest retrocession fees to distributors. Deutsche Bank for one, while in no way admitting to choosing groups according to how much they “kick back” to the distributor, clearly revels in its strong economic position, where it can always call the shots, with every producer vying to get on its shortlist.
But the guided architecture model has by no means been universally accepted or admired. “The move from open to guided architecture was a big disappointment for us and most asset managers,” says Christian Wrede, chief executive officer of Axa Investment Managers in Germany. “Even if you are preferred partners, it does not necessarily mean you will do any business.”
Axa had been in negotiations with Deutsche, but was not chosen for its list, yet received E100m of net new money from Deutsche Bank customers last year. Mr Wrede says these inflows are generated through regular contact with branch customers rather than just branch staff.
There is also some re-alignment going on in the relationship between manufacturers and distributors. Platforms such as those set up by Santander subsidiary Allfunds, which controls the lion’s share of fund distribution in Spain, are now being forced to re-negotiate many of the agreements they originally struck with fund groups thirsty for distribution outlets.
“We were all naïve a few years ago,” confesses the head of distribution at one French funds house. “We gave away our fees to the platforms like Allfunds and they starved us. But now we are wiser, so we can go back to them every year and get a better deal.”
One of the perennial problems fund manufacturers face is the reluctance of distributors to move away from their staple of selling structured products, particularly when uncertain markets favour capital guarantees.
LIFESTYLE CHOICES
Ask Natexis Asset Square, the fund selection and distribution company affiliated to funds house Natexis Asset Management, how they prevent the group’s bank branches exclusively selling structured products, and the answer is something of an education.
At Natexis, the structured product is not seen as something necessarily alien, in the way that many other manufacturers see it. Rather it is a half-way house between a cash account and a fully fledged actively managed investment fund.
What the selector/distributor – in this case a unit owned directly by the regional Banques Populaires chain – has done, is to set up a fund of funds with a capital guaranteed option, which can be chosen by a client prepared to make a trade-off for lower performance potential.
“Our goal is to create a link between structured products and long-term investment funds,” reveals Philippe Couvrecelle, deputy chief of Natexis Asset Square. “We won’t necessarily collect much money in the short-term, but it it is a long-term way to convince clients to return to classical products.”
Natexis is also trying to design a balanced approach for retail banking clients, linking in with the liability-driven, regular savings philosophy also highlighted in our EFB survey.
“We want to avoid the 1999-2000 phenomenon, where clients, seeing only past performance, run into branches and buy technology or internet products,” says Mr Couvrecelle. “The challenge is to organise regular subscriptions on a monthly basis to avoid mass subscriptions at the top of the market.”
The balanced approach, where distributors help clients make asset allocations, is something favoured by manufacturers including Alliance Capital, whose head of international retail sales, Mark Luning, advocates a revolutionary new distribution model of banks working with employers to create funds of funds for individual investors, mixing fixed income and equity allocations in lifestyle packaged savings plans.
Providing the funds industry can respond to these investors’ demands and demographic changes, it will rise from the ashes. “Europe’s fund markets will grow once more. Of course they can,” says Mr Luning, with the quiet confidence of an industry veteran. “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.”
