Jolly good for frank russell’s partnerships

When Russell’s European investment management division was established alongside the traditional investment consultancy in 1994, smaller pension funds, keen to outsource assets to a single external multi-manager in order to save on costs, were the main target. But the politicians have seen to it that pensions reform has been slow.

“We are waiting for reform every year in France, Germany and Italy, but I will believe it when I see it,” says Mr Jolly with a shake of the head. “It is distribution where we will grow.”

Product cachet

Rather than signing up a raft of new partnerships, he talks about doubling assets through existing partners. He wants to preserve a certain cachet for Russell’s products, so that they are available only through selected outlets.

This inevitably means a much deeper relationship with private banks, particularly those restructuring their asset management systems.

“The private banking market is an interesting one,” says Mr Jolly. “They are all losing money and need to customise the business model, delivery of advice and most importantly of all, to industrialise execution.”

Private banks who offer customers tailored portfolios, with individually chosen stocks and funds, can no longer survive, runs the Russell line. But a bank which can track sales of funds from a handful of external providers, overseen by a central selector, rather than a free-for-all supermarket, is on the right road.

“Industrialisation is a word hated by private bankers, but the big issue for them is to invent something profitable,” says Mr Jolly. “They can’t be profitable if they treat each client separately for implementation of investment strategies. You need to rationalise the whole manager selection process, then give each client a separately weighted strategy.”

Last year, Russell struck a deal with Schroders Private Bank, which now uses Russell’s multi-manager products alongside in-house funds. Société Générale is another company in transition, slowly opening up to external influences since Mr Jolly signed an agreement with the group in 1997.

“SocGen has E280bn, plus E40bn in the private bank, but we are only a tiny part of this,” reveals Mr Jolly. “Our ambition is to service providers so well that they increase our exposure to their internal world.”

Insular culture

It is the insular, highly fragmented culture of many private banks which stands in his way of becoming a one-stop, open architecture solution provider.

“In the private banking world, the tradition is that the individual private banker does exactly what he wants. He hates the hierarchy telling him which fund or asset manager to use. He will tell you clients don’t like being sold funds or products. But the problem in private banks is generally not the client, it’s the banker.”

Mr Jolly believes that he can change this culture through the spread of Russell’s reputation. He was initially worried about achieving the growth required by his American paymasters. When a move from offices in London’s Mayfair across the road to Lower Regent Street was first mooted, he felt edgy. “I was concerned about the expense, but it came good in the end,” he remembers. Now he has 160 staff managing $20bn (E18bn) for European clients. FRC runs $85bn globally.

“This is just the beginning of our growth,” says Mr Jolly, who is investing his faith in the open architecture movement.

That Europe’s banks channel 80 per cent of client investments into in-house funds appears of little concern. “It is a problem for single managers like Fidelity and BNP Paribas. But a multi-manager like Russell can get the whole remaining 20 per cent. That’s the beauty of our model,” says Mr Jolly.

He believes European assets can be doubled in three years, providing the right decisions are taken. The latest of these is an agreement to provide manager of manager funds to private clients of Nordic investment bank Carnegie.

This follows a successful link-up with Holland’s Robeco, expected to channel funds through branches of banking group, Rabobank.

But the most successful deal of all was with Arca, the distribution network of Italy’s Banca Populare. When Russell designed the Arca Cinquistelle product for the bank’s high net worth clients in 2000 – offering a choice of five externally managed asset classes as part of a “profile” fund – they pulled in a phenomenal E3.5bn in just nine months. This achievement has yet to be bettered by any competitor in the Italian market. The co-operation led to another e500m product launch, Arca Multi-Fondo, in order to deepen the relationship.

Mr Jolly claims Russell has never participated in a failed relationship. But not all of his partnerships have been equally lucrative. Disappointing sales have made any new deals with non-financial distributors unlikely in the current climate. What seemed like a ground-breaking deal to provide investments for German car manufacturer BMW in 2001 will no longer be used as a template.

German targets

Germany nevertheless remains a key target for Mr Jolly, who flew to Frankfurt for talks with potential partners immediately after his interview with PWM. He recently signed a deal with Metzler private bank to distribute Russell’s hedge funds. But until new German laws are passed next year, Russell can only deal with institutional clients. “Large retail banks would be our ideal partners. These are the areas we currently don’t cover in Germany,” he says.

The challenge, says Mr Jolly, is to convince larger banks that they must walk on two legs, distributing both in-house and third party products. “So even if you have one leg which is a little hurt, you can still use the other one.”

The worst mistake which fund manufacturers can make is go directly to a bank and try and sideline the in-house fund provider rather than working alongside them, believes Mr Jolly.

“We would never sign a deal against their interests as we would always lose this battle. If we can secure 15 to 20 per cent of a group’s distribution, we are very happy.”

Russell’s Continental Europe Equity Fund

• Fund inception: 05/3/1996
• Fund size: E1.28bn

These are the fund’s five managers:

• AXA Rosenberg (value orientation, 25%)
• Capital International (value orientation, 20%)
• BlackRock International (growth orientation, 20%)
• Putnam Europe (market-oriented, 15%)
• Thames River Capital (market-oriented, 20%)

A handy knowledge of politics

Studying alongside the young Frédéric Jolly at the Institut d’Etudes Politiques in Paris during the early 1980s was the future crčme-de-la-crčme of the French civil service.

Mr Jolly realised two things during this period of learning. Firstly, he did not want to join the state bureaucracy, and secondly, he did not feel “Franco French”. He craved international experience and set up the investment consulting business of Watson Wyatt, before joining Russell as managing director to set up the Paris office in 1994.

One of his early highlights was the establishment of a relationship with Société Générale. Working with future administrators and politicians at university had left him well placed for such high level discussions.

“My school was very good for helping me to understand the politics of these banks. It is a key component of these deals,” says Mr Jolly. “You need to evaluate their competitive and positioning problems, understand them and show how you can help. If you can’t do this, nothing happens.”

Jolly: Russell has never had a failed relationship