Keeping a firm grip on in-house outsourcing

When Allianz Dresdner Asset Management (ADAM) announced it was changing its name to Allianz Global Investors (AGI) last year, it was not just a case of shaking off an unpopular acronym. The change clearly reflected the current global nature of the firm, marked the end of its acquisitions and laid down a new commitment to organic growth. It also reaffirmed the commitment of German insurance giant Allianz to asset management.

Joachim Faber, AGI’s CEO and a member of the Allianz group’s board, has played a crucial role in making the firm one of the world’s leading asset management houses.

Following a business model based on an “in-house outsourcing” strategy, Dr Faber believes in building up the highest competence in asset management without losing control over it. In order to do this, the firm starting pulling together asset management capabilities in 1999 by acquiring US fixed income manager Pimco.

And hand in hand with developing this almost unparalleled expertise in the manufacturing of investment strategies, is a push to develop the most efficient distribution channels, both external and external, encompassing a network of banks, insurance companies, specialist Italian agents known as promotori, and independent financial advisers (IFAs).

Dr Faber remembers how the decision to invest resources in fixed income expertise, at a time when equities were so much in fashion, was the subject of many jokes.

“To acquire a manager that was predominantly focused on the fixed income area was kind of boring and only an insurance company could have had this idea in 1999,” he says. He explains that because most of their assets were invested in fixed income, they felt the need to have a highly professional fixed income manager, and found in Pimco’s total return strategies an attractive concept that could be exported into Europe.

Buying frenzy

Pimco was the first of a string of acquisitions that included Oppenheimer Capital and Nicholas Applegate. The shopping spree culminated in 2001 with the Munich-based Allianz insurance company taking over Dresdner Bank. This initiated a period of integration of Dresdner’s banking, insurance and asset management capabilities.

Today, AGI has ?800bn under management, of which ?550bn are third-party assets coming from outside the Allianz group. “This gives us scale and the opportunity to pay for the resources we have to acquire in order to give a top performance,” says Dr Faber. “There is a lot of scepticism about scale and size in many industries, but in our industry it does matter. Having expertise in a broad range of products and transferring one technology from one market to the other is extremely important.

“Also this is what positions us as strong player within the group,” he adds. Within Allianz group, the asset management business brings in 20 per cent of total earnings, while 70 per cent comes from insurance and 10 per cent from banking.

This strong slice of revenues for asset management, together with the large swathe of third-party assets under management explains why AGI is putting so much attention into further developing relationships with external clients.

The firm has been working hard looking after its agreements with external distribution channels including bank networks, IFAs and other distributors, says Dr Faber. In the retail market, which represents 60 per cent of annual net inflows into the firm, he estimates that just 10 to 20 per cent of inflows come from within the group’s internal networks.

Germany, Italy and France are the three European countries where the group has its own meaningful distribution network. “In Germany we have our agents’ networks plus Dresdner Bank,” he notes. “In Italy we have the Ras insurance agents and the promotori finanziari which are also connected to Ras.” The recent acquisition of the promotori networks from Commerzbank and BNL means AGI has a network of over 3000 promotori in Italy. In France the company counts on the distribution power of the AGF network.

Outside its internal distribution platforms, AGI has other distribution operations covering the different regions in the world. AIG Luxembourg, for instance, distributes its products across Europe and similar models operate in the US and Asia.

Focusing on the European market, Dr Faber adds: “We are spending a lot of time across the whole of Europe working with the large banks that are our main distributors, but also with IFAs and other networks in different countries.”

At the same time as AGI expands its external distribution business, Allianz’s internal networks cannot ignore the trend towards open architecture and Dr Faber is well aware of this challenge. He explains that they do not have exclusivity when it comes to serving the asset management needs of the group’s different firms, describing two criteria under which an internal customer might decide to hire an external provider.

“First of all, if we do not have the product or if we have a sustainable underperformance, then we may look outside. Luckily we do not have many areas of sustainable underperformance, but we do have situations where some of our insurance companies have chosen to use an outside manager for a period of time. But we are fighting hard to get back on track and to try to be better than those outside managers, but we are not opposed to the open platform concept.”

As an example of a situation where an insurance subsidiary might decide to go for external expertise, Dr Faber elaborates: “Recently our insurance colleagues in Australia wanted to invest in the Australian market in a value strategy, while we have a growth style strategy. So there is no enforcement on our insurance colleagues to go for a growth strategy when they believe the value strategy is the right one, so they go outside.”

Dresdner Bank represents another example of how open architecture is present throughout the group: “Twenty to 30 per cent of new fund business at Dresdner Bank is going to external managers and that’s fine,” says Dr Faber. “Whenever other managers have products that have a better sustainable performance than ours, then we have to be open to competition.

“In our business you have to look at the components of quality: these are investment management and services. So we are trying our utmost to be at the service of our distribution partners, and particularly our in-house partners, because they are big clients for us. We are dedicating a lot of resources to the Dresdner Bank network and the agents networks across Europe,” he comments.

“If you weight those two elements equally, then we might win, because the service element is dominating here. But if we have a worse performance, our distribution partners will be picking other managers.”

Continental partnerships

Expanding relationships in Europe is without doubt one of the firm’s main focuses, but as Dr Faber notes, the fragmentation of the European market still presents some big challenges for manufactures and distributors.

“European regulations do not allow us to issue a fund for the whole of Europe, and this is one of my favourite topics,” he says. And indeed Dr Faber is passionate on the need for a single registration process for funds being sold across Europe. Together with 13 other chief executives of large asset management houses, he has helped establish the Forum of European Asset Managers (FEAM), to make the voices of manufacturers heard in Brussels and hopefully speed up the creation of a single registration framework.

The forum, chaired by Nicholas Moreau, CEO of Axa Investment Managers, was created around the same time as the European Federation of National Investment Associations (Fefsi) opened its membership to asset manager companies and changed its name to the European Fund and Asset Management Association (Efama).

This has worried industry practitioners, some of whom believe the last thing they need is two different voices representing the interests of a single industry.

“We want to be active with Efama but recognising that it is an organisation of national associations and that when it comes to free and unburdened cross-border distribution, there might be different interests,” he says.

Whether it is as an industry voice, or in his “open platform”, which clearly favours high quality internal manufacturing units over industry rivals, Dr Faber has made his opinions clear. And the interests of a heavy-duty juggernaut such as Allianz, with its vast internal distribution capacity, are not so easily swept aside.