Sanpaolo chiefs still uncertain on outsourcing

Sanpaolo IMI Asset Management introduced a multi-management programme in 2000, with a view to meeting evolving clients demand and keeping up with competitors. “We were the only asset management company not to have a multi-management platform at that time, when the market had already opened up to the concept,” recalls Alessandro Costa, head of multi-management at the largest Italian banking group.

Clearly proud of his rapidly growing baby, which has doubled its assets to ?6bn during 2005, Mr Costa explains that key to its success has been the joint venture with Santander Group, which provides funds and services first and foremost to Sanpaolo AM and is expected to gradually extend this to other Italian players.

“If I had to activate new fund houses internally, the process would be much lengthier and heavier,” says Mr Costa, admitting that, despite being the largest multi-management platform in Italy, his is still a marginal business within the ?120bn asset management house. Being able to request Allfunds Italia’s services, and making the most of the “persuasion and contractual power derived from being their only client”, specifies Mr Costa, “has enabled me to open accounts with many fund houses”.

Mr Costa’s multi-management GPF business, targeting mostly Sanpaolo’s private clientele, currently buys funds from over 35 houses including Fidelity, Franklin Templeton and M&G.

Favoured managers

Quality and stability of the management team are paramount in the selection process of external fund houses. “The more we like a company and its portfolio managers, the more we tend to broaden its mandate,” he says. Mr Costa explains that they also put up seed money to set up ad-hoc funds to be run by their favoured manager. This happens “if the manager we like does not have a mandate that, in our opinion, maximises his potential”.

Sanpaolo also employs Ixis AM and Franklin Templeton on a sub-advisory basis to manage white label global bonds and global equities, respectively. The mandates value are ?100m each.

Delegation of asset management, multi-management GPFs or direct sale of third-party funds, which Italian banks, with the exception of small ones, cannot carry out yet, are different aspects of the same “absolutely growing” trend, which is open architecture, explains Mr Costa.

“Once you have opened the door, you cannot shut it again,” he enthuses. “It is an inevitable trend but while some houses decide to ride the trend, some others try to stem it.”

It transpires that Sanpaolo’s senior management has not made up its mind yet on what direction to take. “You are used to operating in a closed market and suddenly it opens up. But if you open your distribution networks to third-party funds, your margins will clearly decrease. The question is “Are we willing to trade the reduction of our margins against the increase of volumes or market share?”

And although he admits it is a difficult decision to take, making an analogy, he states: “It is the same concept of the Chinese products. Those who want to levy duties on Chinese products are a bit anachronistic. If you adopt a protectionism policy, in the short period you can keep the trend back, but in the long term you are doomed to die. If you prepare yourself in time, you can ride the trend. Your margins will reduce, but in a bearable way”.

Mr Costa’s recipe for Sanpaolo’s long-term success would be to focus on core competency, on active asset classes such as Italian and European equities or euro fixed income, where they have “greater competence than the others”. Hence, strengthen their management team and sell those products on other European multi-management platforms. The remaining asset classes such as emerging markets or US equities, where they don’t have in-house capabilities, would have to be delegated to external managers.

Comparing pros and cons of sub-advisory versus multi-management implemented through buying third-party funds, Mr Costa says: “Buying third-party funds is the simplest thing. If a fund does not perform well, you sell it. But if you delegate the management of a fund and the manager does not do well, what do you do?”

However, employing a sub-adviser for managing a fund costs less than buying that same fund. That reflects the difficulty you have, he says, in dismissing the sub-adviser.

Not surprisingly a firm supporter of the multi-management strategy, Mr Costa does not believe in the now fashionable controlled volatility absolute return or portable alpha products. “[With portable alpha products,] if you are wrong at stock-picking, you have lost money. And I don’t like that. I want a portfolio that generates both alpha and beta,” he explains. “It is the concept of diversification of sources of performance. The more sources of performance there are, the more possibilities I have to make errors, without these affecting the total portfolio’s performance.

ET

“The more we like a company and its portfolio managers, the more we tend to broaden its mandate” - Alessandro Costa, Sanpaolo