Smart banks seek regular range renewal

Reviewing your product range to adapt to constantly changing client demand is vital in any industry and the fund management industry is no exception. With currently more than 29,000 funds in Europe, the industry has experienced unprecedented growth, which is expected to continue. But does reviewing product ranges simply mean inundating the market with yet more new funds?

Gabriel Herrera, EMEA head of UBS Global Asset Management, and one of the key speakers at the forthcoming ICBI Fund Forum event to be held in Monaco at the beginning of July, says that “the decommissioning process is as important as the new product development in a professional management of a product range.

“Decommissioning can range from repositioning a fund and re-launching it in a changed or adjusted mode. It can result in a fund merger, or in a fund closure,” explains Mr Herrera. An entire range of opportunities to reposition and to merge funds was given, for example, by the introduction of the euro, “when more and more clients departed from the pure nationalistic look at country funds and moved towards Europe zone funds.”

Marc Raynaud, global head of mutual fund distribution at BNP Paribas Asset management, is also adamant about the necessity to get rid of those funds that don’t sell, or don’t perform well, or fall below a certain size, which is ?50m of assets in the case of BNP Paribas AM.

“Keeping a fund that does not sell is pointless and expensive. The fund still needs to be managed, both in terms of administration costs and human workload.” The risks of having a product range which is too wide are high fixed costs and a non-performing management, as well as “unpleasant positions” in the league tables, says Mr Raynaud. “A product range needs to be quite wide, but clear, concise, and easy to understand. If it is too big, people get lost and our distributors get lost too.”

Mr Raynaud reveals that a significant review process of the large fund range of BNL Gestioni, the Italian fund house recently taken over by BNP Paribas AM, is likely to take place in the near future.

Product development drivers

The current market trend, however, is towards increasing the number of products available to distributors.

“Over the last few years, there has been more new product development than old product decommissioning,” admits Mr Herrera at UBS.

New product development is considered one of the most important factors of growth at the Swiss bank and fund house, which in 2005 has seen SFr28.2bn (?18bn) of net new money flowing into the SFr324bn wholesale and private business.

“As we tailor new offerings to local jurisdictions and to local client preferences, and as we grow our client base as we do today, I don’t see that our product range will significantly be reduced over the next years, nor can I see this trend in the industry,” says Mr Herrera.

There are a variety of themes and factors driving new product development. The new Ucits III legislation is definitely a major one, as it provides a larger set of opportunities to create new solutions in a fund.

“Ucits III has had an influence in our recent product development and it will continue to have,” explains Mr Herrera.

The other major theme is the quest for absolute return, which the SFr765bn UBS funds operation has addressed in a variety of different product launches over the last few years, ranging from more conservative to more aggressive products, says Mr Herrera. A strong demand coming from the private client segment for funds of hedge funds has driven UBS AM to focus on this area. A growing interest in real estate led to the creation of a global real estate practice, three years ago. Demand for fixed income is also increasing.

A changing attitude to risk is an important driver too in Skandia Global Funds’ product reviewing process. “Although a lot of retail investors have come back to the equity markets over the last couple of years, they are still coming back somewhat tentatively. And issues like the correction in the equity markets over the last couple of months can start to frighten them away,” says Michael Hemming, managing director of Skandia Global Funds, the ?4bn sub-advised fund platform based in Dublin.

“Clients are looking for something that is more risk controlled, but not necessarily the old very structured, guaranteed products. They want a degree of flexibility and risk control, which can be satisfied by providing them more hedge-based products.”

The next generation of Skandia Global funds’ products will be less equity, long-only based and there will be more emphasis on asset protection rather than asset building. It will also have a greater degree of derivative content, foresees Mr Hemming.

Chris Sutton, chief executive officer of iShares Europe at Barclays Global Investors (BGI) says there has been much more focus on product development in equities than in fixed income in the industry. There is now a need for investors, who are demanding more choice in this asset class, to access higher quality fixed income products. Some of BGI’s recent product developments are aimed at addressing these requirements, claims Mr Sutton.

	‘I don’t see that our product range will significantly be reduced over the next years, nor can I see this trend in the industry’ - Gabriel Herrera, UBS
	‘We review our product range on an on-going basis, because a product range needs to be alive, it can’t be static’ - Mark Raynaud, BNP Paribas
	‘Realistically, it is possible for us to bring out new products maybe two-three times a year in each of our six markets’ - Chris Sutton, iShares

iShares focuses on the exchange traded fund (ETF) business and “was created to make BGI indexing capability open to as a wider range of investors as possible”, explains Mr Sutton. The company launched 14 new funds on the London Stock Exchange (LSE) in October last year. The funds are now listed on other exchanges across Europe, including Borsa Italiana, Euronext Amsterdam, Euronext Paris, Frankfurt Stock Exchange, SWX Swiss Exchange and Virt-x in London.

Five additional funds were launched on the LSE this month. “There are two strong themes underlying the launch of these new funds,” says Mr Sutton. “The first one is about meeting the demand for those asset classes which are not easy to access, including China, emerging markets and Eastern Europe equities or European real estate. On the fixed income side, we launched inflation-linked bonds, for the first time in the Eurozone.

“The other big theme is the search for income-producing funds, which resulted in the launch of equity funds producing more fixed-income-like characteristics, in terms of their returns, such as indexes of high-dividend paying companies or value-based funds in the Eurozone.”

Mr Sutton explains that for a relatively new and rapidly growing business such as iShares, which manages ?13bn in Europe, of which ?5bn was acquired in the last six months, reviewing a product range essentially means “extending choice”.

Marc Raynaud at BNP Paribas adds the French, and international, perspective. “We review our product range on an on-going basis, because a product range needs to be alive, it can’t be static. We launch new funds every time we believe there is a new opportunity to sell,” he says. The secret is to adapt the product range to client demand and aim to launch funds when they are still popular.

“If we don’t launch the fund that is fashionable at the time, it is our competitors who will increase their assets.”

Mr Raynaud says that this year, Bric (Brazil, Russia, India, China) funds are fashionable, while global emerging markets were more popular in the recent past. BNP Paribas has just launched an India fund and is planning the launch of a Brazil fund.

“What we also sell very well today are funds of funds which have various risk profiles. Third-party funds are also included in these instruments. Last year, or two years ago, we were selling mainly structured funds, or guaranteed capital or protected funds, as when markets don’t perform well, investors want a higher guarantee,” says Mr Raynaud.

In the fixed income area, European convertible fixed income funds are also becoming very popular. The French fund house has been recently been focussing on high alpha bonds and it is launching an inflation linked bond, in view of rising interest rates.

Better products or just something new?

But does launching a new product mean just pandering to a never satiated need from distributors for a new story to tell their clients?

“To sell, you always have to be innovative,” says Mr Raynaud. “A product that sells for 20 years does not exist, unless it is a monetary fund, for example, but it is not there we get the most money,” he says.

Mr Hemming at Skandia Global Funds agrees that marketing aspects play an important role. “Your sales force like new products, the clients like new products. Launching new products puts you in the press again, because it is something to talk about.”

Retaining existing customers is also key. “The products do become stale and what was exciting two or three years ago is not exciting now. Existing clients are much cheaper to retain than acquiring new clients, so you have to work hard to satisfy your existing clients,” he adds.

Mr Herrera at UBS states that new products get more net inflows than old products because they effectively bring more value. “I am aware that in certain markets, particularly in Asia, the largest proportion of net new money goes into new products. There, it is very tough to get net new money in old products, even if they perform very well. This is a cultural thing, people perceive newly launched products as having a better technology.” For the more established European fund market, however, the scenario would be different. “In Continental Europe, you see more net new money in new products because the product features are really different. You can see a lot of new money in very old funds if they perform well.”

Timing framework

The time necessary to launch new products varies depending on the company, as well as the type of products. BNP Paribas, through Parvest, its Luxembourg-based open-ended multi-manager Sicav, claims that the launch of new funds can happen very rapidly. “Parvest has 71 compartments, alongside some 40 ‘empty boxes’, where we keep our investment policy very vague. This way, we can launch new products very quickly, as the funds sit already in the prospectus, in launch position,” says Mr Raynaud. “Normally, a month does not go by without us launching or closing two or three funds.”

The scenario is different for iShares. The launch of new ETFs are “mini-IPO” says Mr Sutton. “Realistically, it is possible for us to bring out new products maybe two-three times a year in each of our six markets,” he says. “Because of the regulatory process, it takes a few months to actually launch a new product.”

Even more time-consuming, not surprisingly, is the product reviewing process for Skandia Global Funds, which employs single external managers for any mandate the platform awards.

“It can take six to nine months to launch a new fund,” says Mr Hemming. “You have to define a mandate, then putting out a search for external managers, going through a rigorous process of identifying a manager, and negotiating with that manager, then going through the regulatory process,” he explains.

Reviewing a product range can mean launching new funds, or changing mandate or might involve changing manager or a combination of the above. Mr Hemming says that every fund launch also means a prospectus change, a change to your marketing material, to your website. It also means continuing the regulatory process, which involves company lawyers, product development people and external legal experts. “Two to three times a year is fine, particularly when we have to go through a wider range of regulators,” he says. And he adds that external managers can add a great deal of value in defining a particular mandate, “because they don’t want to be associated with failure, but with success”.

All the interviewees for this article are speakers at the ICBI Fund Forum, www.icbi-fundforum.com