Spain ready to embrace third way

In Spain, where the financial crisis has strongly driven traditionally risk-averse Spanish investors to seek a safe heaven mainly in bank deposits, capital guaranteed products, short-term money market and balanced products largely dominate the domestic mutual fund industry, which has E162bn in total assets. Multi-managers, who employ riskier, alpha-generating strategies targeting high net worth investors, have been heavily affected. “The cake is smaller and multi-management is a smaller piece of it. This is true across the whole of Europe but it is very marked in Spain; investments in risky products were seriously affected by the market downturn,” says Myriam Luque, the newly appointed chief of Quality Funds, the open architecture platform of BBVA Asset Management. In 2007, the platform used to oversee E24bn but today its assets amount to under E10bn. However, Ms Luque, who also works closely with BBVA private bank, looks with optimism at the future of third-party fund distribution in the country. “Investors will need time to recover but I definitely think there is an opportunity for open architecture,” she says. “After the crisis, asset managers are looking internally at their core competencies and strengths and considering what funds they should be able to offer to meet the demand of investors, who will ask for either more actively managed solutions or ETFs [exchange traded funds].” Currently, Quality Funds selects existing funds managed by third-party managers but the concept of sub-advisory is gaining traction. “In the future we may decide to award mandates in several strategies, especially when there is strong demand for a specific product, as a mandate allows closer collaboration with an asset manager,” she says. Like many fund selectors in the industry, the multi-management division has strengthened its due diligence following the financial crisis, placing particular focus on operational risk management. There will be much more emphasis on the due diligence of individual funds. “In the past, we would do our due diligence on the manager and reach a distribution agreement for the firm’s whole umbrella of funds or Sicav, often including hundreds of funds. These were all then readily available to clients.” Moving away from this rebate-driven business, in the future only the funds that are internally rated, and have gone through a rigorous due diligence process, will be recommended to clients, either off-the-shelf or in funds of funds. Clients wanting to invest in other funds can do so, but will need to be aware that the product has not undergone the due diligence process. Wider product range The Spanish firm is in the middle of reviewing its relationships with third-party providers. The 60 managers it currently works with will probably decrease to 25, although the product range will broaden. Ten more managers will cover the total return Ucits III alternative investment space. “We are now focusing on these kinds of strategies wrapped in Ucits III structures because we think they will strongly develop,” she says. Following BBVA’s decision to shut down its alternative investment operations in 2009, the multi-management division currently does provide analysis on hedge funds, although it does not build BBVA branded multi-manager products investing in hedge funds. Due diligence is also being carried out on three main ETF providers, which complement BBVA’s growing internal capabilities in ETFs. The plan is to offer around 80 of these passive instruments which will add to the approximately 320 actively managed funds across all asset classes that the division will monitor and recommend. The selection of third-party products is mainly focused on riskier asset classes and geographical areas such as emerging markets, Asia, Eastern Europe, Bric (Brasil, Russia, India and China) strategies, or commodities, where the Spanish asset manager, which runs more than E130bn globally, does not have internal expertise. In global equities, external capabilities are combined with internal expertise to implement global asset allocation, explains Ms Luque.