Sub-advisory struggle

Banif, Santander’s fully-owned private banking group, already had experience in offering third-party funds to its high-net-worth clients, long before spinning off its Allfunds platform five years ago.

But the sub-advisory business in Spain has not been so quick to develop. Currently there is a strong debate in the market about whether pure sub-advisory or use of third-party funds is the most efficient way forward for private investors. Banif pioneered the delegation of selected mandates to third parties, in areas which it does not have investment expertise. Some within the bank say that this is a more efficient way of gaining access to external, specialist strategies. But delegation takes time, and the once cumbersome use of third-party funds is becoming more efficient with the introduction of new technology.

José Manuel Garcia del Sola, investment and products area general manager at Banif, says: “We have been offering open architecture for the last nine years, but it is only in the last three to four years that the business has really taken off. Now our open architecture is more complete than it was a few years ago, when we would employ only a few external asset managers.”

Through the Allfunds platform, the Spanish private bank, which has ?26.8bn in assets under management, is able to offer its private clientele a range of 6000 funds, selected from 130 asset managers.

Banif currently invests ?2.4bn in third-party funds, which represents 30 per cent of the bank’s total mutual funds volume. The Spanish institution has also awarded sub-advisory equity mandates to ABN Amro, Goldman Sachs, Invesco, JPMorgan Fleming and Société Générale, for a total value of ?340m.

A change in the 2003 national legislation was the key driver in Banif’s decision to delegate asset management, says Mr Garcia del Sola. Spanish investors, who until then had to pay a fee when switching their investments from one fund to another, were finally allowed to benefit from the wide range of funds available without incurring any additional cost. This stimulated clients demand for open architecture and encouraged Banif to create its current portfolio of mutual funds.

In Spain, from an operational point of view, delegating mandates is easier than selling third-party funds, explains Mr Garcia del Sola. “When you buy or sell a third-party mutual fund, the fund has to settle in the third-party manager’s market and that might take up to three weeks. This delay affects the liquidity value of the fund and its expected profits. In addition, during that time, investor’s money is simply not invested,” he says. “Instead, when you delegate the management of a fund to a sub-adviser, the fund gets registered in Spain and, as for all domestic funds, the fund settles in one day.”

However, things have improved greatly since 2003. “A lot of international managers have penetrated the Spanish market and have developed better technological systems, so that we can switch easily from a fund to another,” explains Delfina Perez, head of strategy at Banif. “In the future, we will buy more third-party funds rather than delegate on a sub-advisory basis,” she says. With the exception of the domestic market products, managed by Santander AM, Banif employs external managers to manage all the other asset classes.

“In the future, we will buy more third-party funds rather than delegate on a sub-advisory basis” - Delfina Perez, Banif

The new regulation on hedge funds, expected to be approved by the Comisión National del Mercado de Valores (CNMV) within the next couple of months, will allow banks to sell funds of hedge funds to retail clients. This is expected to open new opportunities for the sub-advisory business in Spain.

However, Ms Perez is not so convinced of the benefits. “Hedge funds will only be an additional asset class in which it will be possible to offer open architecture, which can already be employed in all the other investment instruments. The new regulation’s impact is not going to be so big, as the exposure to hedge funds generally recommended to retail clients (although not ours) will be very small, maybe 2 per cent of a client’s portfolio”.

Banif has planned to launch three types of funds of hedge funds within the next two or three months, depending on legislation. The funds of hedge funds will have three different profiles of performance and volatility, ranging from 4 per cent to more than 10 per cent for performance and less than two per cent to less than 9 per cent for volatility.

ET

According to an article recently published by the leading national newspaper Expansión, the third-party funds Spanish market is worth, at the end of 2005, ?33.6bn. This represents around 13 per cent of the total domestic mutual fund market, estimated to amount to ?252bn.

“When you delegate to a sub-adviser, the fund gets registered in Spain and settles in one day” - José Manuel Garcia del Sola, Banif