Steering a route between fund brands and their stars

Branding is becoming a strategic priority for asset managers. Facing decreasing margins, due to fee pressure driven by regulation, client demand and rise of passive instruments, asset management firms have started allocating an increasing level of marketing resources to strengthen their brand and boost awareness among investors and intermediaries. 

The emphasis is on developing a compelling value proposition, beyond products and performance, and around excellence of client service. Distribution has become a crucial area of competition for asset management firms, as the direct consumer market grows and centralisation of fund selectors increases. 

“Asset managers need to encapsulate brand values such as trust, transparency, stability and sustainability into a set of messages that advisers can easily identify, and are able to communicate to their end investors, or end investors in a direct channel are able to to relate to,” says Tony Gaughan, UK investment management and wealth sector leader at Deloitte.

Elusive concept

But brand may prove an elusive concept to measure. “Asset management is one of the only businesses where your clients get to sell you back the product they have bought. This is what makes the measure of brand in asset management extremely difficult,” says Diana Mackay, managing director, global distribution solutions at Broadridge. 

The ultimate test for a good brand is whether it is able to maintain its brand position, regardless of outflows, when the market cycle changes, and how quickly it can bounce back if it is dropped. A strong brand will maintain its credibility over time, also allowing managers to remain attractive long after their funds begin to underperform.

While for smaller boutiques it is easier to build a brand, often around the personality of the manager and product strategies, it is crucial for more generalist groups to develop propositions that fund buyers and their clients will perceive as authentic and want to connect with. 

Scale and popularity tend to give investors comfort. “BlackRock has that aura about it, and is often the first name of asset management firm that comes to mind,” adds Ms Mackay. 

This explains the world’s largest asset manager’s continued leadership position as ‘best brand’ in European third-party asset management. This is measured by several brand metrics, including unprompted brand awareness, according to the latest Broadridge research study (see table).

Popular products

These insights help us interpret the findings of PWM’s analysis of fund flows over the past 12 months, from our panel of selectors, including fund platforms acting as gatekeepers to banking and asset management groups managing more than $3.5tn of client assets.

While BlackRock has retained its title as the best selling fund promoter in Europe this year – according to Lipper Refinitiv data – for the first time in five years since PWM started the analysis, the firm has lost its top position in our champion’s league of leading brands, as measured by fund flows in our asset allocators’ portfolios (see table).

The heavyweight, with $6.8tn in client assets, has fallen into third place, ousted by M&G. The London-based fund house has advanced one position from 2018 and has gained traction among our fund selectors, investing in its global macro bond and global dividend strategy and, despite recent underperformance, its flagship optimal income fund.

The second position in our league table has been taken by Boston-headquartered Wellington. Its US equity research portfolio, a sector neutral strategy managed actively by industry analysts against the S&P 500 index, is the fund which has attracted most assets, out of the 170 different funds across 99 different fund houses which our panel has selected over the past 12 months (see table). 

While large brands, including Invesco, Fidelity, and JP Morgan continue to fare well, Hermes IM, the UK-based sustainable investment manager with less than $50bn in assets, and a new entry last year, further advanced in the ranking. Strong performance, rigour and consistency of its investment process, with ESG integration at its core, are the key reasons of the firm’s success in the wealth management space (see profile). 

Stars in their eyes?

Increasingly, asset managers place strong emphasis on the investment process and risk management, with a team approach at the centre. But ‘star’ managers continue to be appealing, despite recent episodes which have brought much disgrace to the industry. 

The Woodford Equity Income fund’s demise, following its gating this summer, is a clear demonstration of the risk inherent with the star manager culture. The once high-performing fund manager Neil Woodford, who set up his own firm aft er a quarter of century at Invesco Perpetual, left investors furious about their losses, and criticising the earnings of his business, which was ultimately closed. 

This story has deeply damaged the end client relationships for fund platforms that recommended investments in the fund, including PWM’s contributor Hargreaves Lansdown, the UK’s biggest consumer investment platform, which continued to recommend the fund to clients up until its suspension, and removed the Woodford fund from PWM’s selection only in June. 

Some commentators believe that the key risk around star managers is that pressure to perform, to meet raised client expectations, may lead them to change their investment approach. Once they have set up their own firms, they may need to pump money into illiquid stocks like Mr Woodford did, hoping to produce those high returns that can no longer be obtained in this low return environment. Others have different views.

“We think there is an edge when a fund manager goes off and sets up on their own, or works in a smaller outfit, because their desire to outperform is much more visible and important to them,” says Kelly Prior, investment manager, multi-manager solutions, BMO Global Asset Management. In smaller investment houses the fund manager’s interest is likely to be more aligned with that of clients, compared to bigger asset management firms, she says, adding that any fund manager must remain “true to themselves” in how they run money. 

Many small boutiques do not have a brand presence, a factor some multi-managers do not deem important when selecting managers. What is important is the fund managers’ track record acquired over the years, perhaps at larger firms, which often enables fund managers to gain investors’ funding when they decide to launch their own boutique.

Many small fund houses tend to run one strategy only, such as London-based Findlay Park Investment Management, which features in PWM’s top fund list with its American Smaller Companies fund. Findlay Park’s fund managers used to run a US smaller companies mandate at F&C, before setting up their own firm. 

“We have known the managers for 20 years, we backed them at launch and we have been with them ever since,” adds Ms Prior. 

Regardless of company size, due diligence must ensure that a fund manager works in an investment company which allows them to perform at the best of their abilities, she explains. M&G, for instance, the largest active manager for fixed income by AuM in the UK, allows fixed interest managers to have their own views and apply them to the strategy they run. 

Focusing on strengths

There is however a stronger emphasis on boutiques to clearly articulate their risk management and to have a robust infrastructure supporting them, which combined with a higher level of regulatory burden, may lead to increasing interest in multi-boutiques. 

These offer investors access to expertise, with each boutique having their own P&L responsibility, with the benefit that infrastructure and oversight are provided by the overall organisation. 

The multi-boutique business model may also help asset management firms better communicate their strengths and what makes them unique, and improve engagement with clients. 

This is the case at Natixis, whose affiliate smart ETF provider Ossiam entered into our top 10 brands for the first time this year. The French firm was selected for its Ossiam Shiller Barclays Cape US Sector Value ETF, which uses a quant process to mimic the S&P500, focusing on cheap valuations.

Something different

Lack of differentiation in the fund industry is seen as a key issue. “Asset managers should focus on their strengths and focus on clear messages, which they are not doing necessarily,” explains Ian Crispo, head of fund selection at Deutsche Bank Wealth Management. 

“Having a number of subsidiaries with their own brand and specialisation helps increase brand awareness.” However, other firms like BlackRock have a different approach and are “extremely successful too”, he adds. 

To build a good brand it is vital the asset management firm provides an excellent customer service, with timely, sophisticated reporting, supported by a responsive, efficient and knowledgeable distribution team. This has to offer the “right products at the right time, and be aware of our investment house views”, says Mr Crispo.

All other factors being equal, the preference is for a fund house with a popular brand at the German wealth manager. In many cases, however, Deutsche has been very successful at building brand awareness internally, with both private bankers and clients, especially in the case of niche firms offering strong products.

While the consistency and solidity of the investment process are fundamental, the portfolio manager plays a very important role in fund selection. “If a portfolio manager leaves, that’s immediately a yellow flag, and we will dig deeper and assess the situation, on a case by case basis.” 

Several star managers have blown up in the past, these types of events will continue in the future, and the Woodford story is unlikely to change the culture, he adds. 

“It is the job of fund selector teams to make sure we are not falling into those traps,” says Mr Crispo.

Asked what new measures have been taken to improve due diligence, and avoid funds such as the one managed by Mr Woodford slip through the net, Hargreaves Lansdown declined to comment.

“Brand or notoriety is not an influential factor in fund selection”, and both large, well-known fund houses and smaller firms feature in the fund platform’s preferred list, explains Emma Wall, head of investment analysis at Hargreaves Lansdown.

Due diligence on small boutiques follows the same steps applied to large brands, and includes “strict quantitative screens, which are bespoke, and qualitative process”, she adds. 

Other fund selectors believe the recent story is going to mean the death knell for star managers. “The Woodford story is going to accelerate the process towards the end of the star manager culture. The one-man show is something from the past,” states Bernard Aybran CIO for multi-manager portfolios and funds of funds at Invesco. 

“With mega fund houses like BlackRock, Amundi, Vanguard or State Street, most of us are unable to name any fund managers, because we invest in the quality of the process, the quality of risk control, and the quality of trading.”

Value may be found in fund managers who launch their own boutiques, but it is important to make sure that within the firm there is “a system of checks and balances”, so that when “bold” investment decisions are taken, as is often the case in boutiques, they can be properly assessed from a risk perspective, adds Mr Aybran.

Investing in bigger firms makes access to information easier, as they produce reports on a regular basis, and enable investors to slice and dice fund performance and better understand the fund exposure to different factors. 

Investment management firms must be able to provide information about pay incentives, and if the pay structure is well conceived, in compliance with European regulation, interests of the fund managers and clients are aligned
in big firms too, although the impact is more direct on smaller firms, he states. 

Fund selectors should also pay even more attention when carrying out their due diligence on popular brands, with a big advertising budget. “We professional investors have to go well beyond the ad campaign, which make things look great and simple, and dig into the dark side of the brand,” says Mr Aybran. 

Past lawsuits and fines are indicative of the overall culture of the firm, and while they are not necessarily “a show stopper”, as most of the big fund houses have been fined at some point, it is necessary to understand the reason of these fines, and whether lessons have been learned.  

Reality check

There are very few real star managers, who have superior abilities in managing portfolios believes Silvia Tenconi, fund analyst and portfolio manager at Eurizon Capital, multimanager investments and unit linked team, at the asset management division of Intesa Sanpaolo, the largest Italian banking group. 

“The other side of the coin is that when a star manager leaves, we immediately sell the fund, because we know it would be impossible to replace a ‘superman’ with another one soon after.” A team approach, in this respect, offers more comfort. 

Along the same lines, investing in a fund managed by a small asset management firm is riskier, in case of key defections. This way of thinking leads the Italian multi-management team to invest in large or mid-sized firms, rarely selecting asset firms managing less than €50bn ($55bn). Fund selection always starts from a bottom up analysis of the individual fund, but is supported by a “reality check” on the solidity of the firm, including its risk management capabilities and technology infrastructure. 

“If an asset management firm is very good at managing risk for US equity, it is unlikely to be very bad on European bonds,” says Ms Tenconi.

A long term game

Good product performance is crucial in building a good brand, but how underperformance is perceived depends on the distribution channel. 

Within the institutional space, assets tend to be stickier, as tolerance for underperformance tends to be higher, provided the asset manager can explain the strategy, its successes and potential failures, how the team is built and how decisions are made. 

But in the retail space, clients inevitably go for the best performers of the past couple of years, believes Cara Williams, global leader, financial intermediaries and family offices, and global wealth leader at Mercer.

And brand popularity is important. “If you don’t spend your time living and breathing investments, you go with a brand you know, which you may have seen inside of a bus, or you are comfortable with, and give you confidence,” she says.

Fund platforms may well lean towards bigger names. If they move towards lesser known brands, they have to feel confident they can communicate and explain them to clients.

In today’s environment, where there is so much emphasis on costs, rather than resilience of returns, large scale asset management firms have the additional bonus of being able to offer very competitive pricing to platforms. 

They expect to make big sales from their products placed in distributors’ preferred lists, and display large sales forces to support advisers. 

Smaller players with fewer resources tend to stay in the institutional space, and can be successful if they have “a good story”, working with intermediaries, investment consultants or in partnership with a few banks. 

The repeatability of the investment process is a key consideration in fund selection, and fund managers should not ask for forgiveness if they have underperformed in a market where they are not expected to perform, says Kelly Prior, investment manager, multi-manager solutions, at BMO Global Asset Management. 

Fund management houses, as well as advisers, need to better educate clients about the value of investing for the long term. This is particularly important today, after such a long period of time with lack of volatility. 

“Investing is a long term game, volatility is normal and so are drawdowns,” she says. “You need patience.”