Sub-advisory opens door to niche managers and bespoke products

Fund selectors are often looking for niche asset managers, particularly boutiques, which do not typically have access to European distribution channels.

An efficient way of opening the door to these firms is through fund management delegation, also known as sub-advisory. This tried and tested system also enables asset managers to overcome any fund size or ownership ratio constraints, thanks to the possibility of controlling underlying holdings, explains Stéphane Corsaletti, CEO at ABN Amro Investment Solutions (AA IS), the multi-management centre of expertise of the ABN Amro Group.

The Paris-based asset manager, which has €35bn ($37bn) in managed and advised assets – including €9bn advised through its subsidiary ABN Amro Advisors – launched its first sub-advised solution in 2007. The main aim was to overcome the difficulty of finding large enough third-party funds to accommodate clients’ assets from across the business, without breaching the bank’s maximum ownership ratio in a single product.

 “Ten years ago, due to the size of the open architecture at ABN Amro, we were forced only to invest in products with more than €1bn in assets,” Mr Corsaletti recalls, referring to the need to place huge tranches of client assets directly into reputable funds. “But as alpha can be negatively correlated to the size of the investment vehicle, this was leading us to an impasse.”

By then, open architecture had already become a commodity, with access to a large number of big brand managers no longer a differentiating factor for banks. 

Higher transparency and exclusivity of distribution have overtaken larger menu size as key competitive advantages. Also, the possibility of creating bespoke products enables the bank to differentiate its product offerings to those of rivals, explains Mr Corsaletti.

MIX and MATCH

Today, the firm’s Luxembourg sub-advised platform has expanded to oversee €15bn in assets, including 35 different mandates, mainly single manager funds. These vehicles are then mixed into multi-managed or multi-asset solutions, or used as a single manager fund.

ABN Amro is by far its biggest client, although investment solutions are also offered to third-parties. “There are not so many firms that offer primarily open architecture solutions. We are an asset management firm of a new generation,” boasts Mr Corsaletti. 

This approach allows investing into newly established boutiques, and providing seed capital, the key factor being the track record of the manager or team, rather than the track record of the fund, unlike other standard open architecture frameworks.

When Howard Gleicher, who had founded Metropolitan West Capital Management in the US, a sub-adviser for Natixis GAM, left the firm and set up Aristotle Capital Management, AA IS decided to give Aristotle a mandate to run a US equity fund, having invested with the manager in his previous role. 

Another US-based boutique, Pzena Investment Management, manages a European equity mandate. “When we discovered them in New York a few years ago, the team was managing an equity fund, which was performing extremely well. We asked them to extract the European part of their portfolio to create that vehicle for us,” explains Mr Corsalleti.

However, large brands do also have their place on the platform. “In some asset classes such as fixed income, it is certainly more effective to give a mandate to a large player,” he says. Fixed income requires more resources than equity and is more technical, needing research capabilities and infrastructure, so the preference here is for firms such as BlackRock and Schroders. 

With BlackRock, AA IS also recently launched an Asia Pacific Ex-Japan equity mandate, with the aim of expanding its asset coverage outside Europe and the US.

As for alternatives, one of the funds selected is MW TOPS, now “a reference point in the long-short equity space”, with the objective of complementing “portfolio allocation with a consistent absolute return strategy through a low or market neutral exposure”. 

Its systematic approach to stock selection appeals to a few other fund selectors among PWM’s panel members, and the vehicle was the second most selected fund over the past 12 months across the panel. 

Others on our panel carefully avoid it though, because they are not “big fans of the quantitative approach” or because they consider it “a black box, although with a great performance”.

AA IS is also launching a long- short equity mandate with Aventicum, an entrepreneurial boutique, whose team members have worked together since 2002, when they started the European long-short product at Pioneer Alternative Investments. 

“Hedge funds are the best example of how capabilities can only work well in a more agile environment and operate perfectly fine with a limited set of resources,” says Mr Corsaletti.