No logo: brands lose out

Fund performance beats brand strength as the key sales factor for European retail funds, according to research by The Bank of New York. However, it emerges from the study that there is a slight discrepancy between third-party distributors’ perceptions and the empirical evidence. Qualitative results show that distributors across Europe believe both brand strength and investment performance plays an important role in the fund selection process, (even though the relative emphasis placed on brand has decreased from 55 per cent in 2004 to 49 per cent in 2005). Yet, in practice, the empirical analysis, which focuses on the largest 100 retail fund managers in Europe by assets under management, suggests investment performance is the real driver of sales success. Short-term (12 month) performance has the greatest impact on fund managers’ sales activity, while fund performance beyond the three-year period does not appear to have any effect. “Distributors believe that the 12 month figure is more likely to be repeated than longer term numbers but that is just a gut feeling, there is nothing to prove that,” says Daron Pearce, managing director and head of client management for fund managers at The Bank of New York. “However, it is getting easier and easier to switch between funds, the intense competition has led to a reduction in commissions, and it is now cheaper to move in between investment funds.” In practice, brand strength does not appear to be influential at all in generating sales. “We are not saying that advertising and good branding suddenly become worthless,” says Mr Pearce. “What we are looking at here is relative importance. The message is that advertising is not the key differentiator of how fund managers upgrade their business, but it is still a requirement to have a successful franchise.” Fidelity international, JP Morgan Asset Management and Merrill Lynch Group were the firms that scored the highest in terms of brand strength amongst distributors. “These firms combat the trend. Their brand seems to be so strong that they can afford to have a poor 12-month performance period without having a dramatic impact on new business, very few names can afford to do this,” adds Mr Pearce. The study results are consistent across asset classes and countries. French distributors lead the trend in attributing greater importance to fund performance rather than brand, having experienced the biggest shift in this direction, from 40 per cent in 2004 to 57 per cent in 2005. Spain is at the bottom of the ranking with 45 per cent of distributors placing importance on performance rather than brand. The figure has remained practically unchanged from last year. Trend setters “France is a highly sophisticated market, so it is not surprising to see them leading the trend,” explains Deborah Pretty, principal at Oxford Metrica, the consulting firm that worked on the study with research company Metrinomics. “In Spain, many of the fund management products are highly structured and fund performance itself might be less obvious as a driver.” In addition to brand and performance, other factors need to be taken into consideration when picking funds. “Performance is only the visible tip of the iceberg,” says Pierre Bonart, head of multi-management at HSBC’s French funds subsidiary, Louvre Gestion. “In addition to performance, the investment process is also very important.” Investment process includes the investment philosophy, the way the management team is organised, how they structure their decisions, the way they build their portfolios and monitor the risk, explains Mr Bonart. “If you pick a fund on the basis of recent performance, you may end up with the wrong selection,” he warns. “We don’t want to buy at the same time all the funds which have had the best recent performance and that will probably have been managed with the same style.” It is important, says Mr Bonart, to be able to diversify styles and identify where performance comes from. “A style not currently favourable could be the possible winner in the future. For example, we see a strong case for investing in growth-oriented equity funds, although they have underperformed in the past 6-8 months.” Mr Bonart says: “The brand means very little to me. Brand does not sell to the end clients. On the contrary, it may be a very strong marketing argument to say to your clients that you have found this little niche boutique, which is not accessible to everybody.”