Finding the formula for brand success

Macro-economic uncertainty and volatile markets have further focused the work of private banks and other product selectors. While performance and process remain important when the choice is being made, one particular variable – that of brand – is becoming the paramount factor which propels popular fund firms into the champions league for investment strategies. 

“In extremely choppy markets, when confidence is low, investors seek the comfort and perceived stability of larger familiar names,” confirms Diana Mackay, CEO of fund market analysis and research company MackayWilliams. 

Over the past eight months to the end of February 2016, in a period of significant market turmoil, big fund houses have further increased their dominance of European fund flows of PWM’s panel of selectors, acting as gatekeepers to banking and asset management groups managing more than €2.7tn ($3.08tn) of client assets.

Among those firms which have gained most are Jupiter and JP Morgan Asset Management rising to second and third position respectively in our champions league of leading brands (see Fig 1), with BlackRock retaining its number one slot.

However, most of the top 10 brands – with the notable exception of Marshall Wace, our fastest rising fund firm, fuelled by a huge renewed interest in alternative investments – attracted a lower percentage of total assets, as allocation was more evenly spread, across the 70 plus brands PWM fund selectors invested in. Wellington Management and Invesco Perpetual featured in the top 10 as new entries, while M&G lost the most positions, mainly due to the deselection of its Optimal Income Fund (for an in-depth analysis see article on pwmnet).

PWM’s asset allocators’ exposure to hedge funds surged from 14 to 18 per cent of total assets, as banks strived to diversify portfolios in the current volatile environment. The Marshall Wace fund – which ranked number one in our champions league of funds (see Fig 2) attracted inflows from AA Advisors, Aviva Investors and FundQuest. But others were more reluctant to take this route. Invesco’s CIO of multi-management Bernard Aybran called the fund “a black box”, albeit one with “a beautiful track record”. 

The rest of PWM’s top 10 funds are actively managed equity funds investing in Europe, Japan, US and globally. European equities (ex UK) have attracted higher inflows, accounting on average for more than 35 per cent of all clients’ equity portfolios, compared to 31 per cent in the first half of 2015. Allocation to US equities slumped from 27 to 23 per cent of total equity portfolios, as high valuations and an ageing earning cycle started raising concerns. 

Once asset allocation is decided, based on fundamentals/macro-economic outlook, valuations and market sentiment, performance is only one of the seven criteria used by selectors such as Aviva in fund selection. These criteria are what the firm addresses as the “seven Ps”: parent, product, people, philosophy, process, performance and positioning, all feeding into brand recognition.

According to the recent Fund Buyer Focus, conducted by MackayWilliams, houses perceived as ‘safe’ gained in popularity as volatility increased, with brand leader BlackRock pulling further away from rivals. 

“From the middle of last year onwards, a lot of uncertainty and nervousness built up in the market and BlackRock became a default position,” reveals Ms Mackay. 

Around 1000 of Europe’s most significant fund selectors in 10 key markets, accounting for €2.2tn ($2.5tn) of third-party assets, were asked to name their top three suppliers on the basis of ten brand drivers, and their answers contributed to produce a “total brand score”.

BlackRock scored number one for “appealing investment strategy”, thanks to its broad range of products, innovation, expertise and solidity. Moreover, it ranked number one across all distribution channels, including discretionary and advisory businesses of private banks (see Fig 3).

In the retail space, name recognition is very powerful and individuals choosing funds themselves tend to prefer bigger brands. But the same mechanism applies in private banking. Portfolio managers are questioned less by clients if they select reputable houses which the end investor knows and recognises, says Ms Mackay.

Outside the top 10, passive providers scored well, supported by pricing pressures and regulatory changes, according to the study, with iShares and Vanguard having the biggest impact on cross-border rankings. Vanguard was the fastest riser, improving its ranking by 13 places over the past year. 

BlackRock once again posted leading net sales figures for Europe, ahead of Deutsche Bank, JP Morgan and Goldman Sachs, according to Thomson Reuters Lipper (see Fig 4). 

Large asset management firms have built up their brands, raising investor awareness, mainly through a huge marketing spend, so that they now feature very prominently in investors’ minds, says Amin Rajan, CEO at asset management consultancy Create-Research. 

Unlike small “one trick pony” firms, large houses have capabilities “across the water fronts” and in the multi-asset space in particular. “Multi-asset class capabilities put these large firms at a major advantage in today’s unpredictable environment, where it has become increasingly difficult for active managers to beat the markets,” he says. 

Also, large brands can afford competitive fee structures and many have a significant passive business, which is a bonus. “Indexation is the most important trend in asset management today. Its durability, however, is anybody’s guess,” warns Mr Rajan.

Private banks are carrying out a rationalisation process in order to optimise their due diligence efforts, notes Invesco’s Mr Aybran. This enables them to acquire better knowledge of partners and products and, in some cases, negotiate better fees too. 

This means that even poorer quality products can make it onto the buy-list, particularly for retail platforms, purely because they are attached to a prestigious brand name. 

“Even if one specific fund is not that interesting, the fact that it is part of a bigger umbrella with a brilliant name can help a lot,” says Mr Aybran.

This domination of the industry by mega-brands means that to add real value, private banks must go “off-piste” and look for managers who are not so well known, believes Create’s Mr Rajan. “There are quite a lot of niche managers who are delivering very good performance, it’s just that they don’t advertise it. Also, many of their strategies are not scalable.”

In the private banking space what really counts is the trust that clients have in the bank’s selection capabilities and process, more than the individual brand of the fund, says Jörg Grossmann, head of global fund selection and product strategy at Credit Suisse, which advises SF150bn ($157bn) of fund assets. 

“It is the quality of the product that matters, and offering a smaller, less-known fund management company can even be beneficial, as that would really demonstrate the added value of advice and fund selection,” says Mr Grossmann.

Boutiques need to have an edge and be able to outperform the benchmark and peer group, he says. They can be found both in niche asset classes, such as a specialist segment of the fixed income or equity universe, or in core markets. Also, they need to have risk management systems in place and proper infrastructure to meet compliance requirements.

But importantly, small players need to have a minimum size of managed assets to be considered credible partners, which is around $100m, says Mr Grossmann.

“Boutiques also need distribution power, to make their fund available for sales registration in all the markets required by the bank, as well as providing proper after sales support,” he says. 

Boutiques will always play a key role in portfolios, as they enable fund selectors and their clients to differentiate themselves from the competition, says Stéphane Pouchoulin, CEO of FundQuest Advisor, the selection arm of French funds house BNP Paribas Investment Partners. The firm offers buy lists, model portfolios and fund management delegation services to institutional clients, private banks and family offices with a total of Ä50bn of assets under advisory, of which around €7.5bn is on behalf of clients external to the BNP Paribas Group.

“Selecting smaller asset managers is important, as boutiques can bring innovation, be it in the investment process, or in focusing on specific themes or niche markets, which are not on big companies’ radar,” says Mr Pouchoulin, believing research studies may be biased towards large brands, as fund selectors may want to keep these hidden gems for themselves. 

“Sometimes innovative products launched by smaller asset managers will prompt larger managers to follow suit.”

What is rewarding is identifying boutiques at a very early stage, supporting them over the years while they enhance their operational set up, until they reach the required standard to be included in buy lists.

The new regulatory environment may increase the spotlight on small firms and potentially help them play a bigger role. The ban on inducements expected to be imposed by the upcoming MiFid II directive is likely to drive asset managers’ revenues downwards. Also, costs will increase, as asset managers will enhance their compliance, IT and operational infrastructure, and improve marketing strategy to ensure funds reach the right target.

“Asset managers that are not already preparing for MiFid II will really struggle going forward,” says Mr Pouchoulin.

“The barrier to entry into the asset management industry is set to rise and it will be more difficult for smaller players to penetrate the market.” 

This means boutiques may want to find a way into new markets through fund delegation. Sub-advisory specialists are already successfully used by asset managers to offer clients a capability they do not have in-house. For example, BNP Paribas Investment Partners outsources its US mid cap fund to US boutique Fairpointe Capital. 

Alternatively, boutiques may become the target of large asset managers, which may want to integrate them completely, potentially risking the disappearance of the much sought-after entrepreneurial culture, or decide to let them operate independently, while still retaining management of risk and compliance. Otherwise, they may just want to buy a stake in them. 

Another scenario is the emergence of new types of organisations, to which small boutiques can outsource their IT functions in order to be MiFid II compliant. 

“There will always be a place for boutiques, as long as they can be innovative and offer something different to the market,” says Ms MacKay. 

“The dangerous place to be is if you are a mid-sized group, or even a boutique without a differentiated product base.”  

Fee compression

Shocking results about long-term underperformance of actively managed funds call into question the added value of stockpicking, particularly in today’s unpredictable markets. 

Over one year, a significant share of active funds can beat their indices, but few consistently do over the longer term. In the five and 10 year periods ending December 31, 2015, around 81 per cent and 86 per cent of European active equity funds, denominated in euro, failed to beat their benchmark respectively, according to S&P’s analysis of the performance, after fees, of 25,000 active funds. Within these European-domiciled funds, almost all US equity funds (98.9 per cent), emerging market funds (97 per cent) and global equity funds (97.8 per cent) underperformed relevant indices over 10 years. 

The active asset managers’ struggle has contributed to record ETF sales. Net sales of European ETFs – controlling almost €450bn in assets – grew 51 per cent to €71bn in 2015, while sales of actively managed funds – which in total account for $8tn – dropped 14 per cent to €277bn, according to research company Lipper. Underperformance of active funds has also contributed to drive fees down.

“There is a lot of fee compression going on in the industry, and while this trend is much more visible in passive funds – where reduced fees are widely publicised – active asset managers don’t like to talk about it, disguising the reductions as discounts,” says Amin Rajan at Create-Research. 

“But reductions may be genuine, simply because active management has not really delivered the outperformance that customers had been promised.”

Channel consolidation resulting in a more aggressive posturing by intermediaries, coupled with regulatory measures bringing increased transparency, are key drivers in fee reduction, according to Boston Consulting Group. 

Fees for active equity funds have fallen 4 per cent for retail investors between 2012 and 2014, according to the consultancy firm. But competition from passive managers is intense. Fees on passive equity funds for retail investors dropped 20 per cent over the same period, as operating costs fell. 

Global asset managers were not immune to this trend. JP Morgan Asset Management, which manages $1.7tn,  last year significantly changed the structure of its operating and administration costs on its Luxembourg-domiciled SICAV funds, “to be able to share with clients the benefits of a larger size,” explains Massimo Greco, head of European funds at the firm.  “As a result, there has been a fee reduction in the vast majority of our funds. We believe that clients should benefit from increased scale in our business,” he says.

However, adds Mr Greco, “active asset management relies on talent, which does not come round very easily, and it requires substantial investments in internal research.” Unlike many of its competitors, which have made big strides in the passive or ETF business, the global fund house plans to stick to active management only. 

Indeed, those big brand names running active funds hope to make further gains in the champions league, if current market uncertainty prevails, even if passive funds have recently grown in popularity.

“We are expecting to see an increase in market volatility,” says Rob Burdett, co-head of F&C multi-manager solutions at BMO Global Asset Management Emea. “This environment will be opportune for active managers, as stock selection becomes more important during testing times.”