The trend towards decoupling between manufacturing and distribution of investments has consistently driven sub-advisory activity in Europe since the turn of the century. European banks and insurance companies have increasingly identified their core business as servicing clients, rather than managing assets, explains Lloyd Reynolds, managing director at Goldman Sachs Asset Management (GSAM).
The tendency of these financial institutions, is to keep their sub-advisers at arm’s length and invisible to the end consumer. “Understandably, the distributor will nearly always want to keep control of both the client interface and brand experience,” says Mr Reynolds.
Moreover, the increasing popularity of cross-border funds allowed by European Ucits regulation often leads distributors to view sub-advisers, who may distribute investment products in the same markets, as rivals or competitors. This explains why many sub-advisory relationships are not widely disclosed, believes Mr Reynolds.
In Asia, however, the numerous and strong local and pan-regional players certainly do not fear competition from foreign asset managers in their domestic markets. This marks a huge difference to the European experience.
NEW MARKETS, NEW PRODUCTS
“In many ways, Asia is leapfrogging Europe and has the opportunity to go ahead of Europe in terms of its sub-advisory relationships,” says Mr Reynolds, explaining that the most demand for sub-advisory is in those markets where it is still difficult to sell cross-border funds.
Sub-advisory drivers differ greatly between Europe and Asia. In the old continent, asset managers or distributors often sub-advise specific products to enhance or complete their product range, with the aim of at least retaining their assets.
They are likely to employ a sub-adviser to manage an existing pool of assets, which may be already run in-house or by another sub-adviser, whom they may want to replace.
In Asia, the sub-advisory experience is much more about asset gathering; it is about bringing new products to market and accessing new segments, such as the rapidly growing high net worth space, into which sub-advisers can bring their experience. In some Asian countries, firms will specifically employ a sub-adviser to build up their asset management business.
THE FULL SERVICE EXPERIENCE
This different approach to sub-advisory has a strong impact on the service that distributors require from their asset managers. “In Asia, firms want the full service, they want the expertise, the knowledge, the educational capability. There is much more partnership in Asia than in Europe,” says Mr Reynolds, who notices that recently there have been signs of sub-advisory evolving in this direction in Europe too.
“In Asia, distributors really value the sub-advisers that liaise with their adviser networks and offer their support through educational programmes,” he says. They also appreciate help and support in the provision of the marketing material that goes to the end consumer.
“This is why any bank, any insurer looking to sub-advise in Asia wants to know that the asset manager is committed to the region and that it has local people and local presence.”
The acquisition of a South Korean asset management firm and of an Indian asset management licence further boosted GSAM’s widespread presence in the region. The international fund house, which has $690bn (€495bn) in assets under management globally, employs 100 people, across both distribution and portfolio management, in Asia ex-Japan.
Having a strong institutional background is a key strength for GSAM in the sub-advisory business, Mr Reynolds believes. “The due diligence that asset managers or distributors employ when appointing a sub-adviser is the same employed in any institutional mandate,” he says.
Product quality, good performance is paramount but not enough, says Mr Reynolds. “In sub-advisory relationships, you have got to have the ability to run the mandate the way the client wants it to be run; you need transparency on the sources of return and to be able to explain them to your client; you must have really robust risk management systems to enable the performance to be repeatable and explainable,” he emphasises.
GSAM has been making large inroads in Europe in recent years, particularly in the Italian and German markets, where it has gained considerable experience in selling funds to distribution networks. Being a big player in the US retail market, it has also a long track record of running educational tools and programmes for its US distributors, which are then made suitable for its European and Asian distributors, maintains Mr Reynolds.
REDUCING FIXED COSTS
In Europe, asset managers or insurers view sub-advisory as a valid solution to reduce fixed costs. During 2003, sub-advisory activity was largely driven by the fact that many banks - which had built their own asset management capabilities in-house in the bull market of the years before - were forced to shut down their manufacturing arm or reduce their asset management capabilities in the subsequent bear market.
|
