While assets have fallen across most of the fund management and private banking world, the business of contracting out sub-advisory assets to third party managers has proved relatively immune to the financial crisis. In some quarters, the importance of this strategic decision to outsource non core assets to carefully selected, closely supervised managers, while leaving the relationship with retail and high net worth investors firmly in the hands of the originating banks and insurance companies, is actually gaining in importance.
“As a result of the crisis, people are increasingly focusing on the services they offer to their clients and the performance they can deliver,” says Alex Barry, head of wholesale sales at JPMorgan Asset Management. “This means we are seeing an increased interest in sub-advising.”
According to the results of PWM’s 6th annual sub-advisory survey, 84 per cent of European asset managers and distributors of investment products have not been affected at all by the current bear market when it comes to their decision to sub-advise (see figure 1). The sub-advisory solution is considered a long-term strategic decision aimed at meeting client’s long-term needs, rather than a short term fix to improve performance.
“The main driver to sub-advisory is the lack of in-house investment capabilities in areas that are outside our core competencies,” says Filip Kostic, senior partnership manager at SEB Wealth Management, the Nordic firm that delegates stewardship of €1.5bn from its €100bn total to external houses. “Market fluctuations have no impact on this.”
More than 90 per cent of PWM’s pan European panel of 50 major financial institutions employ external managers to run segregated mandates. Sub-advisers are employed, mainly on a white-label basis, to manage a wide range of asset classes totalling €73bn. Equity investments make up the lion’s share of sub-advised mandates in most European countries (see figure 2).
Although demand for delegating money to a handful of successful third party managers is holding firm, patterns of demand are changing. In the bull market, the desire to offer alpha-generating products in niche asset classes strongly contributed to the sub-advisory growth. The majority of respondents questioned for the most recent research, however, revealed that mandates they will award in the future will be in the traditional or alternative space, with global, emerging market and European equity expected to be particularly prominent (see figure 3).
But the full story is even more complex, with more interest in the sub-advisory space for cash management and fixed income, as clients move up the yield curve.
Many players in the industry are recording increased allocations to fixed income. The private banking arm of Fortis for instance, has moved from a 40 to 60 per cent bonds allocation in its balanced portfolio, and these needs of the wealth managers are being reflected in some of the mandates being won by third party fund houses.
“Three years ago there was a lot of demand for equities, particularly the most esoteric in the spectrum,” says JPMorgan’s Mr Barry. “In the last year we have seen a significant increase in sub-advising in the money market and fixed interest areas, but this is a reaction to the crisis. In the fixed income space, in particular, people are looking at going more global. Investors may allocate more of their portfolios to fixed income in the future, and there is awareness that they need to diversify the risk away.”
Compelling evidence of healthy activity in the sub-advisory space is indicated by the fact that 52 per cent of participants in the survey are planning to award new mandates during 2009-2010, although this is in some cases driven by the need to change current sub-advisers.
Across the board, European financial firms report that they decide to sub-advise in order to focus on their core competencies and to search for higher returns or alpha. Many large asset managers struggle to produce alpha across a wide range of products and need to compete with an increased availability of passive instruments such as exchange traded funds, even to supply clients with the market return, notes Christophe Girondel, managing director at Nordea Investment Funds.
The active-passive separation will increasingly drive fund houses to select and employ the best managers who can generate alpha, he says. The desire to provide enhanced offerings to clients, with the additional benefit that funds may be specifically tailored to clients’ needs, is also an important driver.
Sub-advisory is considered a competitive differentiator, even more so in a bear market. “Sometimes it is more difficult to be successful in a bear market and sub-advisory can generate an opportunity of differentiation with competitors if your results stand out,” says Furio Pietribiasi, managing director at Mediolanum Asset Management, an Italian firm that sub-advises around 75 per cent of its E11.6bn total assets under management to external managers. Mediolanum presents the classical sub-advisory model, in that it chooses institutional quality managers from around the world to run money for its retail and mass affluent Italian clientele.
