Sub-advisory roundtable, July 2010, London, UK. Participants:
- Ian Aylward, Head of Alternatives Research, Skandia Investment Management
- Katia Coudray Cornu, Head of Advisory Desk & Multi Management, UBP
- Guy Davies, Director, Portfolio Management, FundQuest
- Klaus Glaser, Head of Product Management, Raiffeisen Capital Management
- Alan Mudie, CEO, Oyster Funds, SYZ & Co
- Furio Pietribiasi, Managing Director, Mediolanum Asset Management
- Oscar Vermeulen, Director, Altis Investment Management
- Marius Wuergler, Managing Director, Head of Switzerland Distribution, Goldman Sachs Asset Management
- Panel moderator: Elisa Trovato, Deputy Editor, Professional Wealth Management
Elisa Trovato: Welcome to PWM’s seventh annual sub-advisory roundtable. I would like to focus our discussion on risk management, impact of costs on the decision to sub-advise and opportunities in the Ucits III hedge funds space.
How important are costs in the decision to sub-advise? Does sub-advising assets mean having to relinquish part of profit margins?
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Klaus Glaser: Outsourcing is to some extent very efficient if you do not have the management capacity for a specific asset class, but it does increase cost, as you have to have your own in-house shadow accounting and risk management, for example.
Findings from a recent US study show the average management fee for equity funds has decreased from 200 to 100 basis points over the last 10 years. The reduction was even more extreme for bond funds. Competition is placing a burden on fees and cost cutting is the name of the game. This encourages in-sourcing, if you have in-house capacities which can be employed.
Sub-advisory is not the core business at Raiffeisen, as we use our own in-house management to a very high degree. We have outsourced some asset classes in the past and have in-sourced some equity and all fixed income funds during 2008/2009. In the short-term, when you in-source, you save on external management fees. In the long-term, however, it is not so clear, as you have to spend on in-house management capabilities, staff and possibly risk management.
If you do have internal capacity or qualified staff in a certain asset class, I would roughly estimate you could save half of the external management fees when you in-source.
Alan Mudie: We operate using both group expertise and external sub-advisors. The way our Oyster fund family is set up enables us to be agnostic when making the choice. For example, when we look at our P&L analytically, Oyster pays out management fees to the asset management arm of Syz & Co or to external sub-advisers on the same basis. Our profitability is based on our ability to control costs and to maximise the distribution of the funds. By thinking about it in this way, we remove from the equation any incentive to prefer internal over external managers. This enables us to manage in-house only those strategies where we have real expertise. In one case, two years ago we brought a global equity fund in-house that had previously been sub-advised, but that was because we had identified and recruited a very talented manager and not because we wanted to reduce the cost related to that particular product.
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Katia Courdray Cornu: Over 80 per cent of our equity funds assets of our Luxembourg Sicav Ubam are managed externally. The rationale for outsourcing is looking for the best talents. In some regions or asset classes it is very difficult to set up internal teams with strong capabilities, track record and knowledge. This is why we sub-advised US equities and we set up a multi-manager Bric fund, for example. A sub-advisory agreement has to be pragmatic. It does not make any sense to delegate to a sub-advisor with a European distribution network. The decision making about sub-advising at UBP is function of a set of opportunity costs. If we have good opportunities to in-source we will, recently for example we hired a talented Turkish equities manager and we set up a fund for him.
Sharing the management fee with a sub-advisor can be costly and even more expensive than having your own team. in particular if the product is successful in terms of size. But on the other side, if the product is successful it is also due to the good returns. But when you start collaborating with a sub-advisor, you are sharing the business risk. it is probably a cost effective solution for both parties. Sub-advising profitability is all about size, breaking point and success.
