In today’s dramatically re-shaped landscape, domestic managers have been unable or unwilling to quickly develop technologically-led, cheap indexing strategies clients require, preferring to concentrate on their own specialities. So Californian BGI has quickly overtaken ABN Amro and ING in the Dutch institutional market, while Schroders, once in deadly competition for UK “balanced” business with Gartmore, is not too disappointed when uneconomic briefs are terminated.
Similarly, in France, cut-throat rivals BNP Paribas and Société Générale apparently battle for institutional business, such as the control of mandates in the €29bn French Pensions Reserve Fund (FRR), whereas in reality they may not be trying that hard.
According to Continental European asset management consultant, Ray Soudah, trophy clients such as the FRR can be more of a burden than a prize. “We’re talking 10 to 20 basis points for mandates. You are paid this fee for the honour of being an adviser,” he says.
For a group in the UBS league, such schemes provide good bulk business, give added kudos and access to information. For medium-sized French groups, it is not so good. “Very large groups do it for the prestige, but it is not profitable in isolation,” confirms Mr Soudah.
When Société Générale’s US asset management arm, TCW, was recently dropped from a €330m mid-cap equities mandate by the FRR, less than half way through a five-year brief, there were almost sighs of relief in SG headquarters in La Défense.
While the Paris fund cited “unsatisfactory” investment performance, the decision to terminate SGAM appears to be part of an ongoing story of a fragile relationship between the scheme and domestic French players.
Anglo-Saxon groups such as SSgA kicked up a stink, accusing the Gallic fundsters of French favouritism when mandates were first awarded back in 2003. Others including JPMorgan pulled back from mandates due to over-onerous requirements, including unrealistic benchmarks. In hindsight, this appears an inspired decision. Unfortunately for the French groups, it was not politically possible for them to do the same thing, with such a prestigious client.
But the FRR story is not a parochial issue and has much wider implications in terms of measuring opportunity cost and relative attractions of the institutional and retail distribution markets.
While SGAM was once very strong institutionally, it has since concentrated more efforts on building up its third-party distribution efforts across Europe and Asia. These attract much higher fees, although the cost of winning business can also be higher.
At SocGen’s Parisian sparring partner, BNP Paribas, Alain Papiasse, installed at the beginning of 2005 to oversee the bank’s asset gathering services in the more aggressive manner desired by the board, talks frankly about the position of institutional asset management in today’s Europe.
Recruited to keep an eagle eye on the bottom line, Mr Papiasse cannot hide the fact that margins in institutional asset management are much slimmer than other business lines under his watch. “But if you are not in contact with the institutional world, you lose competence in portfolio management, performance goes down and you run the risk that distributors want to move to a multi-manager system,” says Mr Papiasse. “There is a danger that technically, you are no longer a fund management house, but a fund selector.”
Mr Papiasse believes the best institutional ideas can then be turned into mutual funds, where they command higher fees. “These more juicy products can then continue to help us finance development in the institutional world, which is less profitable, but from which we derive technology and expertise, which then helps us derive even more revenue from distribution.”
This is easy for the Continental groups to say, claims consultant Mr Soudah. The likes of BNP and SG are only able to make big bucks from distribution because they have captive bank branch networks through which to pump their latest products. The economics of distribution and manufacturing are totally entwined in most continental groups, says Mr Soudah.
Barclays Global Investors ended up in a different place, due to the group’s history. This institutional house also tried to head down the distribution route at the turn of the millennium, but found its efforts unrewarded. Its thinking was too far from the retail mentality to get any real penetration of distribution houses. But its business strategists also realised that in order to spin-off mass-market investment products from its undoubted institutional expertise in passive management, mutual funds were not necessarily the answer in a crowded distribution market.
Instead, BGI opted to the play the exchange traded fund (ETF) card in Europe to devastating effect. The on-going buyout of the IndexChange franchise will give BGI’s i-shares brand a 50 per cent share in the €60bn European ETF market. Much of this may be low-fee business, although funds are cheap to manufacture, but that is not the full story. Fund managers and institutions who want to get in and out of more obscure markets quickly are clearly prepared to pay a premium for the privilege and convenience.
Yuri Bender, editor in chief,
yuri.bender@ft.com
