One large asset manager that appears unperturbed by likely shifts in the playing field is ING Investment Management (ING IM). Gilbert Van Hassel, CEO Europe, envisages an industry landscape populated by hundreds of boutiques offering high-alpha products “and the question then will be what is left over”.
With high-alpha strategies becoming the preserve of specialists, what will remain for ING IM, which manages assets totalling €400bn, is the opportunity to excel as a large, active asset manager.
Consolidation
Mr Van Hassel forecasts that further consolidation in the investment industry will see the emergence of “five to 10 mega-players with household brands” with more than €1000bn assets under management. The current heavy involvement of strong US competitors will increase, while small boutiques with proven skills will fill in the remaining gaps in the specialty and alternative asset management area. Asset managers which are “stuck in the middle” will struggle to survive. The ambition of ING IM Europe, which has €160bn of assets under management (€101.2bn of which was third-party funds at the end of the third quarter 2007), is to become a top-five provider of product and services in each market in which it operates. “What this means is 65-70 per cent of our assets generating above-benchmark returns. It means achieving revenue growth in the region of 20 per cent, a profit margin of 35 per cent and ROEs above 40 per cent,” he says.
In striving to achieve this goal, Mr Van Hassel aims to capitalise on a number of major trends that are changing the shape of the investment industry. Chief among these is the blurring of boundaries between investment banks, asset management companies and insurance companies with fiduciary asset management, capital guaranteed products, structured notes and mutual funds being offered by non-traditional channels.
“It used to be very clear what each of these institutions was doing; not any more. One of the reasons I joined ING is that the company has all three businesses and that allows you to do a lot of things that pure players cannot do by themselves,” he says.
The distinction between hedge funds, private equity and traditional asset managers will eventually become obsolete. The provision of pension fund advisory services and liability-driven investment strategies are examples of areas where Mr Van Hassel claims ING IM has “all the building blocks to enable us to compete head-on” with the big investment banks.
To illustrate ING IM’s capabilities, he highlights the 30 per cent annual return that an investor in Turkey – where ING sealed the acquisition of Oyak Bank in late December – can earn on a local fixed-income instrument offering total liquidity and low risk.
“How do you compete? You use the knowledge that you get from a bank to create a structured note. Within that structured note you can guarantee the principle. Then you provide optionality by including a number of asset classes that can give you the highest possible return. To get around the liquidity issue, I can offer a bridging loan using the structured note as collateral. Now you are no longer talking about asset management but about guarantees, which draws on insurance knowledge. That is called a solution. It is no longer called an asset management product.”
This example, he adds, points to the second big trend, which is the demand for “solutions” as opposed to products. As decumulation becomes as important as accumulation, asset managers are entering the domain of outcome, where investors are interested in strategies designed to preserve their wealth rather than building it up. This translates into rising demand for built-in capital protection and income guarantees.
Mr Gilbert has high hopes for his multi-asset group, which was established about a year ago with the aim of taking the traditional balanced mandate a step further with the inclusion of alternative, absolute and total return strategies. The group currently manages €30bn of assets in largely institutional mandates that permit varying degrees of tactical asset allocation. It recently rolled out a total return bond fund and a total return equity fund, which will be marketed globally.
ING IM is well-positioned to capitalise on the growing trend for Dutch pension schemes to engage fiduciary managers to provide risk budgeting advice, benchmarking and asset manager selection. Last year, the ING Group acquired AZL, a provider of pension fund management services to 63 pension funds. With total assets under management of €17.5bn, AZL Fiducional (as ING’s new subsidiary was rebranded) ranks behind Mn Services as the second biggest fiduciary manager in the Netherlands.
According to consultants Bureau Bosch, the Dutch fiduciary management and associated multi-management market was worth €172.7 at the end of the first quarter 2007. Fiduciary management should, in theory, boost opportunities for external managers to win investment mandates. But does it in practice? Are there not inherent conflicts of interest that render the proposition fatally flawed?
Unsurprisingly, Mr Van Hassel begs to differ – at least in the case of AZL Fiducional. “When I talk to my people, two words are constantly repeated. One is alpha and the other is fiduciary responsibility,” he says. “The client comes first. We would only advise and choose ourselves to run a particular strategy if we actually deserved to, that is, if we were among the best of class. When I look at all the back-testing we have done and the composition of the products and how we are delivering this service, I can sleep very well at night knowing that we have given fiduciary clients the optimum choice.”
Lucrative opportunities
Bureau Bosch has researched 25 providers of fiduciary management services in the Netherlands. While Mr Van Hassel expects consolidation in the sector over time, he believes that currently the business opportunity presented is too lucrative to be ignored, especially for a group such as ING.
“We are a large asset management company; we have an incredible number of corporate and institutional relationships both as an asset manager and as an insurance company and as a bank. So you either participate in this fiduciary trend or you lose out. Defensively it is a good product, which is less prone to performance issues. If as a direct manager you have a performance issue, you can always outsource the mandate to an external manager. Offensively, with AZL we have the backbone needed to develop [fiduciary management] into a good commercial proposition.”
He adds that AZL has an independent investment management team that monitors performance and dynamically manages the underlying investment strategy. This “independent” team then reports to Mr Van Hassel. “I do not meddle in that business. It is a totally independent operation – as it has to be, otherwise you are not credible,” he says.
When asked if the fiduciary manager is disintermediating investment consultants in the Netherlands, Mr Van Hassel declines to comment.
ING IM’s broad strategy is to develop its asset management business outside its core home markets of the Netherlands and Belgium, and is in the process of transferring its European senior bank loans team – currently based in The Hague – to the UK. The US loan team will remain in Scottsdale, Arizona.
“The UK market is currently serviced out of The Hague, but it is clear to us that to be successful we need a physical presence in the UK. That market has far more depth in terms of the people with the skill sets we are looking for. While not impossible from The Hague, we think being in London will give us a beach-head that allows us to expand our senior loans business.”
Mr Van Hassel contends that the firm’s expanding presence in Central and Eastern Europe (CEE) also sets it apart from its competitors. ING IM has operations in Poland, Hungary, Czech Republic, Slovak Republic, Romania and Turkey. Its investment funds are sold by distribution partners such as Citi, Commerzbank, Reif and BNP Paribas. “CEE countries are experiencing the same problems and issues as Western European countries in terms of ageing populations and pension fund markets that are starting to develop. If you have a presence in these markets, you can capitalise on high GDP growth rates. For instance, in Poland [where ING IM has a staff of 45] last year we attracted €800m of net flows into our mutual funds at very high fees.”
Local accent
Mr Van Hassel notes that CEE markets are not yet open to cross-border business so an asset management firm has to start with products that invest in local equity and fixed-income markets.
With regard to products, Mr Van Hassel says he is light on alternative investment strategies. ING IM has two affiliated private equity firms – ING IM Global and Pomona, a funds of private equity funds outfit – in addition to Onyx and Topaz, two funds of hedge funds.
“We need to do more in that area and therefore London may be a place that enables us to achieve that goal of building our alternative assets under management. We are also open to acquiring specialist teams or small companies to help kick-start the growth in alternatives business,” he adds.
