The UK emerges as the clear leader; financial institutions in sectors such as life insurers and pensions, private banks and universal banks are outsourcing part of their asset management capabilities to complete product ranges and forge strategic alliances.
Switzerland follows closely behind, mainly thanks to its global distributors and regional banks. These often embrace the competencies of external managers to fill gaps in their own product offerings.
Scandinavian (Swedish, Finnish and Norwegian) asset managers have also discovered the benefits of sub-advisory, focussing more on distribution and core fund management competencies and using specialists for more niche or exotic asset classes. Even Germany is becoming more open to the concept of outsourcing, following the examples set by Swiss and Italian neighbours – albeit at a slower pace.
An increasing number of financial institutions are stating that they are better at fund distribution than manufacturing. As a result, more mandates are being outsourced to third parties. In northern Europe specifically, growth is dependent on two main drivers. First, asset managers may not be experts in a particular type of product that they would like to offer their clients. Second, an asset manager may have the capacity, yet lack the necessary performance. In both cases, external managers can help to increase choice and meet the needs of both managers and their clients.
Switzerland has been one of the leaders of the sub-advisory boom for a number of years. Dominated by global private banks, the Swiss market is buying fewer external funds and increasingly outsourcing its own funds. This is in part a result of the banks’ enormous asset gathering capabilities and a desire to exert more “control” over their fund ranges. Global private banks are also beginning to look at external providers to help increase their offerings.
Ahrens: trend is spreading
In comparison, smaller private banks often choose to not have internal asset management capabilities covering all asset classes and global regions. To fill the need for certain asset management competencies, these houses tend to look more toward external managers because this is more cost-efficient. Furthermore, in this way the original brand can be maintained.
Recent research conducted with PWM magazine shows that Scandinavian asset managers are largely outsourcing more exotic asset classes, such as Asia and emerging markets, both equity and debt. In such cases, the relationship between the financial institution and the external manager is key. Advisers offering the product may not be as familiar with its investment processes, and may need more support from the external manager. Regular product briefings, sales training and a constant dialogue become integral elements of the partnership.
According to PWM’s research, Scandinavian institutions are also outsourcing high tracking error equities. These are often chosen as complements to lower risk core holdings and may be offered by more specialised houses.
Although Germany is only slowly opening its doors to the concept of sub-advisory, it will undoubtedly soon follow in the footsteps of its Austrian, Swiss and Italian neighbours. Historically, the outsourcing of portfolio management capabilities to external parties has been a rare phenomenon – because most German asset managers not only manufacture investment products, but also tend to distribute these products via their own bank networks. This strategy originated during the boom cycle but may no longer be as relevant in the current market environment, where “best in class” investment management is required.
Gradually, German financial organisations are realising that production and distribution are different creatures. Asset managers are facing ever greater challenges, due in part to a changed economic landscape and new specialist products such as hedge funds. Traditional investment houses, universal banks and insurers are therefore considering balancing a lack of expertise in niche areas with the capabilities of external organisations.
Faced with the boom in sub-advisory in the UK, Italy and Switzerland, Germany cannot escape the trend for much longer.
Northern Europe continues to be a leading force in the growth of sub-advisory throughout Europe. Spearheaded by a strong following in the UK and Switzerland, the outsourcing of asset management capabilities is also on the rise in Scandinavia. Germany, despite being a nascent market, will also undoubtedly begin to see the benefits of adopting the strategy.
- Guide to Europe’s Sub-Advisers (PWM supplement), June 2005
Nick Phillips is head of third party distribution UK, Switzerland, Scandinavia and Benelux, at Goldman Sachs Asset Management and Ingo Ahrens is head of German third party distribution at Goldman Sachs Asset Management (Frankfurt)
Researched and published in association with
Goldman Sachs Asset Management
