June 2008

INTERVIEW: The debt recoverer

Jean-Baptiste de Franssu (pictured, and interviewed before FundForum Barcelona) tells Angele Spiteri Paris that regaining lost assets is a priority after the sub-prime damage. But stunted open architecture, churning by funds of funds and a lack of DC take-up are major challenges ... Jean-Baptiste de Franssu is pondering what it will take to revitalise sales of European funds after the sub-prime crisis drained them of assets. The CEO of Invesco Continental Europe will be talking about this at a ‘think tank’ panel during the FundForum conference, and it sounds like he’s not greatly happy with the way banks and funds of funds play their role in fund sales.

Theoretically, open architecture should mean that the various large banks that have adopted this model should be willing to sell funds from competitors. But not all have been happy to market other managers’ funds, he tells Funds Europe. “Only about 20% of fund distributors across Europe have truly adopted the open architecture business model,” says de Franssu. “Between 20% and 30% have gone some way to doing this while the rest have been extremely cautious.”

Deutsche Bank and Commerzbank are two banks that he says have truly moved into the open architecture sphere.

It is the defensive attitude of other providers towards open architecture, however, that has led to the birth of a slew of fund of funds and multi-manager platforms in the distribution space. These players have become a fundamental element of the European market and their emergence has resulted in the gap between gross and net sales increasing over the last 18 months. The growth of this discrepancy is due to an increase in asset churning by these vehicles and platforms, which can be to the detriment of their fellow fund managers.

De Franssu explains: “These funds are almost traders in that they buy and sell a product within a very short period of time. They sometimes make a large allocation to a fund only to come out of it twelve months later. This contradicts the fundamental purpose of a Ucits fund which is geared toward long-term investment.”

Frequent inflows and outflows distract the fund manager and up the cost for the investors that still hold units in the fund, de Franssu warns.  This could ultimately impact on a fund’s performance. Churning is sometimes associated with the illegal activity of investing to raise fees, in these cases regulation cannot be of assistance.

Churning out solutions
Invesco Continental Europe has chosen to tackle this matter by being more selective about the deals it accepts, says de franssu. The company has sometimes refused business when it was believed this would do more harm than good to investors.

“We have to have assurance that there will be minimal instability as a result of new business before taking it onto our books,” de Franssu says.

De Franssu throws up a number of possibilities as to why some providers are defensive about selling funds from competitors. One is that some providers with struggling in-house managers could genuinely believe that their asset management capabilities have significantly improved. And of course, a fear of losing clients could also be a driver, although there are no examples of this.

But the open architecture business model has proved successful and expansive, notes De Franssu, who believes the industry would benefit from a complete open platform as this would offer clients more choice.

The contenders
Although the argument for open architecture is strong, one can understand the caution about losing business. Until a few years ago, top-quartile fund managers could be considered well placed to win new business. But today, top quartile is not good enough; only those falling into the top ten can expect to find interest from investors.

Competition has become extremely tough with managers needing to generate strong, consistent performance, or to continually offer a new range of products.

De Franssu says the era of  keeping business on the basis of  personal relationships is over. Close client contact is still key to improving an asset manager’s position, but it cannot stand alone as a driver for winning new mandates. Track record is a key deal maker now. But so too is marketing, particularly around alternatives.

“With alternative asset classes, managers do not generally need lengthy track records. In this space it is more about putting new products on offer, rather than the ultimate performance,” de Franssu says. He notes that success in this was therefore based more on marketing than investment.

But for core asset classes a track record is helpful, although de Franssu advises that managers without a long-term, robust track record in core classes should seek to market themed products.

Pensions problem
Fund flows from the defined contribution (DC) pensions arena in Europe is also a problem. De Franssu says DC pension schemes would provide fund managers with a steady income stream even in times of market fluctuations. But take-up has been lacklustre.

“In the US, the 401(k) market is not only a significant portion of fund managers’ inflows, but also signifies a very regular contribution,” he says. “This source of income plays a buffer role for the fund manager, irrespective of what is going on in the market place.”

He adds: “European fund managers haven’t got a source of recurring long-term stable savings and in volatile times such as these, this would be extremely beneficial.”

The emergence of funds of funds and incomplete open architecture has contributed significantly to this volatility, de Franssu says, and having peace of mind from DC inflows would see a manager better placed to deal with it.

European fund management firms should put Ucits funds on the podium as the best receptacle for DC savings. In its 20-year existence the vehicle has demonstrated a solid track record and  and ability to provide robust returns.

“Throughout its lifetime there have been no major traffic accidents,” de Franssu says. “Even in the liquidity crisis, only seven funds out of a few thousand were closed – most of which have reopened.”

© 2008 funds europe

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