Magazine Issues » April 2011

THE LONG AND SHORT OF IT: staying relevant

cover_storyFund platforms are a useful retail distribution tool, but they also make it easier for investors to punish short-term underperformance by switching providers. Fiona Rintoul finds out how managers use brand to keep customers.

The rise of retail fund platforms has changed the way fund managers do business. Platforms provide a simple way for them to put their products in front of interested financial advisers and end investors. However, they also provide a simple way for those advisers and investors to switch to a competitor.

“There is democracy of access and access will become ever more democratic,” says Andrea Favaloro, head of external distribution sales at BNP Paribas Investment Partners (BNPP IP).

And while the long-term nature of certain investments is perhaps better understood than previously, poor short-term performance can still lead to outflows.

“I wish short-term performance was less important, but there is still too much emphasis on it,” says Favaloro. “Investment is also a lot about emotions. The advisers are the key ring in the chain in making sure end investors are as free as possible from emotion when assessing investments.”

In order to achieve flows on fund platforms, fund management companies must stand out from the crowd. And in order for them to keep those flows, their existing funds must continue to satisfy investors’ requirements, or new funds must be made available to meet changing needs.

“Much depends on the line-up of products offered, particularly in a period where there are a lot of uncertainties,” says Emanuele Ravano, head of Pimco’s financial institutions group across Europe. “Having the right products is very important for brand.”

This has perhaps been the case, particularly over the past year when concentration of flows on a small number of funds has intensified. Data from the New York-based research firm Strategic Insight for 2010 shows that 90% of total net inflows to long-term funds went into just 350 funds out of a total universe of 68,000. In Europe, the top 25 funds accounted for one-third of net sales, according to figures from fund data firm Lipper, although they control only 6% of assets under management. The top five funds alone attracted almost 14% of net inflows.

Concentrated flows

Within particular asset classes, flow concentration can be even more intense. Lipper reports that in the absolute return sector in Europe, the top ten funds captured two-thirds of net sales, while in the emerging markets sector the figure for the top ten funds was over one-quarter.

Pimco is one of the companies that has benefited from this trend. Its Dublin-based total return bond fund was the second bestseller in Europe in 2010 and the third best-selling European fund overall. Staying in pole position, says Ravano, is partly about having the products at any given moment that match investors’ needs.

“Our positioning depends quite a bit on being seen as a cautious innovator,” he says. “We have a product in the top ten that we didn’t have two years ago and we have recently launched products that would withstand hikes in interest rates. We try to introduce new products where new trends arise that are relevant.”

In the post-crisis environment, innovation is perhaps more important than ever before.“ The next ten years will be totally different to the last ten years,” says Ravano. Interestingly, he does not believe that the concentration of fund flows in an ever-smaller number of funds is a sign of investors running scared or not being prepared to experiment.

“Some funds are better positioned for the new normal than others and that has polarised demand onto a very few funds,” he says. “But people are not averse to looking at new things. There is concentration but it’s not necessarily locking people out. We see quite a bit of rotation.”

Different positioning

Another company that has topped sales tables with a star fund is Standard Life Investments (SLI). Its Global Absolute Return Strategy Fund was the top seller in the UK in 2010 and ranked fifth across Europe. The fund has now been launched as a Sicav, and SLI hopes it will enjoy the same success in mainland Europe that it has in the UK.

However, for SLI the process of positioning both this fund and others on platforms in mainland Europe is very different from that in the UK. “We have a good brand in the UK,” says Jennifer Richards, joint head of the European business development team. “We hope to build that in Europe. In the meantime, we need to work to make sure the sales team knows who we are.”

This affects the products that the company chooses to promote in mainland Europe. “It has to be a special fund,” says Richards. “It can’t be a me-too fund. Something like the absolute return fund works because it is such a strong proposition and quite different.”

And even in these days of passporting, the approach usually has to be made on a country-by-country basis. Most platforms are national and even those that cover multiple jurisdictions may still need country-by-country attention.

“There are certain institutions that are global, but it depends on where the analysts sit,” says Richards. “Even if a fund has been approved, you still need to engage with each region to get them to know you’re it.”

There are, it seems, no shortcuts. Often it is not just a question of a country-by-country approach, notes Pimco’s Ravano, but platform-by-platform.

“We work with platforms very directly – one-to-one,” he says. “It’s difficult to do it in a standardised form. We look at a platform’s specific needs and take it step-by-step, considering what training and education requirements they have.”

Schroders, a company that punched well above its weight last year in sales terms, ranking sixth in the Lipper top 25 European master groupsbysalestablebutjust17thinthetableby AuM (assets under management), also sees value in cutting its coat to suit its cloth in terms of how it approaches different markets. This applies not just to products, but to the overall marketing approach.

Promotional campaigns

James Cardew, Schroders’ global head of marketing, believes products are bought by customers as much as they are sold by advisers, and so sees value in general promotional campaigns in the press and on billboards.

However, he says this does not make sense everywhere. As general promotional campaigns are expensive and can take several years to have an effect, it only makes sense to use them in countries where investments have longevity.

Broadly speaking, these are the markets where independent advisers play an important role: the UK, France and Germany to an extent. In the UK, longevity has come down from around eight or nine years to six years, but in many European countries where wealth managers and banks dominate distribution, longevity is as low as one to two years.

Even in the UK, where longevity remains high, there are limits to how broad-brush an advertising campaign for investment products can usefully be, in Cardew’s view. Advertising in the national press and on investor websites may be the only way to reach the five million to six million potential investors in the AB1 social group, but Cardew draws the line at, for example, advertising in celebrity magazines.

And in a market such as Spain, which is dominated by several bank distribution platforms, even advertising in national newspapers does not stack up financially. There, it can make more sense to target advisers rather than end investors.

“In that instance, it’s about service and education,” says Cardew.

Getting the most out of a listing on a fund platform is also about understanding what the platform wants. Some want fund providers to engage with them and some do not want that at all, according to Richards at SLI.

“It’s about being a willing partner, where appropriate,” she says.

Thought leadership

The educational input that is so important to maintaining good relationships with advisers – and ensuring that they understand the products and are selling them to the right people in the right way–can also be part of a company’s brand proposition to the end investor. Alongside having the right products, Pimco’s Ravano lists thought leadership as an important brand-positioning tool for his company.

“We try to push the debate a little further forward, ”he says. “We try to address key issues, such as how the market behaves in this environment, and how to deal with risk.”

Much of this educational drive takes place through “Pimco institutes”, which were launched early in the formation of the company. This tool has since been extended to the wholesale and retail sectors. In the retail sector in particular, Pimco has tried to counteract “dumbing down”. Over the past year, the company has, for example, been educating people that a lot of risk that was thought of as sovereign risk was in fact credit risk.

“It’s very much educational, not commercial,” says Ravano. “You must educate people and not use it as a hidden way to sell.”

Cardew also believes that as investors become more canny and better informed, it is important to be part of the information flow. And that to do this effectively, companies must be honest and  straightforward, he says; the era of spin and message management is over.

“People are much clearer about the cyclical nature of performance,” says Cardew. “End investors don’t expect you to be able to predict events such as 9/11 or Libya, but they do expect you to be honest and transparent.”

In some ways, this honest communication is part of another important characteristic that will endear an investment fund brand to investors and advisers browsing through a platform: stability.

“You need to give a message of stability,” says Favaloro. “That means having a presence in good and bad weather. The frequency of updates is very important. You must have an open door to what is going on in the market.”

Favaloro’s company has, of course, just come out of a merger that saw it integrate Fortis Investments and ABN Amro. Such a major change might be perceived as a source of instability, but Favaloro believes the presence on the ground in every market that it has brought to BNPP IP instead promotes a stable image.

“The distributors have had the same faces in front of them for the past three to four years,” he says.

For a player such as BNPP IP, which ranks third in Europe by AuM, another facet of stability is having as complete a product range as possible. Where a firm like Standard Life Investments may compete on certain special funds away from its home market of the UK, BNPP IP wants to compete on mainstream funds in every European market.

“The way I like to position the company to distributors is as a core asset management reference to whom they can come for the main building blocks of their portfolios, but also adding the salt and pepper of innovation,” says Favaloro.

Crisis performance

But being perceived as stable can also be about something it is now too late to do anything about: how a company performed in the crisis. “People want to know that you did well during the crisis,” says Ravano.

Overall, investors are becoming more savvy and a greater premium is being placed on advice through initiatives such as the Retail Distribution Review (RDR) in the UK. This, says Cardew, means advisers who target mass affluent clients are more likely to use modelling tools and to outsource asset allocation to third parties.

“There will be a general rise in the use of discretionary managers, and what you will see in the UK is that longevity will come down,” he says.

It is basically becoming harder all the time to impress investors, and even if you can tickle their fancy with a particular product, the chances of them moving on pretty swiftly are high. To win investors’ and advisers’ confidence, providers need to have an excellent product line-up and they need to put a lot of effort into training, genuinely helpful education and service.

That being the case, it is important to make intelligent choices about where to target this effort.

“You need to pick and choose platforms,” says Cardew.

“It’s a lot of effort and a lot of cost. You need to make sure that this is adequately rewarded.”

©2011 funds europe