With the Eurozone crisis building and the West on the brink of double dip recession, the sub-advisory market has started to gain momentum as fund managers, private banks, insurers and distributors revisit costs and their service offerings to clients as they strive to succeed in this changing and challenging environment.
Although today, sub-advisers are having to work harder to win mandates, as those looking to appoint them are not just after alpha generators, but are looking for long-term partnerships with firms that they can trust and build long-term relationships with.
Frank Schäfer, head of sub-advisory relationships at Swiss Bank Clariden Leu, which has awarded a number of sub-advisory mandates over the last few years, says strategic partnerships are the way forward for the future of the industry.
“We consider sub-advisory as long-term oriented relationships; it is not sufficient anymore just to have ambitions and to chase alpha; we are interested in strategic partnerships,” he says. “Strategic partnerships are the most important thing to us; it’s all about the people, philosophy, process, performance and pricing.”
Mr Schäfer says the bank is looking to work only with value orientated managers with long-term strategies.
Few firms tick all boxes required to provide strategic partnerships – so sub-advisers are having to work harder to come up with the right products and make themselves attractive to potential clients. Mr Schäfer adds that transparency is also a vital consideration when picking sub-advisers, noting that his firm preferred to work with strategies that are Ucits IV complaint.
He says the bank preferred Ucits compliant funds as they allowed for funds to be distributed across Europe. “This gives us the broadest reach in terms of distribution,” Mr Schäfer explains.
Transparency
Since 2008, and in particular with the continuing market volatility, transparency and reporting requirements have pushed higher up the agenda when selecting sub-advisers, with investors demanding institutional-type services. Todd Ruppert, president, investment services, at T Rowe Price International, explains: “The key things which are considered when looking for a sub-adviser, also include: investment quality; the legal and compliance capability of the firm; financial stability; transparency and the ability to report in a timely manner.
“Quality is the driver of manager selection – if you are going to hire a sub-adviser, you are going to want them to be excellent.” he adds. “Quality is more important than retail brand – sub-advisory mandates are awarded to those of top quality, regardless of brand.”
According to Emanuele Ravano, managing director at Pimco, transparency is a key issue now and sub-advisers are being asked to be more transparent than ever before. “Reporting and access to information is also important now than it has ever been,” he explains.
However, in contrast to Mr Ruppert, he says brand plays an important role when selecting sub-advisers, and although there are a number of new players in the sub-advisory business, not everyone can be a winner.
“Since the financial crisis, I think investors have preferred to focus on the larger firms where the resources and access to services are greater. Having a recognisable brand and good performance is important to be successful in sub-advisory,” he claims.
Driving down costs has been one of the main drivers of sub-advisory as well as the desire to improve the quality of products and broaden the range of products on offer, says Pimco’s Mr Ravano.
“I think the driver of sub-advisory is the recognition of high costs – doing things in-house can be expensive, especially if you do not have the ‘know-how’ – so partnering with a sub-adviser can help.”
T Rowe Price’s Mr Ruppert agrees, saying in many cases, it was cheaper to outsource than build in-house expertise. “It may be less expensive to retain a third party manager than keep hold of a headcount of six.”
Mr Ruppert says product quality played a key role in the selection process. “When considering sub advisers, fund managers/private banks are looking at cost rationalisation, quality of product, and the breadth of product,” he explains.
However, outsourcing is not always the preferred option for some fund managers, who may feel that they have failed to some extent.
“I call it the NIH [not invented here] syndrome – some asset managers just want to do it themselves , even if they are not adequately prepared to do so,” claims Mr Ruppert.
But for others, outsourcing can be a sign of strength and forward thinking, particularly at a time of increased market volatility coupled with increased consumer demand, when outsourcing a particular fund can allow you to trim costs, add value, and maintain branding.
“At the end of the day, if they do not want to risk losing a client and want to provide them with the service, then sub-advisory can help, by providing them with a proven sub-adviser with consistent alpha in an asset class – it is a win-win situation for clients and distributors,” Mr Ruppert argues.
