By Fiona Maciver
Catching the eyes of funds of funds’ portfolio construction teams requires a distinct blend of product, people and information, as demonstrated by the asset managers most successful in selling component funds to them. When it comes to servicing fund of funds clients, BlackRock and Fidelity lead the field thanks to comprehensively robust competencies in this area – including the all-important element of information provision.
▪Brand preference and product quality the top drivers of business flows for the funds of funds distribution channel.
▪ Funds of funds look set to boost their passive allocations in the future.
▪ Cementing fund of funds relationships relies on good quality information and accessibility.
Last month, Fund Radar’s product development analysis delved into the sharp growth in sales that funds of funds have been enjoying of late, and this month we examine them from the distribution angle. As fund buyers, what do funds of funds expect from the third-party asset managers that supply their component parts?
Before answering this question, it is important to first clarify the sort of organizations covered in this analysis. Funds of funds are a particularly singular distribution category. Their selectors wear a multitude of hats, in part because of their wide presence across various channels such as retail banks, private banks, insurance companies and discretionary portfolio managers, but also because they are fund providers as well as buyers. The Fund Buyer Focus survey’s respondents that belong in this category all have responsibility for portfolio management, making them well placed to explain the needs of this channel.
Fund of funds interviewees express some common themes in their responses on key selection criteria but there are inevitably some variances too, with manager preferences differing according to target clients and investor needs. For example, retail banks may have a preference for familiar brand names, while private banks and discretionary portfolio managers often favour smaller managers. This is well illustrated by one of the fastest growing funds of funds markets: Spain. Here, growth has largely been driven by the retail banks, which have a bias towards big-name asset managers that are known to end-clients. Targeting funds of funds as part of a new market-entry strategy has in the past been seen as an opportunity for picking low-hanging fruit. But just how low is this fruit? While strong recent sales figures and the ballooning popularity of multi asset funds suggests that asset-gathering opportunities abound, targeting this channel is not as straightforward as it may first appear. Attaining buy-list accreditation is a complex and sometimes lengthy process that offers no guarantee of eventual sales. Competition is not solely restricted to other third-party providers but also in some instances proprietary funds. Impressing discerning buyers requires a holistic approach that spans the whole gamut of competencies, from effective communication of investment philosophy and process through to sales and account management.
The first hurdle: selection
Fund Buyer Focus measures different layers of the buying process and drivers of business flows. For funds of funds buyers, brand preference has interestingly moved slightly ahead of product quality as the main driver to do business with a particular group. The two are closely linked but with a large number of funds in the marketplace, brand is clearly becoming an important differentiator. Probing the more detailed drivers of fund selection, the chart on this page highlights fund of funds selectors’ top reasons for picking a product. Quality of fund management team tops the list for this channel, followed by investment process and information provision. The top three criteria are consistent with those of discretionary managers but there are notable differences with some other distribution channels. For fund supermarkets and retail banks, for example, support and quality of service is the most highly rated criteria while insurance buyers give a heavier weighting to risk management. Looking specifically at selectors’ qualitative comments on the quality of fund management team reveals a broad range of expectations (see text boxes for specific examples).
Appropriate company structure.
Stability of company and management team.
Ability of individual managers.
Track record and performance in different market conditions.
Alignment of interest of managers.
Operational and risk controls.
The look of buy lists
Given the marketplace’s large volume of available fund offerings and the need to ensure that each and every component fund complements the overall portfolio, fund of funds buyers can afford to be very selective in the number of managers they have on their buy lists. The average size of these lists varies across distribution channels. Fund Buyer Focus estimates the average number of fund groups recommended by funds of funds to be 41. This compares to an average of 25 manager son the preferred-supplier lists of retail banks. Responses on future business growth and new providers of choice flags up a diversity of managers large and small that are currently being considered for inclusion in fund of funds portfolios, with blockbuster brands such as Fidelity, BlackRock and Aberdeen appearing alongside nimble boutique houses including Alken and Polar Capital.
A (not very) sticky situation
Fund Buyer Focus data also reveals average fund holding periods per distribution channel. Funds of funds’ average holding period of 28.5 months is at the lowest end of the spectrum, though it is a very similar time frame to that of discretionary managers. This short period contrasts starkly with that of insurance companies at the opposite end of the scale, which averages 86 months. Of course, many factors influence the holding period, including performance and asset allocation shifts. Beyond these, a strong relationship can extend manager loyalty well beyond industry norms. For example, Pictet’s head offend selection, Mussie Kidane, was recently reported today the firm has held funds from one boutique manager for more than 14 years.1Funds of funds’ usage of passive funds is also low relative to other channels. Fund Buyer Focus estimates that funds of funds currently allocate 14.7% of assets to passive strategies, compared with 17.9% across all distributors. There are demonstrated across fund selection and relationship management – essential ingredients for creating strong brands and ultimately winning and retaining the business of funds of funds. Asset classes. Besides Raiffeisen’s own funds, the list primarily includes third-party funds from foreign fund providers. The current list includes funds from ACM, Axa IM, Bantleon, DeAM, JP Morgan, Sarasin and BAM. However, the bank points out that the funds will be monitored constantly and the master list will be modified whenever necessary so that it can justify its selections in line with Mifid 2 regulations. Raiffeisen Private Banking currently manages around €2bn for6,300 customers. However, a large part of these assets is still in money market products. With the new fund list, the aim is for this balance to change.
Sales and account management
While brand preference and product quality are currently the main drivers of business for this channel, buyers’ perceptions of the quality of sales and account management delivery influence the overall brand experience. Fund Buyer Focus measures the most important factors for distributors in sales and account management together with the top ranked groups for this function. Fund Buyer Focus also measures the impact of the most important factors across these ‘functions’for fund selectors. Where funds of funds are concerned, the top five groups for sales and account management are BlackRock, Fidelity, JP Morgan, Schroders andM&G2. These groups also form the top five managers by brand preference, in the eyes of fund of funds selectors. Blackrock’s first-place ranking can be attributed to high scores across all aspects, with its quality of support material and level of interactions particularly appreciated by portfolio teams. It is interesting to see information provision ranks highly for sales and account management, as it does in manager selection. This has both content and delivery perspectives. Regulatory requirements have played their part but overall, fund analysts and portfolio management teams have an increasing thirst for information and tighter expectations on delivery times. From a review of survey respondents’ qualitative comments, the key sales and account management requirements for servicing this channel are to provide:
▪ Transparent and timely information provision. Information should be supplied in a format and timeframe consistent with portfolio management teams ‘expectations. A high level of transparency on fund holdings and dealings is required to support overall portfolio management.
▪ Knowledgeable and responsive sales teams. Sales teams should demonstrate knowledge of their products but also of the broader market to allow them to be proactive and demonstrate an understanding of clients’ needs. Companies promoting specific products that respond to client demands, as opposed to entire product ranges, are viewed more favorably by buyers
▪ Access to the right people. This covers a broad spectrum of activities and functions from fund managers to sales teams. The key takeaway is to provide the client with the comfort and knowledge that any queries they may have can be dealt with rapidly, whether on reporting, fund objectives, dips in performance etc.
And don’t forget…Asset managers targeting the European funds offends market for distribution opportunities need today attention to local market dynamics. As we have highlighted in earlier articles, different channels dominate in each market, serving different clients. Market segmentation is therefore essential, with product quality only the first step in getting a foot in the door. A robust company, management team and processes must be demonstrated across fund selection and relationship management – essential ingredients for creating strong brands and ultimately winning and retaining the business of funds of funds. Asset classes. Besides Raiffeisen’s own funds, the list primarily includes third-party funds from foreign fund providers. The current list includes funds from ACM, Axa IM, Bantleon, DeAM, JP Morgan, Sarasin and BAM. However, the bank points out that the funds will be monitored constantly and the master list will be modified whenever necessary so that it can justify its selections in line with Mifid 2 regulations. Raiffeisen Private Banking currently manages around €2bn for6,300 customers. However, a large part of these assets is still in money market products. With the new fund list, the aim is for this balance to change.