ABN AMRO prides itself of being “pretty global” on the asset management side, says global chief investment officer Andrew Fleming. “We have asset management offices in 30 locations worldwide, with money being managed in 22 of these,” he points out. “Few other asset managers are as genuinely global as we are.”
With assets under management of E150bn, the firm is by no means a colossus of the industry. The business is well diversified by origin as it is sourced from the US, Europe and a range of developing markets, and by client, with around 50% institutional, 40% retail and 8% in private client portfolios.
The asset management operations are divided between global and local centres. “We regard as global those centres of excellence for the management of assets for investors wherever they are sourced in the world. These are Chicago and Atlanta, for equities and fixed income, Amsterdam, London and Hong Kong/Singapore, he says.
But the largest number of centres just manage local assets. “This includes Kazakhstan were we run local fixed income!” There are some 400 investment professionals’ worldwide.
“Our capabilities are very broad and our product offering reflects this. So in US equities we provide growth, value, large and small cap, but traditionally in Europe and rest of the world, we have had a growth bias.” The firm, he says, is still committed to this, but has been diversifying the offering. “For example, we launched a global value fund run on a quant basis last year.”
ABN AMRO was one of the pioneers of the industry approach to equities, adopting this strategy as far back as the mid-1980s. “That has been a key foundation for our historic success, and our platform for the future. We think that geography is increasingly irrelevant, particularly for the larger capitilisation stocks.” Despite, some strong country effects in recent years, Fleming believes that the companies researched are all facing global forces. “Our investment process has to reflect that!”
The equity approach has always been active: “We live or die by this.”
The asset split of the business is round 41% fixed income, 48% equities, including the still significant balanced business, the rest is in specialist areas, like real estate, alternatives and cash. “We still find strong interest in balanced in continental Europe, and we never had big balanced business in the UK.”
A focused two-prong strategy has been in place to maintain excellence in the core offerings, whilst diversifying into high growth areas. “In the past five years, we have developed new strengths in emerging market debt, high yield bonds as part of a much enhanced credit capability, high income products, and a fund of hedge fund capability, among others.”
The group has a strong structured capability, running optimised option portfolios and replication strategies. “We launched an inflation linked product in the Netherlands last year, since there is no Dutch index-linked bond market. This is linked to property.”
Three years ago, a foreign exchange management operation was established. “In addition to strong returns, it has produced some innovative structured note products that have done very well.” Scheduled for later this year is an open-ended FX fund launch.
“I set up our funds of hedge funds activities some four years ago, with the first fund emerging after a year – ahead of many other diversified groups. We now have over E600m under management including significant institutional business, which we are very pleased about, thanks to our risk-adjusted returns.” A single manager hedge fund capability is to come on stream this year, which will be managed in-house.
“I have given a lot thought as to how to position alternative strategies with traditional asset management firms, like ours,” says Fleming. “We think it can be done, but on a selective basis, where we have the right people to manage the strategies. Not every long only manager can turn to running long-short strategies as well.” He adds that there is enthusiasm about moving into these areas, where there is strong client demand. “As we do not think this is the start of a great new equity bull market, some absolute return-type products are necessary. You cannot allow the specialist hedge funds to take all the high margins in this business.”
Since the strategy of the business is for profitable growth rather than assets under management for their own sake, higher margin alternatives fit in, even if they do not produce great volumes of assets, he points out.
“In 2002, asset management profits were higher than in 2001, so we have been delivering, even in the difficult times. This has been by controlling costs – in particular as we did not over-expand in the late 1990s, we then did not have to make a lot of compulsory redundancies in the inevitable contraction others faced in 2002 and 2003.”
The investment process on the equity side is looking for growth stocks, where the future growth has not been discounted, but all selected on the industry-based approach. “In recent years we have strengthened the valuation area and our sell disciplines for equities. On both the equity and bond side, we have been hit by a fair share of torpedoes in the portfolio in the 2002, and we have learned some lessons. I’m glad to say we did not have any Parmalat bonds, which our credit team gauged to be a high risk issuer.” One result has been to bring the equity research and credit analyst teams closer together.
“As to our process, my view is that the best active processes are supported by strong quantitative input. We have been developing a broader quant ability, right across the business. My feeling is that the market is moving to more concentrated portfolios, as clients want to differentiate between alpha and beta. We are likely to move in this direction, using a number of building blocks for different risk profiles,” he says.
“While Europe is probably the largest source of assets for us, the US is also big. But we have probably more flags on the map in Europe than most groups, with clients and representation in most markets.”
The Netherlands is the largest single market and is regarded as a cornerstone for both retail and institutional, but it is mature, sophisticated and well developed. “This has traditionally been a low fee region for institutional mandates, but now there is some evidence that fees are creeping up, perhaps as a result of increased activity by the US money managers who come from a market where fees are higher,” he surmises.
The business has developed strongly in Germany and Spain, as well as in Italy. In particular, asset management has grown in the Nordic region, having made a number acquisitions there, including Alfred Berg, and more recently making a number of smaller buys in Norway.
“Central and eastern Europe has been an important building block in our emerging market capability. We have Russia funds, for example, and equities operations in a number of these countries. We see this as part of our global emerging market activities, including South America and Asia, with people on the ground. It is a very strong line-up.”
ABN AMRO believes it is well positioned for future growth in the US, where it has its own mutual fund operations, one of the few non-US groups with this. As the group is one of the largest foreign banks in North America, the asset management arm has an excellent base to grow from, says Fleming. “We have hardly begun to tap this potential in terms of providing solutions and products to the client base of the retail bank there. So there is a big opportunity on both the institutional and retail side.”
The business in Brazil is significant, again partly thanks to the group’s banking presence there. In the Far East, the asset management activities cover both retail and institutional. “Our structured products have done well here.”
Acquisition moves are very much a two-way street, wanting the acquired company to contribute to group profitability, while at the same time hopefully bringing something to the company. “We are pragmatic as to how the new member is integrated, but we are not going to destroy shareholder value. Asset management businesses can be quite fragile, as they completely depend on the people. So a high degree of mutual respect is required. If we go in and tell them how to do things on day one, it will have a very negative effect.” It is, he adds a question of being sensible about what is done centrally and locally.
For the future, Fleming sees growth coming from a “broadly defined alternatives area. Rather than a particular product area, I think it is going to be about providing solutions. We must look more carefully at what our clients want and then at our capabilities across the firm and bring together our strengths to find solutions.” The industry must shuffle off thinking product and geography, he reckons. “The challenge for us is to find those solutions in highly tailored and cost effective ways, so that we deliver value to clients and obtain a proper return on that business that enables us to satisfy our shareholder, reward our people and invest in the business for the future.”
In particular, asset managers should overcome their reluctance to hold back from the asset side when it comes to asset liability management for fear of upsetting the investment consultants. “Asset managers do have something legitimate to add in conversations with pensions fund clients.” The firm intends building on their already established relationships it has with its institutional client base. He points to the structured products area, where this approach could be built up in a more systematic way. “So we combine some of our traditional with our structured capabilities.”
Growth is on the agenda, but without an assets under management target. Fleming expects this to be mainly organic, but with some “focussed acquisitions” from time to time.
Taking a three to five year view, he will judge progress by “our growth in profits and in our being a more meaningful part of ABN AMRO as a whole, while being regarded in the marketplace and by our clients as a leading asset manager”.