Sub-advisory funds prosper in hard times

Skandia finds attracting best of breed easier when traditional fund managers are suffering.

After a year-long registration process, Skandia Global Funds has launched Hong Kong's first sub-advised range of fund, giving the retail market access to a 'best of breed' of investment talent often limited only to high-net worth individuals.

"This is a fantastic time to bargain with fund managers, to access the capacity of the fund management industry," says Christian Thwaites, London-based CEO. "There are far too many fund managers chasing a shrinking and disgruntled asset pool." Fund managers are desperate to broaden distribution and agree to manage products to a sub-advisor such as Skandia at low cost. As a result, a sub-advisor such as Skandia can provide a fund range with top-ranked managers to a retail client for the same fee as a traditional mutual fund.

"There is no overlay of fees," says Simon Powell, managing director of the Asia-Pacific operations in Hong Kong. "We can offer a range of funds at the same price because a traditional mutual fund provider has costs of infrastructure and global marketing."

Skandia executives are quick to separate a sub-advisory product from multi-manager funds of funds. The sub-advisor selects a single, top-class fund manager for each asset class, and then puts a diverse range of asset classes together into one product. A multi-manager or fund of funds provider appoints several managers within the same style. This provides a broader, more diversified product, but one that Thwaites dismisses as "expensive index funds", with each underlying fund involving separate dealing, custody and other costs, and a lot of overlap.

Sub-advisory, he says, is about Skandia having a view about a particular fund manager for a given asset class. Like an investment consultant, Skandia reviews prospective managers' investment philosophy, style, management structure, compensation, personnel and track record to determine which is the best.

"There is huge overcapacity," Thwaites says. "That's leading to ongoing structural changes in the industry. It's a good time to be a buyer to take advantage of those changes. No fund management company is stable anymore."

He points to the evolution of firms such as Janus and Alliance, which were local boutiques when Skandia Global Funds launched its first US product in 1997. They have since gone through many corporate changes.

While a retail investor buying one of their funds may have to ride the roller coaster or try to select another manager, a sub-advisor such as Skandia can add and drop managers with ease, cheaply, and with the intelligence of an institutional client.

Skandia has looked at the Asian market for about two years. It hired Powell from Credit Agricole Asset Management about one year ago, after its initial application to the Hong Kong Securities and Futures Commission for its sub-advisory platform.

It is a subsidiary of Skandia Insurance, a Swedish-based insurer with $50 billion in assets. The insurance arm has operated in Asia for two decades. Skandia Global has an existing operation in Japan, where it provides sub-advised ranges for the insurer's variable annuity business, as well as in Australia. Hong Kong was the next logical step, Thwaites says, serving as a springboard for the rest of Asia. Skandia Global has designs on registering in Singapore and Taiwan, but wants to secure its Hong Kong business first. In addition to distributing through the Hong Kong office of Skandia Insurance, Powell is negotiating agreements with several local and global commercial banks and independent financial advisors.

The biggest challenge is simply explaining what sub-advisory fund management involves, as this is the first time Hong Kong investors will have exposure to it.