Right time, right place
Raiffeisen Capital Management (RCM), the asset manager of the Raiffeisen banking group, is an Austrian firm with European ambitions and e30bn in assets under management.
It has a dominant position in Austria, where it has 22% share of the overall market and 26% of institutional business, and a growing share of markets in western Europe.
It has strong prospects in central and eastern Europe, thanks to the activities of its banking parent, whose footprint in Europe extends from Russia to France, and from Poland to Kosovo.
RCM is also an Austrian asset manager with an international asset management capability. A quarter of its investment portfolio is managed by international managers in a series of strategic partnerships.
The establishment of these partnerships followed RCM’s decision nine years ago to focus on and develop its core asset management competencies in-house and to outsource the management of asset classes where its skills and know-how were less developed.
In 1996 it formed a partnership with Capital International to manage its equity funds and the equity segments of its balanced funds. It followed this in 2001 with a partnership with sector fund specialist Wellington Management to manage sector funds in the areas of technology, healthcare, energy, finance and consumer goods.
In 2003 it teamed up with Curzon Global Partners to manage its European real estate funds. And last year, in its fourth partnership, RMC linked with AIG for the selection of managers for RMC’s fund of hedge funds investments.
Mathias Bauer, one of the triumvirate of managing directors that runs RCM, says it was one of the first European asset managers to take such a bold step: “We started the process long before most asset managers were thinking about such co-operations or partnerships. We consider it one of our major strategic cornerstones and a success story to be proud of.”
The spur to RMC’s decision to change the way it managed its funds was provided by the entry of foreign managers into the Austrian market during the 1990s, he says.
“At that time we at Raiffeisen Capital Management were considering what would we need to do on a strategic basis to remain successful for the next 10 to 20 years, and to become one of the leading providers in Europe in terms of quality.”
With the help of a consultant, RMC carried out a strategic review. As a result of this review, RMC decided to focus its energies on asset classes and investment skills where they were strong, and outsource the management asset classes where they were relatively weak.
However, this was no straightforward outsourcing exercise, Bauer says. RMC wanted partnerships with international managers who were top of their class.
“We didn’t want to team up with the first external managers to arrive in Austria. It was important for our strategy that we worked with the leading houses and that we not only do business with them but also have entered into a long-term strategic partnership. “This was the basis for the partnerships which we now have. The managers we work with belong to the top league of worldwide asset managers. And with their help, and together with our products, we have had tremendous success in our own market and also in other European markets .
“We did the right thing at the right time, and that has been one of the main drivers of our business success.”
Timing also played a part in RMC’s decision to add hedge fund investment to its portfolio, and create a partnership with AIG last year. The decision was shaped by a change in Austria’s investment funds law to bring it into line with the UCITS III directive. Under this directive, UCITS III compliant funds may invest in funds of hedge funds.
“It was clear to us that this was an attractive asset class. So we did what we have done in the past. We looked at how we could, very professionally, gain access to this kind of business. We chose to have a partnership with a real expert in this business, and after a long search process we chose AIG.
“They do all the selection of managers and due diligence and put
them together within a single fund
of funds – very successfully, as we have seen in the first 12 months.”
Overseeing the management of the partnerships involves considerable management resources, he says. “We have built up a lot of mid- and back-office capacity to monitor this business and ensure that everything is being done in the way that was agreed in the contract.
“We have people in the company who are dedicated to monitoring closely what our partners do. They look at performance and performance attribution, and they play
an important part delivering information from the partners to RCM and passing that on to institutional investors or to our retail sales force and their customers.”
RCM is also constantly updating its in-house competencies, Bauer says. Fixed income skills include the management of bond funds, both core products - euro denominated bonds and international bonds - and funds specialising in European high yield bonds, corporate bonds or east European bonds.
In equities, RCM has become a specialist in emerging Europe, the European growth market and the Austrian domestic market. It has also developed a small-cap capability.
RCM’s core competencies also include two key skill sets – asset allocation and fund of funds. RCM introduced fund of funds investment for institutional investors in 1998. Again this area where RCM has been ahead of the game, says Bauer. “We were forerunners of fund of funds, not only in Austria but also in European terms, especially on the institutional side.
“We offer, on a sub-fund basis, pure asset classes, which we combine together in funds of funds. These are tailored to the needs of individual institutional clients. So each institutional client can have his own asset allocation and management, based on sub-fund management, either through an in-house or partner-managed product.”
Fund of funds can draw on the resources of RCM, the RCM partners and third-party funds, he says. “We offer fund of funds, mostly for retail clients, where we add in third-party funds. We have established a qualitative and quantitative process, supported by a consulting firm, to choose the best available funds in their particular asset class.”
Fund of funds now accounts for
30-40% of RCM’s overall institutional business. If other similar concepts, without the legal framework of fund of funds, are included, the proportion is closer to 50%, Bauer says. “So for us it is a very important business and one of our biggest success stories.”
RCM’s investment philosophy is simple, Bauer says. Capital markets are inefficient, and active management is the only way to outperform.
“We are fundamentally focused active managers. Our aim is to add long-term value compared to the market and our competitors,” says Bauer.
RCM’s investment teams use a large number of independent investment strategies to ensure diversification. Each strategy has its own performance target and risk budget, record keeping and performance related payment system.
“We do not believe we can outperform with large single bets in the market. We have developed a process where we have a mixture of different risks, which are low or non-correlated, and in the combination of them we try to deliver outperformance. This holds true for all our core competencies, the euro bonds, equities, and asset allocation, which we do on a fund of funds basis.”
RMC sets high store by performance measurement. In 2000 it was the first Austrian investment company to submit itself to a Global Investment Performance Standards (GIPS) examination, a standard approach for assessing and reporting the performance of investment funds.
RCM’s dominant position in the
Austrian market might suggest that winning future business will become increasingly difficult. However, Bauer is sanguine about domestic prospects
“ There are a lot of opportunities in Austria both in the retail and institutional market. It is a market that is now heavily penetrated by asset
management firms, but there are still opportunities for us to gain more mandates or deliver more products.”
Yet non-Austrian markets will inevitably become more important. RCM already has a strong presence in western Europe, principally Germany, Italy and France. Germany and Italy each account for about e600m of business each of the groups asset, while France accounts for e300m
RCM’s balance between retail and institutional business differs from country to country. In Italy, three-quarters of its business is retail, while in France, the reverse is true. In
Germany, the mix is even.
“This is changing with each new
distribution agreement that we sign and the new mandates that we gain. So we aim to roll out both types of business in western Europe,” says Bauer.
Volumes in western Europe are growing rapidly, he says, and RCM aims to double its assets under management within the next 16-18 months.
Currently two-thirds of RCM’s non-Austrian business is in western Europe and one third in central and eastern Europe. RCM is unlikely to be able to correct this imbalance in the short term, Bauer says. “Obviously our banking group is very strong in
eastern Europe and we are also
focusing on this side. But this is more a matter for the future because although most of the countries are in a very rapidly emerging process they are not yet at the stage where asset management products have assumed a high importance
“But this will become a very attractive market in the future and we are ready to be there – at the right place at the right time.”