Extending the home market
Erste-Sparinvest KAG, the investment management arm of Erste Bank and the Austrian savings banks, is Austria’s second largest investment manager, and third largest manager of institutional assets.
Assets under management currently totalling €27bn are managed in retail mutual funds and large-scale institutional funds. Erste-Sparinvest also manages close on €2bn in advisory mandates for institutions inside and outside Austria.
Founded 40 years ago, Erste-Sparinvest is now one of the most successful and experienced investment fund companies in Austria and Germany. In a report issued earlier this year the German manager-rating agency RCP rated the Vienna-based fund manager “very good”.
Erste-Sparinvest’s managing director, Heinz Bednar, who joined in 2001 from Bank Austria, says the firm has achieved its position by focusing on what it does best.
“Since Austria is a small market, and our fund management companies are also somewhat small, we have never had the aim to manage everything. We try to focus on asset classes we think we can manage better than others. As soon as we think we are not able to do that we make use of other managers.
“In Austria we quite often use the fund of funds vehicle to bring in asset classes we don’t manage ourselves. We want to be able to offer everything a client might need and therefore we bring in other fund managers into the portfolio to provide a complete set of asset classes.”
Funds of funds will typically include funds from international fund managers such as Alliance Capital Management, Henderson, Sal Oppenheim, Invesco, and Merrill Lynch in its funds of funds, together with Erste-Sparinvest’s own funds.
Erste-Sparinvest’s core competencies are European and emerging market fixed income, European equities and funds of funds. Historically, European fixed income has been the cornerstone of its business, says Bednar.
“The importance of fixed income has to do with the client appetite in Austria. We have a very conservative clientele, and by far the biggest share of assets is invested in the bond markets. Only a small amount is invested in balanced funds and even less in equity markets. This is true for institutional investors as well as for retail investors.”
Emerging market bonds are a speciality of Erste-Sparinvest, which moved into this asset class following its success with central and eastern European funds.
“We launched the first central and eastern European bond and equity funds and from then on we developed a little bit of know-how about emerging markets and extended this to global bond markets. We have also launched emerging markets money market funds in local currencies,” says Bednar.
Emerging market equities, however, are beyond Erste-Sparinvest’s competence and resources. “We don’t have the manpower and we don’t have the know-how in various regions. This is something we cannot oversee on a stock picking level,” he says.
Erste Sparinvest’s involvement in central and eastern European funds stems partly from the strategy of its parent, the Erste group. Erste believes that the central European countries next to Austria, which, with the exception of Croatia, became members of the EU in 2004, represent the only genuine growth market in Europe. As a result the group has built a formidable presence in the Czech Republic, the Slovak Republic, Hungary, Croatia and Slovenia.
These five countries, plus Austria, are Erste-Sparinvest’s extended home market, says Bednar. Austria is still the most important home market but in terms of growth eastern Europe is catching up quickly, he says.
“The total volumes are small but the growth rates are enormous. In eastern Europe our market share is more than 20% but in some markets like the Czech Republic it’s more than 30%.”
Much of this growth is driven by the growth of the bank, says Bednar, and this is likely to be the pattern in other eastern European countries. “If Erste Bank is going to extend its markets to Romania and Ukraine, and its no secret that it wants to, we will go there as well.”
Growth is also driven by the
demand for retail funds in eastern Europe. “The bank is going for a full range of retail banking in these markets and one of the core products is fund management.”
The Erste group currently has four fund management companies in eastern Europe managing a total of €4.5bn. “Their aim is basically to manage local asset in local markets. So a Czech money market fund is managed out of the Czech Republic,” says Bednar.
Erste-Sparinvest’s role in the extended home market is to be a locally based asset manager providing a full range of retail and institutional products and services. “In these countries we are a dominant provider of fund manager solutions and we try to keep that role. What we try to do as a group is focus on the needs of the local investors and offer a mixture of locally produced and internationally produced products.”
In some cases, markets will not want all that Erste-Sparinvest can offer. “We don’t really sell European government bond funds in Hungary, for example. There is no appetite and no need for these products. They buy their own bond funds, which have much higher yields and no currency risk.”
One of the advantages of choosing EU countries for an extended home market is that all provide the same legal framework - UCITS III - for fund management. The one exception is Croatia, which is putting in place a new mutual fund management law next year. “This means that we can use the same fund products in all of these markets,” Bednar says.
Institutional business in eastern European countries is growing, says Bednar, but from a small base. “You also have to take account of the fact that the institutional investor bases in Eastern Europe are not very big.”
For institutional business of any size, Erste-Sparinvest looks to Germany.
Erste-Sparinvest’s strategy in Germany is markedly different from its approach to its home market, says Bednar. “In Austrian and eastern European markets, which we consider our natural home market, we have the broad retail customer bases, In Germany we have only an institutional base.”
This requires a different approach, he says. “In Germany, and other western European markets, we approach the clients directly as a fund management company. There is no holy writ on how to do that. It’s a very pragmatic process.
“In Austria we offer institutional clients a number of solutions, such as balanced portfolios and total return strategies. In Germany our role is rather that of a specialist for certain market areas.
“In Austria we have a reasonable market share of somewhere between 17% and 18%. In Germany we are not present in the way that a German fund management company is present. Rather we are rather a provider of certain products.
“Typically a German institutional client will be looking for, say, eastern European bonds or Vienna equities. The client issues an RFP and we go there and try to win a mandate. That has worked very well so far.”
Bednar describes the approach in Germany as opportunistic: “ It is opportunistic in the sense that if there were demand for any German stock we would go there for a pitch and try to sell German stocks.
“It is opportunistic in the sense that we are offering 10 to 12 products and if someone is looking for a manager for those products then we go there and try to get the mandate.”
Erste-Sparinvest also tailors its investment style to suit its different markets, he says. Its investment approach is fundamentally driven, but using quantitative techniques when appropriate, says Bednar.
“For example, we have funds that are close to Eurostoxx 50, which are the most liquid equities. This is not something where we think we have a big advantage in terms of know how and research. So there we will apply quantitatively driven approaches.
“We also do this for global funds. Here we will apply top down, quantitative models rather than a bottom up approach because we are not stock-pickers in these markets.
Erste-Sparinvest has pioneered the use of alternative investment techniques in traditional investment vehicles. Last summer it launched an alternative emerging markets fund.
“We call it an alternative fund rather than a hedge fund because we don’t want to have hedge funds in the classical sense. So we are not going for distressed debt or anything like that. It’s more of a long-short equity index, and the purpose is low correlation in the portfolios.
“There are two big differences between these long shorts and typical hedge funds. First of all we are constrained in the leverage we can use. We can only do 100 %.
“The other big difference is that you get a daily value at which you can buy and sell the fund. ”
Erste-Sparinvest also uses hedge funds in a fund of funds, he adds. “In a fund of funds form we can also have the classic hedge fund types – an alternative multi-strategy. But this is a classical, rather conservative approach.”
New, specialist products could provide the key to future markets. Erste-Sparinvest is poised to take a more proactive approach in its search for new business in western European markets, says Bednar “Where we really think we have future potential is in Germany and in other western European markets. Up till now we have not approached these markets aggressively. Rather we react to demand and try to win mandates. But this could change.”
Bednar does not identify specific future markets. It plans to use its specialist products to gain entry to these markets, he says. “We will try to get the attention of clients with our Eastern European mandates. Eastern Europe will probably be one of our door-opening products. This is already the case in Germany. Then we will take it from there.”
If it is successful, Erste-Sparinvest could see a substantial extension of its extended home market.