Bespoke fittings for the fuller figure

Morgan Stanley’s asset management arm, MSIM, is pushing to gain a bigger share of Britain’s IFA market, offering clients a range of non-traditional products, writes Neal Underwood.

Virtually everyone will have heard of Morgan Stanley, one of the biggest American investment banks. Its asset management arm, Morgan Stanley Investment Management (MSIM), however, is still relatively unknown to much of the intermediary market.

Richard Lockwood, executive director, who heads the British business, says its range of products and strategies should appeal to the IFA market. MSIM is not a small operation: it has more than 4,000 employees, of whom 1,000 are investment professionals, with 42 offices in 21 countries, and it manages assets for clients in more than 80 countries.

The firm has assets under management of $600 billion (£338 billion) globally and has had a presence in Britain since the 1980s. It set up its Sicav range in the 1990s for distribution in Europe. “This has been a springboard for our distribution teams,” says Lockwood. “We now have sales teams in each of the main European countries. In the UK, our focus was initially more institutional than intermediary.”

In the late 1990s MSIM began focusing for the first time on the intermediary market. “We’ve been dealing with the biggest multi-managers and private banks. A lot of our business has been pan-European or global – that was the focus of our early strategy. We’ve got a broad range of products, both traditional and increasingly in alternatives. We’ve been aggressively expanding since 2005, adding, for example, the FrontPoint hedge fund business.”

FrontPoint, an American hedge fund manager, was acquired by MSIM in October 2006. “We’ve also brought in teams to run quant products in FX [foreign exchange] and commodities strategies,” says Lockwood. “This gives us great traditional and alternative strategies in Ucits III formats, which we can start marketing more to intermediaries.”

A further reason for MSIM’s more active push into the IFA market is the growing acceptance of offshore funds. “Distributor status has enabled the message to be pushed further out,” says Lockwood. “It’s very heartening to see this opportunity for us.” He says some themes that are emerging in product launches in the market play into the firm’s hands.

MSIM’s investment teams are structured as boutiques, with each responsible for running their own strategy. Alongside this is the ability to tap into Morgan Stanley’s vast depth of global resources. MSIM has a diverse range, although one area where it has few products is in British equities.

“In the institutional market we haven’t had the domestic product focus,” says Lockwood. “We have some great regional equity products which stand up in the marketplace.” These include global and regional emerging markets, America and Japan, all of which, he says, have had teams in place for several years. He highlights products such as the American Franchise fund, which has had success with some multi-manager and intermediary clients this year. “It’s a concentrated strategy that aims to preserve capital on the way down. People are seeing it and seeing its benefit.”

Most MSIM’s funds are domiciled offshore, but of those based in Britain three are first quartile in their sectors. Sterling Corporate Bond fell 1.63% over three years to September 29, UK Equity rose by 10.07% over the period and the Global Brands fund was up 13.23%.

Alex Brunton, vice-president of intermediary sales at MSIM, says there are several key themes in the intermediary market that are positive for the group. “We’ve seen the opening up of the offshore marketplace to UK intermediaries,” he says. “Regulatory bodies such as the IMA [Investment Management Association] are including sales data and including offshore funds within their sector classifications. This has raised the profile of offshore funds, which is of benefit to the UK intermediary community.”

He points out that only 10% of fund sales in Britain last year were offshore funds but expects this figure to rise as investors become more familiar with offshore vehicles.

A second theme, says Brunton, is a greater interest in non-traditional ways of managing money. “We have some more esoteric and different offshore strategies that we believe should be of interest to UK intermediaries. We have also seen a degree of movement away from domestic asset classes such as equities and bonds. We have a broad product offering, managing a number of core equity and fixed income products, but we’ve also developed a number of alternative ways of generating alpha. Ucits III allows greater flexibility.”

Lockwood says that traditional asset class performance has been “disappointing” in recent times, especially in the present economic climate. He adds: “The ability to offer target return funds, non-correlated with traditional asset classes, is an advantage. Before the credit crunch we were already seeing that interest.”

To cater for this demand, MSIM has, for example, launched a sterling version of its FX offering specifically targeted at British investors which, says Lockwood, is one product that sets it apart from its peers.

The currency market is the largest and most liquid market, as well as the most inefficient, says Brunton. “There are plenty of opportunities to generate alpha. If you can demonstrate with a track record that you’ve been able to make money, and not dial up risk or deviate from your risk budget, then people are going to be interested. We’re in an environment at the moment where no one is making money. Our FX funds are managing to protect our investors’ capital. They see you are sticking to what you are mandated to do.”

Ryan Hughes, a fund manager at Skandia Investment Management (SIM), says that MSIM has “very clear strengths on the currency side”. “They have a very talented team and a very clear investment process. Similarly in commodities, because it is quant driven, it’s very simple to understand.”

The focus for MSIM is not just on products but on working with clients to find appropriate solutions. “We’ve got a lot of the strategies that will do well in the current market,” says Lockwood. “In the past our institutional business has always been seen as separate but there’s a greying of the edges. We’re seeing the way our boutiques run money being increasingly of interest. People want something fresh and new, not just ‘what funds can we buy?'”According to Brunton, “the blurring between the institutional and intermediary marketplace has led to conversations with a handful of clients about creating a bespoke solution”.

He says: “We are well set up in terms of providing intermediary clients with institutional-type solutions. The Sterling Corporate Bond fund, which is an onshore fund, was developed as the shop window for our institutional business. We’re now having enquiries from intermediaries.

“We have hopes to start marketing more widely to the intermediary market. It’s the right moment for this type of product. We have seen somewhat of a flight to quality, to the top-quality investment grade issuers. We shall be going to the market with this strategy in the third and fourth quarters.”

This institutional background is something that appeals to Hughes. SIM holds two MSIM funds in its Alternative Investments fund: FX Alpha Plus, a currency fund, and Commodity Alpha Plus. The commodities fund is also held in SIM’s Spectrum fund range.

“Research on those funds has actually come out of different desks here,” says Hughes. “Morgan Stanley as a group has been very innovative in these institutional-type products. We can look at the strategy and see it’s been going for a long time. It’s very important for us that we can look at that. As a group, that history in the institutional space gives us that demonstrable comfort. We take a quantitative and a qualitative view here as to whether these funds should be included in our portfolios.”

One thing SIM is keen to do is to seek out institutional funds that retail investors might not otherwise be able to access, and incorporate them its portfolios. MSIM’s funds, says Hughes, are a good example of this.

Hughes also notes that it is important to differentiate the problems of investment banks, which have afflicted Morgan Stanley, with the security of investing in funds, where Ucits III assets are ring fenced.

Historically, says Brunton, MSIM’s business model has targeted those intermediaries who can buy products in reasonable size, such as global banks, asset allocators at multi-managers and wealth managers. Platforms and life companies, however, have been reluctant to link with offshore funds. “It’s been very difficult for the man on the street to access MSIM products. As more and more platforms and life companies link to ourselves, this will be great for our business. But this permeation of offshore funds takes time.”

MSIM’s position as part of Morgan Stanley gives it an advantage in trying to penetrate the intermediary market. “We can really leverage off our brand and our franchise,” says Brunton. “It’s of great benefit. It does open doors for initial conversations. We’ve seen people genuinely interested in our strategies, products and product mix. We’ve got a somewhat opportunistic sales and marketing strategy.”

“We can demonstrably show how we’ve harnessed the wider group,” says Lockwood. He cites the example of MSIM’s 130/30 European Equity Active Extension strategy, which uses aspects of the quant team to access sell-side analysts from Morgan Stanley.

“People have also got to look at where to put assets when more stability comes into the market,” he says. “There is a business opportunity for us. Everything is lining up in our favour. We want to access that and take the opportunity. We would like to see the intermediary business significantly increase. Many of the same trends are also playing out in our institutional business. We’ve got the product – we need to widen that to the intermediary side.”

Another part of the Morgan Stanley group that MSIM has been able to draw on is the FundLogic operation, which runs thematic strategies along the lines of the Schroder Agriculture and Pictet Water funds.

“Down the line these could be of interest,” says Lockwood. “We have a mechanism through our FundLogic platform where we can bring products to market fairly quickly. It’s another string to our bow. We have some talent in delivering Ucits III products such as our FX fund. We’ve got every intention of bringing that to bear on other alternative asset classes.”

MSIM concedes that it will never be a mass market retail distributor and has no aspirations to go toe-to-toe with established British-based asset managers. Where it can excel, says Lockwood, is in offering innovative solutions; working with clients to find a fit with what they do.

MORGAN STANLEY INVESTMENT MANAGEMENT was founded more than 35 years ago and has some 1,000 investment professionals working in 42 offices in 21 countries. Its strategies and products include global equities, global fixed income and alternatives. MSIM has assets under management of more than $600 billion (£338 billion).

The best and worst funds
The best and worst funds for each group profiled in the Focus are shown on a relative rather than absolute basis. Until recently, the best and worst funds were defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.