A grass-roots approach to growth

Allianz Dresdner Asset Management is a huge global player, with more than E1trn of assets under management, yet its UK retail Oeic has just 14 subfunds – far fewer than many of its smaller rivals. Of these funds, six are in the second quartile over three years, with no funds reaching the top 25% of their respective sectors. Over one year there are four funds in the first or second quartile. The acquisition by Allianz of Dresdner RCM in 2001 led to the rebranding of the former Dresdner RCM funds in February last year. But as head of retail sales & marketing Nick Smith points out, the takeover was more than a mere branding exercise. “Allianz acquired a lot of investment management companies, but instead of crunching them all into one, it has preserved the character of each,” he says. So RCM continues as the core equity platform for the whole group, while fixed interest assets are managed by Pimco. “RCM is a growth-orientated equity manager with a focus on bottom-up, fundamental research,” says Smith. “It has a lot of in-house analysts, who are organised globally on a sector basis – so, for example, the telecoms team would have some people in London, some in San Francisco, some in Asia and some in Frankfurt – it gives the benefit of a global view.” As well as its investment analysts, RCM has a proprietary research platform called “Grassroots”, which takes a qualitative, market-research approach. “For instance, if we wanted to assess the impact of British supermarkets expanding into Asia, we would send researchers to Asia to ask what they thought of Tesco in Bangkok,” says Smith. Individual managers can then draw on these resources to understand how companies in their own markets are perceived globally. Bates Investment Services head of investment James Dalby is a fan of Pimco, and his firm currently recommends Allianz Dresdner’s High Income Bond fund. Aidan Kearney, investment director of Premier Funds, the fund of funds arm of Artemis, does not hold any Allianz Dresdner funds, but he does say UK Mid-Cap and UK Growth fund manager Trevor Green is “doing a great job” since arriving at the firm two years ago from Credit Suisse. Dalby rates Green’s funds as a hold rather than a buy. “Anyone in them shouldn’t be exiting,” he says. “But we are not looking to make them a buy in the short term as there is so much choice in the UK All Companies sector.” The news is worse for the underperforming North American fund, however: “Currently it’s a sell for us, and it’s hard to see we’d change our minds. It has had an awful three years or so and people should be looking at alternatives.” Despite its patchy fund performance, Smith is confident about Allianz Dresdner’s strengths. “Size is important,” he says. “Globally we’re in the top five in terms of funds under management. Allianz is very big and provides stability of ownership, which is vital for fund management companies as it encourages staff to stay. “The way the firm is structured is also an issue. Most companies this size tend to become homogenised, but keeping the separate entities within Allianz Dresdner intact allows us to offer products managed with quite different approaches.” On a less general note, Smith says: “Pimco has been a huge asset. It is the world’s largest bond fund manager and one of the most respected. Its tremendous performance record has given new vigour to our bond funds and allowed us to make an impact in the retail market.” Dalby echoes this view, but sounds a note of caution: “Allianz Dresdner’s main strength is the Pimco fixed interest team, which has a very strong brand, particularly in the US. But outside of fixed interest – notwithstanding the performance of Trevor Green – I don’t really see where the firm can add value in a crowded retail market.” Kearney sees Green as central to the Allianz Dresdner story, however. “To be serious in the UK, you need a good UK fund. Trevor Green is an avid collector of information, takes active positions and has delivered results. But Allianz Dresdner is competing in difficult areas and a lot of the time we simply have better options elsewhere.” According to Smith, the Allianz Dresdner fund range is subject to constant review. “If investors are not interested or funds are not delivering, we will look to reconfigure,” he says. In fact, just such a process was behind the launch of High Income Bond, which celebrates its first birthday in March. “We couldn’t see a future for our Managed Preference & Bond fund, so we used that as a vehicle to change into the High Income Bond fund and gave it to Pimco to manage,” says Smith. As well as making Bates’ buy list, the High Income Bond fund has put on 7.48% since launch, with volatility below that of the UK Corporate Bond sector despite the fact that the fund is actually classified in the much riskier UK Other Bond category. It is significantly ahead of the UK Corporate Bond sector average return of 2.48%, though it has slightly underperformed the UK Other Bond sector. UK Corporate Bond funds have a maximum permitted high-yield weighting of 20%, whereas Pimco believes the optimal holding in high-yield averages 25-35% across an economic cycle. “We didn’t want to compromise to get the fund slotted into the UK Corporate Bond sector,” says Smith. Allianz Dresdner does not currently offer a UK Corporate Bond fund. However, Smith says: “Looking at it from Pimco’s core belief, we believe the High Income Bond fund does what a normal corporate bond fund would do in terms of risk, with some extra returns. We wouldn’t launch a ‘plain vanilla’ fund as it wouldn’t allow Pimco to add value.” Over three years, the Pimco-run Gilt Yield fund is Allianz Dresdner’s best performer in absolute terms, with a return of 8.95%. None of the firm’s equity funds has made a positive return over this period, but the North American fund brings up the rear with a fourth-quartile return of -45.19%. Over one year too, the fund is near the foot of its sector, with a 13.45% return placing it 89th of 91 funds. Smith defends the fund’s performance: “The North American fund has a core growth style and invests in large-cap, quality growth companies. The last few years have not favoured that type of investing, as a value bias has been better for most of the time.” He points out that the fund has retained its AA rating from Standard & Poor’s throughout its poor run. “The fund is very style-orientated, and when things don’t go your way, you either change your style or stick with it and wait for that style to come back in. S&P accepts that the fund is managed well according to its style.” Kearney, however, suspects there may be more to the underperformance than a simple style clash: “The US fund is run out of San Francisco by a manager who runs a couple of billion dollars in the US. A little fund for a few UK investors is probably not in the forefront of his thoughts.” The best-performing fund over one year is Trevor Green’s UK Mid-Cap fund, with a return of 50.66%. But although Green still thinks mid-caps will do well in 2004 (see news, p6), others are less convinced. Dalby says: “We’ve seen the valuation gap between large and mid-cap stocks close, so this year won’t be great for mid-caps. Going forward, we could see the UK Mid-Cap fund falling back to second-quartile.” Kearney points out that, although the mid-cap fund has done well, it is not the whole story as far as Allianz’s UK equity offerings go. He says Green’s UK Growth fund, while it carries some exposure to mid-caps, “would be populated with known names” – and hence would fare better if the market focus returned to blue-chips. Even further down the risk spectrum is Mark Lovett’s UK Equity fund, an index-plus fund based on one of Allianz Dresdner’s institutional products. Smith says: “The retail share class was launched as a less ‘growthy’ fund in terms of risk and return.” Allianz Dresdner sees Trevor Green’s two funds and the High Income Bond fund as its “shop window” products, and is focusing on these for the forthcoming Isa season. But rather than coming up with an Isa-orientated special offer, Smith says the firm is actually cutting the funds’ initial charge for non-Isa investors to 3%, in line with the Isa initial charge, until the end of April. Despite having some good performance to promote, Allianz Dresdner has less recognition in the UK market than its E1trn of global assets might be expected to command. Dalby thinks this may be down to the firm’s most recent change of identity: “The Allianz brand is not strong in the UK retail marketplace.” However, he says the handling of a name change is at least as important as the change itself. “If you look at JP Morgan Fleming, it has been through loads of names but it promotes its brand quite well and the retail market understands what it’s about. Allianz has not yet taken that opportunity, with the result that it is a much weaker brand in the UK market than Dresdner used to be.” Smith is unconcerned, however: “People tend to accept name changes faster than you think. Allianz is not very high profile in the UK but globally it is better known than Dresdner. We see the move as positive and hope clients do too.” For Kearney, the continued use of the Dresdner name is enough to avoid confusion: “Dresdner is a big, known name. Putting Allianz in front has moved the company up the alphabetical table but it hasn’t affected its identity from my point of view. Most discerning investors will have done sufficient homework to know who they are dealing with.” As Smith points out, Allianz makes most of its sales to the top end of the intermediary market, including funds of funds and discretionary managers, who must surely fit Kearney’s definition of “discerning investors”. Even so, Allianz Dresdner is taking steps to promote its brand, which will be familiar by now to fans of Bayern Munich and the BMW Williams Formula One team. But visibility needs to be backed by credibility, and in the UK retail fund market it is the bottom line that counts. Allianz Dresdner must build on its successes with Trevor Green and the Pimco team if its UK operation is to reflect its global muscle.