The U.S. market is a key area of focus for many European managers with the ambition of establishing a global presence due to the market’s size and potential. Findings from Cerulli Associates, a global research and consulting firm, conclude that one of the ways that asset managers are targeting the country is through subadvisory agreements.
Subadvisory agreements do present some challenges; however, they are a beneficial vehicle for European managers that have an interest in the U.S. market but are lacking the resources to build a presence on their own. Aldrin Boraine, senior analyst in Cerulli’s European retail practice, explains, “Despite the U.S. subadvised mutual fund industry contracting in 2018, many European managers indicate that subadvisory is an attractive channel and entry point for their firms.”
With subadvised agreements, offshore managers do not need to sink large fixed expenditures into building a salesforce. “Entering subadvisory agreements means European managers can acquire distribution, brand recognition, and a salesforce that understands the nuances of the U.S. retail wealth management market,” adds Boraine.
Managers should be aware that the U.S. subadvisory space does present some product-related challenges. Research shows that U.S. investors have a home-country bias and are, therefore, not looking for U.S. expertise from foreign managers. To combat this challenge, Cerulli suggests that managers focus on what they are good at from a product perspective—once managers build trust and perform well, they can look to offer sponsor firms different products.
“One of the key areas of product-related focus—which is likely to attract subadvised assets—is environmental, social, and governance (ESG) capabilities,” says Boraine. “Despite increased conversations around ESG topics in the U.S., implementation is lacking compared to markets like Europe.” Although there is a lack of actual investment dollars, Cerulli believes that ESG is an area worth monitoring as the conversation turns into action and the factors become more important to subadvisory sponsors.
Thematic products, such as those focusing on artificial intelligence, are also becoming increasingly popular for sponsors. “The narrative around the investment is appealing and easy for end-investors to understand,” adds Boraine. Several managers note that the most challenging aspect for entrants is creating a product range that appeals to U.S. investors. Differentiation is important when approaching sponsors and thematic products could be one way of differentiating the product offering.
These findings and more are from the October 2019 issue of The Cerulli Edge—U.S. Asset and Wealth Management Edition, which explores why the subadvisory channel remains an important way for firms to enter new markets, and what European managers should consider when building their U.S. presence.