The sub-advised model is in resurgence. Nicholas Pratt looks at the reasons for the boom and the prospect of it continuing.
The sub-advised model, whereby a bank or other promoter outsources investment to a non-affiliated fund manager, is in resurgence. Data from Cerulli Associates issued in 2023 showed that sub-advised funds attracted €32.9 billion in net new inflows during the first four months of 2023, defying market volatility and an overall decline in assets under management (AuM).
The Cerulli report found that the sub-advised model is growing at different rates across Europe. But while the UK, Italy and Switzerland lead the way in terms of assets, Ireland is bullish on the sector.
According to Furio Pietribissi, CEO of Mediolanum International Funds, the Ireland-based asset management arm of Italy’s Banca Mediolanum Group, the sub-advised model is especially suited to Ireland because of the domicile’s long history of outsourcing and delegation.
When the funds market properly developed in Ireland in the 1980s and early 1990s, it was built around outsourcing. Sub-advisory – or delegation – was a core element, even if. Initially. delegated managers were entities around the world of the same group which had established funds in Ireland, rather than independent of the groups. This allowed Ireland to develop a unique experience and deep understanding of how delegated models work, says Pietribiasi.
“Innovating and adapting the funds and asset management industry in Ireland is helping address the challenges facing investors and the wider society in which it operates.”
-Pat Lardner, CEO, Irish Funds
“The Central Bank of Ireland has gone through the authorisation of hundreds and hundreds of entities domiciled in the EU and outside Europe providing investment services to Irish vehicles. It has done equivalence analysis on regulatory standards and established numerous MoUs with different regulators to facilitate information exchange. For this reason, Ireland has become the best place for sub-advisory with clear processes, effective execution and timing.
He adds that the Central Bank’s expectations and requirements are “very clear and prescriptive” on dedicated resources and activities for delegate managers. Oversight is well regulated by “CP86” – a package of rules on resources and governance – and well-defined responsibilities and accountabilities regulated by the Individual Accountability Framework and soon the Senior Executive Accountability Regime (SEAR).
“All these regulations are unique to Ireland and are on top of Ucits and AIFMD. This provides a very solid framework to ensure very tight supervision,” says Pietribiasi.
He adds that the sub-advised model is gaining traction because it addresses a multitude of different business needs. “Some leverage it for product innovation, some for better performance quality resulting from highly specialised managers. Others are attracted by how branding can increase product attractiveness and others for its potential to create better manufacturing margins for intermediaries,” says Pietribiasi.
“Of course, for many it’s a combination of all of these. It’s also very attractive for managers because, while the pressure on fees is higher, longevity is much better and the servicing cost is lower, particularly when compared to pure fund distribution, which requires substantial financial and people resources. So, it is a win-win for everybody – asset managers, intermediaries and clients.”
“For several years, there was a subset of fund promoters who sought to be the intellectual capacity behind a fund but circumvent the spirit of the regulatory framework by positioning themselves as advisors rather than licensed fund managers.” -Keith Milne, CEO and country head, Universal Investments
Boutique funds & ESG
According to data from Allfunds Data Analytics, sub-advised funds accounted for 11% of the Ucits funds universe as of June 2023, equivalent to €1.38 trillion in AuM.
Growth is especially strong in the number of boutique fund managers working in the sub-advisor space, particularly when it involves ESG mandates issued by sponsors. In the Emea region, the number of ESG-focused mandates that were sub-advised by boutiques grew by 45% over the course of 2022.
ESG funds are an area where Ireland has enjoyed some success in recent months. As of November 2023, ESG products accounted for over €1.2 trillion in AuM, equivalent to 31% of all AuM in Ireland.
According to Irish Funds CEO Pat Lardner, the rapid growth of ESG products is clear evidence of Ireland’s funds industry “continually developing our capabilities, innovating and adapting the funds and asset management industry in Ireland is helping address the challenges facing investors and the wider society in which it operates”.
“Additionally, the Irish Government’s Funds Sector 2030 Review demonstrates their commitment to enhancing the funds and asset management sector’s ability to meet the needs of global investors and the investment managers who look to Ireland as a trusted partner which has a breadth of expertise and widening capability,” says Lardner.
Mediolanum is one of the companies fully delegating management of its sustainable products. “Regulators have made it very clear that ESG or sustainable investing cannot be improvised and requires specialised skills, competencies and very structured and dedicated processes,” says Pietribiasi. “For this reason, nobody in the market wants to risk their reputation or, worse, be exposed to fines, so delegating to somebody with the necessary expertise and the right track record is the easiest solution.”
He says the firm is “obsessed” with making sure Article 9 funds – those categorised with the highest levels of sustainability impact – are delivering on their mandates through delegated manager decisions and that managers have the necessary tools to measure and monitor impact.
“In order to do this, we have contributed to developing an analytic tool called Skillmetrics with an Irish start-up Fastnet, which analyses investment decisions and allows us to monitor and measure against different ESG ratings, sustainable goals, indicators or principal adverse impacts,” says Pietribiasi.
“Less prominent elsewhere”
Ireland’s evolution as a major fund domicile with a huge variety of products and a focus on a delegated service model has laid the groundwork for a substantial sub-advisory market, says Keith Milne, CEO and country head for Universal Investments.
“Ireland has a well-established delegation model for fund advisors, in which ManCos appoint external delegates and oversee the collective resources contributing to the functions of the fund,” he says. Milne says this framework places an emphasis on the oversight role and responsibility of the ManCo and optimises the benefits of multiple experts acting for a fund, leading to increased performance for investors.
He adds: “Despite the delegation model’s benefits, the model is less prominent elsewhere in Europe where the various functions are more often handled in-house with less delegation of services to independent parties.”
This means there is a certain reliance on the delegation model, which has been subject to more regulatory scrutiny in recent years. Recent clarification in the EU on the Alternative Investment Fund Managers Directive – “AIFMD 2” – has allayed fears around the future of the delegation mode in general, with the updated regulation cementing the future of this model for the foreseeable future, says Milne.
In more specific areas of delegation, however, the sub-advisory model has become more of a focus for regulators, largely due to fee structures, says Milne.
“For several years, there was a subset of fund promoters who sought to be the intellectual capacity behind a fund but circumvent the spirit of the regulatory framework by positioning themselves as advisors rather than licensed fund managers.
“It is absurd that in Europe the discussions are to limit delegation only to entities in the EU, despite the terrible outcomes for clients reducing access to specialised managers.”
-Furio Pietribiasi, CEO, Mediolanum International Funds
“As fund promoters, these groups could garner the lion’s share of fees. However, regulators have recently focused on these arrangements and corrected the structure such that advisors cannot earn a greater portion of fee than the discretionary investment managers,” says Milne.
This model is adhered to across traditional securities funds, though in some more niche illiquid asset classes – such as real estate and private equity funds where only institutional investors are targeted – regulators acknowledge the value in this very specific additional level of advisory expertise, and advisors are allowed to earn a significant portion of the fees, adds Milne.
“Pinch of politics”
Pietribiasi also expresses concern that regulation and politics could threaten the success of the sub-advised model in Ireland. Despite the evident value for investors in terms of both returns and cost reductions, not all regulators have the same familiarity with the model, he says.
“There’s probably also a pinch of politics following Brexit, which has triggered many conversations since 2016 in reviewing delegation rules limiting this activity to entities in EU.”
These proposals have been turned down repeatedly in the European Parliament in Brussels, but they still resurface regularly, says Pietribiasi.
“It is absurd that in Europe the discussions are to limit delegation only to entities in the EU, despite the terrible outcomes for clients reducing access to specialised managers, delivering possibly lower quality results and certainly limiting the choices.
“The EU should instead focus on regulating effective oversight of investment delegation as the Central Bank has done in Ireland, and as has been done in Europe on outsourcing, imposing adequate rules across Member States,” says Pietribiasi. “This is the right way to create a real level playing field which starts by protecting investors’ interests.”
