STEPHAN WAGNER: I’m here with Fabio Oertle, Head of Structural Products and AMCs at ISP Group. ISP stands for Investment Solution Partners. And we’re here today to talk about the AMC business – the actively managed certificate business. Let’s start right away: What is the importance of the AMC business at ISP for you?
FABIO OERTLE: Hi Stefan. Thanks for having me. It’s a pleasure to be here. We got the ball rolling at ISP for the AMC project in early 2020. Based on my team’s experience, we saw significant potential in this market, and therefore decided to enter it. Now, roughly a year later, I can look back on absolutely astonishing demand from our clients for AMCs, which couldn’t have made it any clearer that we took the right decision to enter the market. Therefore, yes, AMCs are very important for ISP. However, looking at the big picture, ISP has existed for more than 30 years and employs more than 50 professionals, and AMCs are just one of many diversified services and products offered by ISP. But there’s no way of downplaying the importance of AMCs, both for ISP and the general market.
STEPHAN WAGNER: You only reflected on how much success you had, but I think AMCs have been very successful in general. Why do you think that is?
FABIO OERTLE: The increase in assets managed through AMCs over the last few years has been truly exceptional. Based on that, yes, you can definitely say that it has been a massive success story. Behind most such astonishing growth stories, there is a solution that fulfils clients’ needs. In the case of actively managed certificates, the clients are professional asset managers that manage the wealth of their end clients.
STEPHAN WAGNER: You already touched on this a little bit, but can you go into a little bit more detail regarding what the added value of an AMC is for external asset managers?
FABIO OERTLE: Sure. Basically, it makes their work life much easier, enables them to work more efficiently, and lowers costs. The gain in efficiency helps the asset manager to focus on their core function, which is asset allocation. Through AMCs, they save lots of time they would otherwise spend on cumbersome trade allocation, settlement instructions and other administrative work. Every day, we see that these simple but crucial advantages are the reasons why asset managers choose to work with AMCs.
STEPHAN WAGNER: So, that’s a lot of the boring stuff taken care of. But, if you take a step back, what are the more general benefits and advantages of AMCs?
FABIO OERTLE: Well, actually there are numerous benefits. Let’s focus on the one of the most important ones to start with: efficiency. An AMC saves an asset manager a lot of time. How it works is that the asset manager only has to manage one single product for all their clients. For a few of their smaller clients, the AMC manager might, for example, subscribe to the AMC for 20,000 Swiss francs. For another group of their bigger clients, they might buy 1 million Swiss francs each. If the asset manager decides to invest 2% of their overall model portfolio in a certain stock, like for example Coca-Cola, they only need to carry out the rebalancing once within the AMC, and not several times for each individual client account. This means that the asset manager no longer needs to make hundreds of single client bookings against often different custodian banks. Additionally, they save time that would otherwise be spent on cumbersome calculations in order to allocate trades to the different-sized client accounts. To sum up, this efficiency doesn’t just save time, but obviously also lowers costs. All this offers an asset manager a unique opportunity to scale their business by allowing them to manage several hundreds of end clients in a very easy and efficient way.
STEPHAN WAGNER: There clearly are some very big advantages to using AMCs in terms of efficiency, but are there also other benefits unrelated to efficiency?
FABIO OERTLE: Sure. Another benefit of AMCs is that some of the providers offer state-of-the-art reporting and rebalancing tools. These web-based solutions are similar to a very professional online banking or portfolio management tool. They generate daily reports about the asset manager’s current holdings, show important risk and performance metrics, and allow the asset managers to keep their clients informed with brief management summaries. The reports – which sometimes are even customisable – can then easily be distributed among the investor base. As you can surely imagine, such a tool needs years of development. That’s why ISP has decided to enter a strategic partnership with a Swiss fintech company called Vestr, which is one of the market’s best – if not the best – life-cycle management tool for AMCs. Last but not least, AMCs help the asset manager to promote themselves by allowing them to build a track record. The performance of the AMC is tracked on a daily basis and made publically available to all of the asset manager’s investors. It’s something independent and measurable that an asset manager can show to their existing clients and, perhaps more importantly, prospective clients.
STEPHAN WAGNER: Obviously you touched on it: ISP is not the only one offering AMCs. But what makes ISP’s AMC offering particularly unique?
FABIO OERTLE: What my team and I have tried to achieve over the past year was to analyse the whole value chain of AMCs from A to Z, and have the absolute best solution for each link in the value chain. Therefore, it’s not really a single feature that makes ISP’s AMCs unique, but rather the complete offering with several key differentiators.
STEPHAN WAGNER: Could you maybe highlight some of these key differentiators?
FABIO OERTLE: Sure. There are a couple of things that set us apart from our competition. First of all, as mentioned before, we have entered a collaboration with Vestr that allows us to offer our clients a truly unique life-cycle management tool. Another prime collaboration that we entered was together with one of the world’s largest electronic trading platforms, Interactive Brokers. This enables our asset managers to execute their trades within an AMC at much more competitive rates than you would get from a traditional bank. Furthermore, as a Swiss FINMA-regulated and -licensed securities house, ISP is equipped with a very experienced AMC trading desk, which enables the AMC managers to access less liquid or even unlisted instruments.
STEPHAN WAGNER: That sounds very appealing. Now we have been talking about your platform for quite a while, but I think you probably left one of the key differentiators to the end.
FABIO OERTLE: You are absolutely right, Stefan. Even though the other aspects already help us a lot to convince our clients to invest in AMCs with ISP, I have saved the key differentiator for last.
STEPHAN WAGNER: Would you like to share it with us?
FABIO OERTLE: Of course. We issue our AMCs out of SPVs.
STEPHAN WAGNER: SPV is an acronym. Would you like to explain what it stands for?
FABIO OERTLE: Of course. SPV stands for special purpose vehicle. Contrary to the common conception, SPVs are not complex at all. They can best be compared to an empty balance sheet.
STEPHAN WAGNER: And is there an added value for an investor or an asset manager when they use a structure like an SPV?
FABIO OERTLE: Yes. It mitigates what we call issuer risk. Traditional structured products and AMCs issued by banks unfortunately bear such issuer risk. When AMCs are issued out of an SPV, this counterparty risk is mitigated.
STEPHAN WAGNER: Can you explain to our listeners how that actually happens?
FABIO OERTLE: Well, an AMC, like every structured product, is a certificate, in contrast to a fund, right? When you use a traditional AMC at the bank, that certificate will be part of the bank’s balance sheet. On that bank’s balance sheet, there are hundreds, if not thousands, of liabilities, such as other AMCs, structured products, the short- and long-term debts of the bank, and also other liabilities of other departments of that bank. Theoretically, and explained in a simplified way, if the bank, as the issuer of the AMC, gets in some sort of trouble and does not manage to repay some of those liabilities, the AMC might experience a severe drop in value. In the worst-case scenario, if the bank defaults, it might well be even a total loss, even though the assets in the AMC are still very much intact, and might even have no decrease in value at all. This tail risk is a risk that many asset managers do not want to live with. Everyone knows it’s a small risk, but we’ve all seen that, in rare cases, it can and does happen.
STEPHAN WAGNER: Yeah, I mean probably the most recent scenario of this nature that is still very fresh in our memories is Lehmann Brothers, which is probably a good example here.
FABIO OERTLE: Absolutely. Hundreds of client interactions made us recognise the imminent demand to mitigate this kind of issuer risk. Imagine: many of the asset managers control a big part of their clients’ wealth through AMCs. That’s exactly the reason why we came up with the solution of using SPVs.
STEPHAN WAGNER: So how exactly does an SPV mitigate the issuer risk?
FABIO OERTLE: Now, the situation with SPVs is very different. You do not have this typical issuer risk. The backbone of this is that every one of our AMC managers gets their own SPV.
STEPHAN WAGNER: And how does this work inside the SPV, then?
FABIO OERTLE: Once you issue the AMC out of the SPV, the certificate will become the SPV’s first balance-sheet entry on the liabilities side. The cash paid by the investors for the AMC will flow directly to the other side of the balance sheet: the assets of the SPV. Now there are two important things to understand here: First, the value of the certificate fluctuates directly with the value of the assets held by the SPV. Secondly, and this is the key point, there’s nothing else in the SPV. Nothing but the AMC and its assets. No other liability, no other business activity, no other AMC within the SPV that could potentially dip into the assets of your AMC. That’s how the traditional issuer risk is mitigated.
STEPHAN WAGNER: Now you mentioned that for every AMC there’s a dedicated SPV that the asset manager is allocated. Isn’t that associated with a lot of work and high costs?
FABIO OERTLE: We do indeed launch a new SPV for each of our asset manager clients. For us, that was an absolute must-feature in our set-up. We wanted to make sure that our AMCs are as safe as possible. It was our nightmare scenario to have an AMC being contaminated by another one that the asset manager cannot influence. We were advised by one of Switzerland’s best law firms to make absolutely sure that our SPVs are fully ring-fenced and bankruptcy-remote. But we also managed to find a prime partner, probably the best when it comes to corporate services worldwide, that supports us in everything related to these SPVs. With this strategic partner, we have already managed to develop an outstanding and highly efficient collaboration and processes that allow us to issue AMCs out of SPVs in a very time- and cost-efficient manner.
STEPHAN WAGNER: Now, you and I are quite familiar with what SPVs are, but are investors? Do they understand what they’re getting?
FABIO OERTLE: Surprisingly, very much so. To be quite honest with you, I expected more headwind and more education to be necessary regarding the topic of SPVs. I anticipated prejudice and criticism due to such structures having been misused during the 2008 financial crisis for things like CDOs. But no, I was very positively surprised that the vast majority of clients we talked to in the past year didn’t have any scepticism at all. However, it’s also not like SPVs are something new or unknown – they have actually existed for almost half a century, right? It shows me that most asset managers have realised that the SPVs themselves are a very practical tool when they are used in the correct manner and for the right purpose.
STEPHAN WAGNER: Fair point. Now let’s leave SPVs behind and think about how AMCs – actively managed certificates – work. There are two main styles: the fund style and the certificate style. In your view, what are the benefits and advantages of each style?
FABIO OERTLE: Well, first of all, the difference between fund style and certificate style is best described by looking at what happens when investors buy the AMC in the secondary market. In a fund-style AMC, the cash proceeds would flow directly to the cash component of the AMC. Nothing happens with this cash until the day the AMC manager takes a decision on how to invest that new money. In a certificate-style AMC, however, the incoming money would be immediately and automatically invested into the current portfolio constituents according to their current relative weightings. So it’s very easy to see the advantages of both. If you are a relatively small- to medium-sized asset manager, you typically do not have daily or even weekly inflows or outflows within your AMC. In these cases, the fund-style AMC is best suited as it gives the AMC manager time to think about how to invest incoming funds. If, however, you expect very frequent and daily inflows and outflows with your AMC, a certificate-style AMC would certainly be the better fit. In the end, as always, the client is king, and they decide which version they prefer.
STEPHAN WAGNER: And in which certificate style do you see the most growth right now?
FABIO OERTLE: Oh, in my view that’s clearly the fund-style certificates.
STEPHAN WAGNER: And why do you think that is?
FABIO OERTLE: First and foremost, at ISP, we see a very one-sided demand for fund-style certificates.
STEPHAN WAGNER: And why do you think that is?
FABIO OERTLE: Well, certificate-style AMCs win the race against fund-style AMCs when the AMC manager expects a very busy secondary market. A very busy secondary market is clearly correlated with the size of the AMC manager and its assets under management. So, it’s typically the bigger banks that are looking for certificate-style AMCs. In the area of 50 or 100 million Swiss france AuM per AMC, certificate-style AMCs, however, fully compete with funds. Now, these bigger players also often already have their own sophisticated tools to efficiently manage their clients’ assets. Consequently, it’s the small- to medium-sized asset managers that profit the most from AMCs. Since they typically don’t have very frequent inflows and outflows with their AMC, the fund-style certificate is perfect and really tailor-made for them.
STEPHAN WAGNER: Now, you mentioned funds, and that AMCs are competition, in a sense, to funds. How would you convince a bigger asset manager, then, to launch an AMC instead of a fund?
FABIO OERTLE: Well, Stefan, as is the case with everything, both funds and AMCs have their pros and cons. Where AMCs certainly shine is when it comes to costs. Everyone knows that funds carry substantial fixed and recurring fees, which are also closely related to the heavy legal workload. Secondly, AMCs are not only substantially cheaper, they also benefit from a much quicker time to market. While AMCs are set up within just a few weeks, a typical fund easily takes several months to be incorporated. Last but not least, AMCs are definitely much more flexible compared to funds when it comes to product design. One of the main reasons behind this fact is of course the lower regulatory requirements. So the bottom line is: our clients’ feedback over the past few years was that funds are only worth looking at starting from 50 million Swiss francs upwards. But even then, in certain circumstances, AMCs could be the better solution to serve an asset manager’s demand.
STEPHAN WAGNER: Now, you have clearly experienced strong growth at ISP in the AMC market, but we also see this with everybody who is currently participating in the market. What do you think is the growth rate currently, and how big is the current overall AMC market? I’m asking this because most AMCs are private placements, so it’s very difficult to get public information about them.
FABIO OERTLE: You’re absolutely right. AMCs have grown at an astonishing rate over the past decade. To be honest, I haven’t seen any official numbers, but I would estimate the global AMC market to exceed 1 trillion US dollars and its growth rate to be in the low double digits. But, come on, that’s massive. However, even though the increase in AuM over the last decade has been absolutely incredible, I am convinced there are still plenty of asset managers that are not yet familiar with AMCs. Therefore, I am very optimistic that this amazing growth story will continue in the upcoming years.
STEPHAN WAGNER: Great. Thank you very much, Fabio, I really much appreciate that you took the time to talk to us. Now, I have one question I like to ask everybody, and that is: What are your favourite three finance movies, and why? I mean, one is enough, but I’ll also happily take three.
FABIO OERTLE: Alright, yes, sure. First of all, I have to say that I love movies that are based on a true story. The first fact-based movie that comes to mind that also has something of an educational aspect is The Big Short. There’s a lot to learn about how different parts of the global financial markets interact with each other, how they depend on each other, how individuals play their roles in them, and how greed, non-transparent structures and wrong incentives can cause a huge historic financial crisis. It’s simply a fantastic movie with a lot of entertainment and lessons to be learned. As my number two and three top finance movies I would go for the two Wall Street movies with Michael Douglas. The first one, starring a then fantastic Charlie Sheen, was actually filmed in the year I was born, which makes it quite interesting for me. It shows how complex and potentially hugely lucrative the financial market already was more than 30 years ago. These movies are well worth the watch for financial experts and laymen alike. Especially for the younger generation, it provides a very valuable insight into how the markets worked in the past. This is important because, in the end, that’s the foundation of how they work today, and how they will work in the future.