CRITERIA FOR PRODUCT PORTFOLIO MANAGEMENT BNP Paribas Investment Partners

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CRITERIA FOR PRODUCT PORTFOLIO MANAGEMENT

BNP Paribas Investment Partners

Yännick Sascha van den Nieuwendijk

University of Groningen Faculty of Economics and Business Master of Science in Business Administration Specialization: Organizational and Management Control

Groningen, April 2012

Student number: s2147955

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Criteria for Product Portfolio Management: BNP Paribas Investment Partners

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Preface

Since my youth I was fascinated by financial markets and the story behind the figures mentioned on the news. During the lectures on the university this interest has grown and for my master thesis I got the opportunity to combine my interest with practice, through writing my thesis by BNP Paribas Investment Partners. With this thesis I conclude my degree, Master of Science in Business Administration, specialization: Organizational and Management and Control in the Faculty of Business and Economics of the University of Groningen.

For the result of the performed research I would like to thank my family and friends for their support. In addition, I would like to thank my supervisor prof. dr. D.M. Swagerman for his cooperation and feedback during the writing of my thesis and also dr. L. Dam for being my second supervisor. Finally, I would like to thank Aldert Veldhuisen and other colleges from BNP Paribas Investment Partners for the learning experience during my internship.

Yours sincerely,

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Abstract

In this study the criteria for product portfolio management was the central subject of research. The focus is on a specific company, BNPP IP, to formulate a broader set of criteria that can be used by asset managers to manage their portfolio on business level. Regarding the five methods of Cooper for portfolio management three of them were useful for this research: financial methods, business strategy and bubble diagrams. The following criteria were the results of the analysis and the comparison with the company: asset under management, revenues, market share and market growth. Complementary criteria are related to the choice of business strategy and dependences to segments, clients and products.

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General introduction

‘Recently, banks have found themselves facing more aggressive competition, uncertainty and unlimited opportunities. No bank can offer all products/services and be the best/leading bank for all customers. They are forced to find a new basis for competition. A bank must examine

its strengths and opportunities and take a competitive position in the competitive marketplace’ (Zineldin, 1996).

The positioning question for a financial company in the marketplace is eminent due to the evolvement of the financial markets, the impact on the revenues, changing clients’ behaviour and the development of different regulations in the branch. For a manager in this business, this means keeping up to speed with the environment and shaping the organization to be adaptive.

To be adaptive the company also has to pay attention to the current product portfolio of the company. There are some topics around managing the product portfolio, which require some attention. To manage a product portfolio within the company the management needs a set of criteria to evaluate and measure the composition of the portfolio. To formulate a set of criteria like this is a challenge for each company, especially within the asset management branch, through a lack of available research on business level. This study will focus on one specific case, BNP Paribas Investment Partners, to eventually provide more insight in the criteria to evaluate and measure the composition of the portfolio.

The first chapter will elaborate on BNP Paribas Investment Partners, a substitute of BNP Paribas, where the research will be performed. The second chapter will discuss the research design used to address the research questions. Besides the theories used in this research also the data sources and the measurement and perception methods will be presented.

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1. Introduction BNP Paribas and the asset market

The first chapter will elaborate on the organization where the research will be performed. First a general introduction will be given of BNP Paribas Group (BNPP) after which BNP Paribas Investment Partners Netherlands (BNPP IP) will be described. To enhance the perspective of the organisation the market and the strategy will be elaborated. Furthermore, the next section will discuss the main segments and the product portfolio. This chapter is based on general available information from BNPP IP.

1.1. BNP Paribas Group and Investment Partners Netherlands

BNPP is one of main banks in Europe and has activities in more than 80 countries. There are more than 200 000 employees, from which 160 000 are employed in Europe. There are three core activities within the bank: Retail Banking, Investment Solutions and Corporate & Investment Banking. BNPP has four different home markets for retail banking in Europe: Belgium, Italy, Luxemburg and France. Besides these four home countries the bank has two divisions named Investment Solutions and Corporate & Investment Banking, which have large positions in the Asian and European market.

In the Netherlands BNPP is active since 1863, first as Banque de Paris et des Pays-Bas, one of the earlier names of BNP Paribas (BNPP IP, 2010). BNPP is servicing corporations, financial institutions, public owned companies and individuals. The presence in Netherlands consists of the bank itself, with regional business centres, and eight sub-holdings, representing activities like leasing, insurance and wealth management. Since its acquisition of Fortis Investments (2009), BNPP has also an asset management entity in the Netherlands. Through this acquisition of Fortis Investments approximately 150 employees are working for BNPP IP NL, located in Amsterdam. BNPP IP has further several investment centres with client service centres and functional departments like human resource management, marketing and corporate governance etc (BNPP IP, 2010).

1.2. Asset market

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8 BNPP IP is market leader with 25% in the mutual fund market in the Netherlands; more than 90% of these customers are clients by larger banks. The other part of the customers is client of the smaller banks like SNS Bank and Theodoor Gilissen Bankiers.

Besides the retail clients the pension funds are important. Currently BNPP IP holds the 12th position in this market with amount of asset under management more than 25 billion euro (Sector in cijfers, 2011/2012). The institutional market is a unique market compared with other countries in the world. Large holdings of capital by institutions should fulfil the future obligations towards the people who are retired. In this market several developments have taken place in the last years. An example: changes in supervisory rules, according to Ponds and van Riel (2007) the supervision of pension funds in the past war period were quite loose. However, from January 2007, the ‘Financieel toetsingkader’ (FTK, FinancialAssesment Network) is effective. This body of supervision rules aims to make the market more transparent. Another hot item with pension funds is ‘Underfunded’. In 2009 most pension funds were underfunded according to the Dutch Central Bank (DNB). This relation is positively supported through the population that is rapidly aging due to the combined effect of a lower birth-rate and a lower mortality rate etc. (Bovenberg and Knaap, 2008).

1.3. Strategy

The organisation of BNPP IP could be addressed as a company in the profit sector. The initiatives are then also mostly financed with own capital. The government has only influence with regulations that they initiate in the market. BNPP IP is trying to adapt to and cope with these changes in regulations.

Tracey (1996) mentions three different categories were a company could distinguish themselves in compared to their competitors. Product leadership stands for delivering the best product or service to the customer; differentiation has a central position. The second category is operational excellence, delivering the products or services against the lowest cost possible. The third category is called customer intimacy; offer the best solution to your costumer.

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9 The larger banks and the institutions are the reason for existence. They value personal advice and service (BNPP IP, 2011). To be innovative and adapt to the economic developments in the world they often launch new products. An example, with the upcoming economy of China the opportunity of high performance in funds was realistic. BNPP IP was required to invest in China with a maximum amount of 500 billion euro. They launched the Flexifund Equity China A that should manage these holdings. The product became quickly popular with the clients and a run on this product was developed. The run caused that the amount of the holding was quickly growing what resulted in higher fees, if clients wanted to invest in the fund. Eventually they had to disappoint some of their clients, because the maximum of the fund was reached. Besides continues improvements on product level, BNPP IP is trying to fulfil their clients’ needs through providing them investment solutions.

The clients should also be able to recognize themselves in the organization and that could only be established through personal relations (BNPP IP, 2011). The relationship managers are visiting the clients on regular bases and discussing their current needs and the possibilities for the future. Regarding the product portfolio the management team is focussing on 1) the amount of assets under management (AUM), 2) the profitability of the organisation and 3) the brand awareness. BNPP IP is relative new player on the Dutch asset market, but they have a large position through earlier acquisitions.

1.4. Segments and products

BNPP IP has several clients that can be segmented into two groups: external distributors and institutional clients. The external distributors are the larger banks in the Netherlands like ING, ABN AMRO and Rabobank. These banks offer the market the possibility to invest in the funds that are managed. The institutional clients are for example the larger pension funds like: Stichting Pensioenfonds ABP, Stichting Pensioenfonds Zorg en Welzijn en Stichting Pensioenfonds Metaal en Techniek etc.

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Figure 1.4.1. Construction Product Portfolio

These asset classes can be further divided in subclasses. The subclasses describe what kind of asset allocation or equity BNPP IP will invest in behalf of their customer. Examples of equities are Asia/Pacific, Equities Emerging Markets and Fixed Income Global etc. In total there are 161 different subclasses distinguished. These subclasses can be further separated in a total of 814 different funds were customers can invest in.

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2. Research design

The research methodology has a central position in this chapter. First an introduction to the problem statement will be given. The following part deals with the problem statement and the theoretical background of this research.

2.1. Introduction to the problem statement

Often problems can be divided in three different problems: a target-, a perception- and a reality problem (De Leeuw, 1986). The existence of the first problem mentioned is caused through unrealistic wishes by the problem owner. A perceptions problem can be solved through changing the perception of the problem owner. The third problem is a problem where the perception and the aims of the problem owner are not taken as a starting point, but changing reality itself (De Leeuw, 1986). With research questions in the third problem area, researches should be looking for the ‘real’ problem. In a research no underlying problems should exist; the research would only give a part of the solution.

BNPP IP has the ability to gain information about their portfolio regarding the different segments, clients and products mentioned in chapter 1. The data is presented in a PIVOT-file and contains detailed information about more than 3100 products and every country where the holding is active. Most managers currently aren’t using information about the product portfolio, because they don’t know how to generate this info.

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12 Another issue has to do with the amount of products and their contribution to the overall performance of the company. When discussing the contribution of the products the first noticeable issue was the amount of different products that are offered on the market, 814 products only on the Dutch market. No insight could be given by the managers in what the influences is of th individual products and the total product portfolio on the overall amount of AUM and SNR.

Regarding the issues above the management of BNPP IP is searching for more structure in portfolio management. To realise this a set of criteria will be necessary for the decision process regarding the composition and structuring the product portfolio.

2.2. Methodology

In order to have a good foundation for a research it is important to have a clear picture of the methodology of the research. There are many different methodologies to develop a structured research. In this research the ‘Ballentent’ van De Leeuw (De Leeuw, 1996) is chosen, because it gives a clear overview of the important aspects of a research design.

In a methodology perspective the approach of a research are the combined decisions over the different balloons given in the figure by De Leeuw (1996). De Leeuw stated that the research design could be regarded as linked decisions about:

1. Problem statement: What do you want to produce and for who?

2. Theoretical concepts: In which theoretical concepts do you want to cover the appearance?

3. Data sources: In which way is the data collected?

4. Measurement and perceptions methods: How do you subtract the data from that? 5. Analysis and reportage: How does the material collected being analysed and how do

the results being offered to the client?

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13 2.3. Problem statement

In this subsection the problem statement will be discussed. The problem statement must be relevant, researchable and cover the aim (De Leeuw, 1996). Relevance has to do with the value to the client when the research is finished, in this case BNPP IP and the literature in this field. Researchable is that proper results can be realised within the set preconditions. With these different conditions in mind the following problem statement is formulated.

Aim

The aim is to give BNP Paribas Investment Partners insight in the composition of their current product portfolio.

Central question

- Which criteria should be used to manage the product portfolio of an asset manager?

Describing questions

 How is the current product portfolio structured?

 Which parties have influences on the product portfolio?  How does the management team judge their product portfolio? Literature questions

 What is product portfolio management?

 Which different criteria are recognized in the literature to judge a product portfolio? Preconditions

De Leeuw (1996) separates two different kinds of preconditions, process and product conditions. The first conditions have to do with process and the second one with the eventually result of the research.

 Process conditions

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14  Product conditions

o In the research only BNPP IP is taken into consideration, other organisations of BNPP are left out consideration.

o Only the Dutch market segment and products are taken into account with the recommendations.

o Information about underlying and supporting processes is left out of consideration.

o This research is about managerial activities, the information system of BNPP IP is considered as given, because an information system only supports decision making for the different managerial activities.

Definitions

Product: A product, based on Jain and Wu (2000) can be defined as fund.

Portfolio management: Portfolio management is a dynamic decision process, whereby a business’s list of active products is continually up-dated and revised (Cooper, Scott and Kleinschmidt, 2001).

Market segments: A group of businesses and organisations sharing one or more characteristics or needs in the market (Smith, 1956).

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15 2.4. Theoretical background

Portfolio management is being used as an approach to manage the operations and is considered through companies and industries as important (Cooper et al, 2001). For this reason portfolio management is often mentioned in combination with innovations and developing new projects and products (Day, 2007; Scott, Johnson and Sinfield, 2008; Mangun and Thurston, 2002). Portfolio management can also be supporting in maintaining or improving the competitive position of a company and therefore is closely linked to the strategy and the company’s overall performance (Hambrick, MacMillen and Day, 1982; Seeger, 1984).

In industries different portfolio methods and sometimes multiple methods are used in one company. A top five was made by Cooper et al (2001) through requiring their respondents to select the dominant method in portfolio management. The main five methods are: financial methods, business strategy, bubble diagrams, scoring models and check lists. For selecting criteria financial methods will be looked into, even as the business strategy and bubble diagrams. The other methods are not taken into account. Taken this as starting point a set of criteria will be generated for portfolio management for an asset manager, in this case especially BNPP IP.

Currently, the literature doesn’t mention an explicit set of criteria for the asset management industry on business level. In the banking industry financial methods are often used as bases to judge and making decisions for the company’s future (Jain and Wu, 2000; Seiford and Zhu, 1999; Wheelock and Wilson, 1999). Despite that BNPP IP is an asset manager; it is a substitute of a large bank (BNP Paribas).

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Table 2.4.1. Data Envelopment Analysis (DEA) variables

Author Year Input variable Output variable

- Fixed assets - Non-interest income

- Employee - Interest income

- Interest expenses

- Assets

- Interest expenses - Non-interest income

- Deposits - Interest income

- Operating costs

- Branches

- Assets

- Capital stock - Revenues

- Assets - Profits - Employees - Space - Expenses - Employees - Number of transactions

Chen and Yeh 1998

Seiford and Zhu 1999

Sherman and Gold 1985

Ho 2001

The financial criteria as inputs and outputs in this study are influenced by the literature on Data Envelopment Analysis (DEA) applications in the banking industry (Ho, 2001; Chen and Yeh, 1998; Jiao and Zhang, 2005; Ho and Zhu, 2004; Pastor, Pérez and Quesada, 1997; Seiford and Zhu, 1999; Sherman and Gold, 1985; Wheelock and Wilson, 1999). DEA is a non-parametric deterministic frontier method based on mathematical linear programming (Pastor, Pérez and Quesada, 1997) and gives a more multidimensional perspective of performance, profitability and efficiency. Besides that this application is often used for banks, it also incorporates much of the information contained in financial ratios (Ho and Zhu, 2004). Furthermore, the diversity of DEA applications does give this study the opportunity to select the proper criteria. The variables from Ho (2001), Chen and Yeh (1998), Seiford and Zhu (1999) and Sherman and Gold (1985) are presented below.

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17 The other criteria will be used and described based on the activities of BNPP IP: 1) assets; the capital amount under management, 2) branches; different market segments; a group of businesses and organisations sharing one or more characteristics or needs in the market (Smith, 1956). When deducting the several costs aspects, like operating costs (the costs per trade) multiplied with the amount of transactions (the number of trades done for the client or fund), form the income, this eventually will result in the revenues of the company. Furthermore, through the perspective of BNPP IP no real distinction is made between profits and revenues in terms of portfolio management. So these six different criteria will be combined into one: 3) revenues. The used describing of this criterion is the fee received by clients, besides the invested amount in specific products, minus the costs for trading.

The business strategy is also of influence on the portfolio management. Business strategy is a well-known subject within the area of Business Administration. Many different models exist to define and evaluated strategy. For this research the model of Tracey and Wiersma will be used. Another model that could be used is for example Porter (1976) (distinction between differentiation, cost and focus strategy). The great advantage of Tracey is the simplicity in their approach to distinguish three basic directions a company can choose to gain competitive advantage; furthermore they add one extra category compared with Porter. The chosen direction gives an input for the criteria necessary to manage the product portfolio.

As mentioned in chapter one, BNPP IP is characterised as a combination of product leadership and customer intimacy, based on the framework of Tracey and Wiersma. These two scientists stated that three things can distinguish a company in this competitive world (Tracey, 1996):

- different costumers buying different kinds of value,

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18 To extent the three things mentioned above a few rules that companies should fulfil are stated below (Tracey, 1996):

- offer the market the best product/service to accelerate on a certain part of business, - other value dimensions should be at least on standard level,

- dominate the market by dominate every year,

- develop and ‘build’ a good working business model to reach that aim and maintain it. Product leadership stands for delivering the best product or service to the costumer; differentiation has a central position. Innovations, market knowledge, quick and effective use of resources are often mentioned words with this concept. Within customer intimacy the level of customer satisfaction is the key-driver for brand advocacy, cross-selling and retention (Walsh, Forth, Thogmartin, Bickford, Desmangles and Berz, 2010). In this category it is chosen that a company should react to the desires of the customer and trying to give a total solution for this.

Taking both directions of strategy in consideration, criteria that are useful for the product portfolio process are:

- the rate and amount of innovations, - differentiation of the products, - retention,

- customer satisfaction.

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19 The latter is defined as: the own market share divided by the share of the biggest competitor. Based on the diagram, four possible categories are mentioned: dogs, question marks, stars and cash cows. For an organisation it is vital to have different products in each category for maintaining a positive cash flow. If the company has a relative larger market share than one, then the products are plotted on right of the matrix.

The following criteria from the literature will be used in chapter four to compare the current situation with the literature perspective: assets under management, number of branches, revenues, the rate and amount of innovations, differentiation of the products, retention, customer satisfaction, market share, and market growth.

In the following chapter, chapter 3 (Analysis of BNP Paribas Investment Partners), the product portfolio will be analysed. After the analysis, the findings and the theoretical framework will be discussed in the fourth chapter and placed in a broader perspective.

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20 2.5. Conceptual model

The model presented below resembles my view on reality and offers connecting factors to give the management of asset managers insight in their current product portfolio management.

First attention will be paid to portfolio management on business level. Several different factors are interrelated with the portfolio. Business strategy is the starting point of managing the portfolio and the performance is used to evaluate the business strategy. Also the clients have an influence on the performance of the portfolio considering their needs and requirements towards the asset manager. Other external influences could also have impact on the portfolio like changing financial market, new upcoming regulations etc.

However, it is not possible to describe the current product portfolio, without knowing how to control and judge a portfolio. It is only possible to manage a product portfolio when the management knows what to manage and how. For this reason there is the layer between Management Product Portfolio and Product Portfolio named Criteria. Liked described in the theoretical framework several criteria should be used through the management, when they want to judge or make decisions about the portfolio.

Figure 2.5.2. Conceptual Model

Product Portfolio Criteria

Management Product Portfolio

Product Product

Business Strategy Clients Other external

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21 The focus in this search is on the central part of the conceptual model. The factors outside this frame will not be taken into account in this research. With support of these starting points this research will look in which way the discomforts, like mentioned in the introduction to the problem statement, can be solved. With the given analysis the management can be given insight in their current product portfolio.

The analysis of chapter 3 will discuss the aspects of the model mentioned above and will focus on the describing questions that are presented in paragraph 2.3. Chapter 4 will discuss the findings of the following chapter with the theoretical framework to eventually give an answer on the central questions and possible recommendations.

2.6. Data sources

Data sources are not to be missed connection in a research to find information that can support the analysis and to come up with a solution. Below each sub question is mentioned with an approach of the way of data collections.

Describing questions

 How is the current product portfolio structured?

 Which parties have influences on the product portfolio?  How does the management team judge their product portfolio?

To collect the needed information several managers and four relationship managers will be interviewed about the current product portfolio management of BNPP IP. Different parties could be influencing the product portfolio: distributors, institutional clients, government. The relationship managers will be asked about what the influences of the different parties and how to judge the product portfolio.

In all the interviews the opportunities, threats and possible improvements in the eyes of these managers will be discussed. Besides their opinion, the perspective of the management team of the Netherlands on the product portfolio is important, because they are responsible for the overall performance.

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22 Literature questions

 What is product portfolio management?

 Which different criteria are recognized in the literature to judge a product portfolio? To be able to give an answer on the questions mentioned above, the available literature in this field will be looked at. Like pointed out in the theoretical background, this research will use several different criteria.

2.7. Measurement and perceptions methods

At the end of the research it is important to be able to examine if the results are reliable and valid, because the results can have impact on the organisation. Also it’s important to the researcher to be able to give an opinion about the way the research has been done.

Interviews are a method to get an impression of what the vision of people is. By using specific questions in the interview it is possible to see the current situation and using the thoughts of the people in the research. In this research people going to be interviewed about the current product portfolio and which information is used for judging the portfolio.

These interviews are going to be semi-structured. In this way the aim of the interview is saved guarded, so that all the different topics are discussed. This way of interviewing gives people the opportunity to elaborate on topics that are maybe useful for the research. It also gives the opportunity to ask for further explanation in some situations and sometimes to leave this behind. These interviews will be contributed to the describing sub-questions.

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Criteria for Product Portfolio Management: BNP Paribas Investment Partners 23 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Asset Under Management Sum Net Revenues

Institutional

External Distribution

3. Analysis of BNP Paribas Investment Partners

This chapter will discuss the criteria used by BNPP IP for managing their product portfolio on business level. The first section will give a short introduction to the amount of asset under management and sum net revenues. The second section will discuss the external distribution segment and the second part the institutional segment. Finally the analysis ends with a comparison between the two segments and different funds. To eventually come up with a set of criteria in the fourth chapter for managing the product portfolio.

3.1. Asset under Management and Sum Net Revenues

A dinstinghuised is made between the amounts of asset under management (AUM) and the sum net revenues (SNR). The institutional clients have more AUM, but their contribution to the overall net revenues is much smaller than that from the external distributors. The main part of the AUM comes from the institutional clients with 55%.

Despite the large amount of AUM for the institutional clients the driver of the SNR of BNPP IP is the external distribution segment. The external distribution segment is with 45% of the AUM responsible for 72.5% of the total SNR that BNPP IP is generating. To support the argument the illustration shows how the AUM and the SNR are divided between the two client groups (Appendix A and B).

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24 Besides the difference in the contribution the impact on the business and the drivers of these segments are different. The analysis is being done through the holdings by BNPP IP for their clients and the products they are offering on the market.

3.2. External distributors segment

The portfolio with the clients in the external distribution segment is dominated by a few clients in particular. The five most important clients based on the SNR are ABN AMRO, ASR, Rabobank, Legal & General Nederland Beleggingen B.V. and ING. Most of these clients are regarded as the larger holding banks in the Netherlands. In appendix A a more specific overview is given of the top five clients based on the AUM and the SNR.

In the specific overview the contribution of ABN AMRO and ASR is without a doubt much larger than the other three important clients (Appendix A). The reason for their enormous impact on the overall AUM and SNR is that these two companies are the legacy of earlier acquisitions. ABN AMRO was taken over through an acquisition by Banco Santandor, Royal Bank of Scotland and Fortis. Not much later Fortis Investment, what had in that time the asset management department of ABN AMRO, was submitted to an acquisition by BNP Paribas. Through the acquisition BNPP IP was immediately market leader with 25% of the asset available on the market under their management.

The amount of assets under management is declining for several reasons a) differentiation of the portfolios of the banks, b) increase of available knowledge of products on the web and brochures the clients are more critical and self-directed and c) movement of actively managed funds towards passively managed funds (ETFs, index funds) is taken place (the costs of managing active funds are higher than passively managed funds).

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25 These two clients together are responsible for 73.7% (ABN AMRO = 44.86% and ASR = 28.89%) of the AUM for the external distributors. BNPP IP is already depending on the top five clients for more than 75% of their revenues. Also the effect that these two clients have on the SNR of this segment is large. ABN AMRO and ASR are responsible for 67.2% of the total SNR.

Despite the fact that both clients have several subunits, the companies act as a single company towards BNPP IP. However, the sales managers are maintaining and building relations with the key-decision makers within those subunits. The relation with these clients and the service-level towards them is an important aspect of the business within BNPP IP to maintain the possible outflow of AUM as low as possible and to make sure that the products will stay on the sales lists of these clients.

Asset classes and the main drivers

With regard to the funds a selection is made based on the terms of AUM and SNR (Appendix E). Two of the five larger funds in terms of AUM are white label funds: ‘ASR fonds profielfonds G’ and ‘ASR fonds profielfonds E’. These funds are managed, but are offered on the market under the name of ASR and only customers of their sub holdings have the opportunity to invest in these funds, for this reason they are not taken into account in this analysis.

Taken also the time available for this research the scoop on the products will be on the main two drivers of the SNR within BNPP IP (Appendix E). These two funds, BNP Paribas OBAM N.V. and BNP Paribas Global High Income Equity Fund together generate approximately 15.1% of the total revues of overall company. The dependences of the financial success of BNPP IP to these two funds is high. Below these funds will be analyzed on the products specific assets and what makes them unique.

 BNP Paribas OBAM N.V.

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26 When asking the portfolio managers and the sales managers what are the specific assets and what makes the fund unique comparing them with other funds, they all give comparable answer. Branding, the strong vision and their long term focus within the fund. Branding can be linked with their existence on the market (since 1936) and with the good performance of 10.52 % since the year 1954.

However, the last few years the performance was less than the years before. The strong vision that OBAM has, is another reason for their success. The directors, like J. Stoutendijk and R. Stout, had their own vision on the market and to outperform it, what had a determined impact on the performance. Recently, since the first of December is P. Ranty the new director of OBAM. The last thing the portfolios managers explicitly said that their long term focus was extraordinary comparing to other funds in the market. OBAM invest in equity for a period of 2 to 5 years.

Despite the specific assets and the unique characteristics OBAM also has to deal with the consequences of the legacy of the earlier acquisitions. The fund revenues depends on a small amount of clients ABN AMRO (26.9%), Rabobank (26.4%) and ASR (11.1%). However, the last few years an outflow of cash of ABN AMRO is noticeable (2010, € 1.047.114.399; 2011, € 490.053.399). The other important cliental holdings are regarded as stable, but a possible decline will have considerable negative influence on the SNR of OBAM.

 BNP Paribas Global High Income Equity Fund

Currently the amount of AUM is 6.0% of the overall holdings that BNPP IP has under their management. With this amount the fund is responsible for 6.6% of the total SNR (Appendix H).

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27 Furthermore, he is a portfolio manager that likes to go to clients and tell and explain his vision. This is unique for a portfolio manager: normally these managers just are more interested in stock selection. The relation with the customer is considered as important, but their vision and contraire approach for investing is not being influences through this. For selecting companies for the fund a company needs a relatively high dividend return and a stable dividend policy. Another special aspect of this funds is the stability in the team, their isn’t high turnover rate for team members and a strong cohesion is noticeable within the team. Despite the specific assets and the unique characteristics of the fund they have to deal with the consequences of the legacy of the earlier acquisitions just like OBAM. The portfolio revenues are even more depended on small amount of clients. Rabobank is responsible for 7.0 % of the revenues. Comparing this percentage with the influences ABN AMRO has on the fund it could be neglected. ABN AMRO is the revenue driver on this fund; it is responsible for 83.4 % SNR (Appendix H).

3.3. Institutional segment

The five largest institutions in terms of AUM in the Netherlands are APG, PGGM, ING IM, BlackRock and MN Services. Currently, BNPP IP holds a 12th position in the Dutch market for institutions with an amount of AUM of € 20 billion. The ten largest clients are responsible for approximately € 13.6 billion of the total amount (Appendix H).

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Criteria for Product Portfolio Management: BNP Paribas Investment Partners 28 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Asset Under Management

Sum Net Revenues

Others

Stichting Voorzieningsfonds Getronics

Stichting Pensioenfonds Fortis Bank Nederland

ASR

Stichting Bedrijfstakpensioenfonds Zorgverzekeraars (SBZ)

ABN AMRO Pensioenfonds

For this reason ASR is looked at as one single client. Taken the legacy together with the other main clients in top five, Stichting Bedrijfstakpensioenfonds Zorgverzekeraars (SBZ) and Stichting Pensioenfonds Corporate Express this percentage (48.2%) raises to 68%.

With regard to the revenues generated by the institutions, the main five clients contribute 53.1% to the total SNR of BNPP IP. ABN AMRO Pensioenfonds, Stichting Pensioenfonds Fortis Bank and ASR together are already responsible for 42.9% of the overall SNR. The impact that the five clients have or the influence that they could exert on the overall SNR is large. Below an overview is given of the main clients and their terms of AUM and SNR. Besides the consequences of the legacy two other thing are noticeable in the figure:

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29 1. in proportion of the amount of AUM to SNR the contribution SBZ is rather small with

just 4.6 % to the overall SNR,

2. the contribution Stichting Voorzieningfonds Getronics in proportion of AUM to SNR is large.

In the institutional segment most funds are managed under special mandates and structures. In the next paragraph the funds and their revenue drivers will be analysis.

Institutional funds and revenue drivers

In first chapter the difference is explained between balanced and specialized mandates. In my opinion these separation of different mandates is unnecessary. Regarding the possibilities by these two different forms of mandates the clients have actually the same opportunities by both mandates. With regard to the possibilities the client is charged more by a complicated product or structure. Another factor, the scarcity of the product, could also drives the fee upwards, like with the Flexi Fund China A.

Currently BNPP IP holds positions for 140 clients in the institutional segment. All together these clients have the same investment opportunities that the distributional clients have. For the institutional clients 291 funds are used and asset allocation is responsible for 58% for the SNR of the institutional clients. The 10 funds with the highest SNR are generating 44% of the overall SNR for their segment.

Taken into consideration the time available for this research, the scoop will be on the main drivers of the SNR of the institutional clients (Appendix H). The mandates of the funds of Fortis Bank Nederland and ABN AMRO will be discussed and also the Stichting Voorzieningfonds Getronics (all these funds are a legacy of earlier acquisitions). The financial dependences in terms of SNR to these funds are approximately 21%.

 Stichting Pensioenfonds Fortis Bank Nederland NV (FBN)

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30 Since the acquisition of Fortis Investments is BNPP IP managing almost the complete amount of assets of FBN. The FBN had the opinion that trough their large holding, BNPP IP should also participate in their investment committee. The relationship manager was at that time participant in the committee and minutes secretary in those meetings. In this position he delivered the reports of the funds and their performance, documented the meetings of the investment committee and being the administrator of FBN. Through all these positions the FBN positioned itself very depended on BNPP IP. FBN was really satisfied with the contribution, but decided to select a new independent investment committee. Also a new company was checking the performance of the funds were BNPP IP reported on. Recently the FBN decided to sell the smaller funds what caused an outflow of a couple of hundred million euro in AUM. Despite the more professional development within the FBN their contribution is still large.

 Stiching Pensioenfonds van de ABN AMRO NV

The amount of assets that the fund has under management contributes a small 16 % to the overall AUM. Despite their large amount of AUM with BNPP IP, the generating revenues are in proportion rather small. The pension fund contributes 6 % of the SNR.

The pension fund of ABN AMRO is a well-known fund, which have won different awards for best pension fund in the Netherlands. The board and the overall organisation are regarded as one that is totally independent from their asset managers. The board of the fund is performance orientated and wants proper results what fits best to their organisation. Besides the performance the service level must also have a high standard.

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31  Stichting Voorzieningfonds Getronics

Before the acquisitions the Stichting Voorzieningfonds Getronics was a part of the ASR portfolios. Since the acquisitions the fund has an independent contract. Other acquisitions happened and Getronics was becoming a part of KPN. The consequence for BNPP IP is that the management of the fund was outsourced to another company named TKP. TKP is a servicing company for company/branch pension funds and is offering their clients to take care over their administration and holdings. This resulted that the communication and decision making for the Getronics fund happens through this channel.

Still the fund of Getronics is a revenue driver. The pension fund is responsible for 2 % of the total amount of AUM by BNPP IP. However, proportional their contribution with this amount of AUM is rather large. Getronics is the third best client in terms of SNR with a contribution of 6 %.

3.3. Comparison the segments

In the external distribution segment several different specific assets were an outcome comparing the individual specific assets of these funds that are considered as revenue driver. The OBAM fund has a strong brand name, vision and long term focus as the factors what drives their AUM and their SNR. The Global High Income Equity fund has other factors like the broad network during introduction, client focus, and contraire vision and team stability. The comparable factor what drives these funds is the vision that these teams have. BNPP IP operates on the market as a generalist and according the employees the company is very conservative in formulation their vision on the market.

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4. Results and discussion

The first paragraph of this section will elaborate on the findings from the analysis of the product portfolio of BNPP IP, whereupon these findings will be discussed together with the criteria mentioned in the theoretical framework. The next part of this section will formulate an answer on the central question and will reflect on the entire research and the possible limitations.

4.1. Results

Like mentioned BNPP IP is using two financial criteria, the AUM and the SNR, for managing their portfolio. In the analysis of the product portfolio different findings were found. The first main result from the analysis is the legacy through the earlier acquisitions. Through the acquisition of Fortis Investment and their portfolio, ABN AMRO and ASR are responsible for a large part of the portfolio. The legacy of the earlier acquisitions is responsible for 73.7 % of the AUM regarding the external distribution segment (ABN AMRO = 44.86% and ASR = 28.89 %).

The legacy also has a large impact on the funds that are the revenue drivers. The main customers have large holdings and possible cash outflow, through diversification of their portfolios, would have a large impact on the performance. An example is the negative cash flows within the OBAM-fund, where the consequences are already noticeable for the organisation. Another fund, Global High Equity Income Fund, the dependence should also be of concern of the management, because only ABN AMRO is already responsible 83 % of the revenues of this fund.

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34 Final, during the interviews the employees, the investment teams and the relationships managers, were considered as important assets, were some clients even base their entire decision on. Combining this with the fact that no real strategic choice has been made, like mentioned in the first chapter, BNPP IP could take more client related criteria into account when managing their portfolio.

The use of just financial criteria offers the management a superficial overview of the performance of the portfolio, but this doesn’t offer real insight on detailed level. Developing a broader set of criteria could support the management and give them a better view on the current composition of the portfolio and the performance.

The next subsection will discuss al the criteria based on literature and practice and will select the main criterion that should be used by BNPP IP in the future.

4.2. Discussion

In this section the results of the analysis and the theoretical framework will be discussed to advise BNPP IP on the criteria they should use for their product portfolio. Furthermore, the results regarding the criteria will be discussed in a broader perspective regarding the asset management branch in the next paragraph.

In the results is stated that the AUM and the SNR are used by BNPP IP for managing the product portfolio. These aspects are equal to the aspects ‘Assets under Management’ and ‘Revenues’ mentioned in chapter two and in line with Chen and Yeh (1998) and Seiford and Zhu (1999). The use of these two aspects will help BNPP IP to evaluate the financial results of the product portfolio as whole and per fund. There are no real indicators given for the judgement of the success of these aspects. At the moment measuring the AUM and the SNR is just a process of doing reactively instead of pro-actively managing the funds and the portfolio. Branches

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35 An external distributor has different needs than an institutional client. In relation to the subject of product portfolio, BNPP IP has to make a distinction between the portfolio management of the external distributors and the institutional clients. For each segment there can be an equal set of criteria, but the indicators for the criteria must be different to effectively manage the portfolio and the clients.

For example, the contribution of these segments is not in proportion to the AUM. The driver behind the SNR is the external distribution segment and internally this segment should have more emphasis. By creating different norms it is possible to manage the different segments based on their own preconditions.

Market growth and market share

BNPP IP should calculate periodically the contribution of the segments in terms of market share and market growth. Currently, BNPP IP has a dominant position in the external distribution segment and has possibilities to growth, through a possible direct channel. In the BCG-matrix it could be considered as Star (Hambrick, MacMillen and Day, 1982; Keuning, 2011), which means that additional cash flow is needed to maintain and improve the market position.

Regarding the institutional segment the growth potential is low and the relative market share is also considered low, with the 12th position in the market. According to the matrix it would classified as a dog. However, the available capital amount in this market is rather unique and with a positive cash flow it could be considered as a friendly dog (Hambrick, McMillen and Day, 1982, Seeger 1984). BNPP IP should try to maintain their current position, without making large investments.

Strategic choices

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36 The criteria taken from the customer intimacy must play a central role in managing the product portfolio. Retention and customer satisfaction must be added to the set of criteria that BNPP IP must use in line with Tracey and Wiersma (1996). Retention can be defined as

maintaining connections with buyers of firm's products, where customer satisfaction is total

judgement of a customer regarding the overall performance.

In relation with retention BNPP IP has a few clients that have a large influence on the performance of the company. The main contribution in the external distribution and in the institutional segment comes for ABN AMRO and ASR.

These companies are the legacy of earlier acquisitions and have a large impact on the overall profitability. If these clients make the decision to prefer another asset manager, BNPP IP have to deal with a large cash outflow what harms the amount of AUM and the SNR. An increase, a growth in AUM is doubtful, because new regulations and market developments require banks to differentiated their portfolios that are under management by asset managers. From an outsider perspective, the dependences on a select amount of different clients is very unhealthy for the future of the business and should be managed with high priority.

The different criteria should be linked with certain departments in the organization so the portfolio is look at in a multidimensional perspective. Furthermore, it would be helpful if one manager in a department is held responsible for gathering, mapping and communicating the information found on these criteria. Besides, the responsible managers should meet on monthly bases to discuss their findings, what could lead to possible action for their employees.

4.3. Criteria for the asset manager in general

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37 Besides the criteria that are an outflow of the business strategy, asset managers should use a standard set of criteria for managing their product portfolio, based on the theoretical framework in chapter two: assets under management, number of branches, revenues, market share and market growth. If an asset manager offers products and services towards different client segments: these branches should be managed separately with a different set performance indicators linked with the chosen criteria. Also taken into account the other two criteria, based on Hambrick, McMillen and Day (1982), Seeger (1984) and Keuning (2011) (market share and growth), these criteria could help the management of an asset manager to provide them with information about the opportunities and possible threats they face, regard to the cash flows within the organisation.

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Conclusion and Reflection

In this section the final results will be given of this research and an answer will be given on the central question. The last paragraph will give a reflection of this study.

Conclusion

In this research product portfolio management was the central subject of the study. The insight in the composition and profitability of the product portfolio could be improved by an asset manager. To determine a set of criteria for managing a product portfolio one specific company is examined: BNP Paribas Investment Partners. BNPP IP is active in two market segments: external distributor and institutional clients. It were not clear what the contribution was of the two segments to the overall result. Also no insight could be given by the managers in what the influence was of the individual products and the total product portfolio on the overall amount of Assets under Management and Sum Net Revenues. To address these issues, the following main question is stated for this research:

Which criteria should be used to manage the product portfolio of an asset manager?

The central theme in the analysis was the legacy of the acquisition of Fortis Investment. Through the earlier acquisitions some clients have a large impact on the AUM and the SNR of BNPP IP. In the discussion the theoretical framework and the results of the analysis were combined in a set of criteria. Cooper stated that there are five methods of portfolio management, where three of them were useful for this research: financial methods, business strategy and bubble diagrams.

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39 However, regarding the developments on the market and the internal developments BNPP IP should focus more on the strategy of customer intimacy. In line with this choice the related criteria are branches, retention, customer satisfaction and the legacy of the earlier acquisitions. With regard to the bubble diagram BNPP IP should calculate and visualize the market position regarding their market share and growth potential, according to the BCG-matrix. When using this framework of criteria for other asset managers the first criterion is determined by their choice of business strategy. An asset manager should always use the other criteria to manage the product portfolio of the company.

Reflection

In terms of reflection of this research the results are based on internal data, the available literature and interviews. Two terms that comes with the quality of the measurement are: reliability and validity. It is important to be able to judge after the research if the results are reliable and valid, because the outcome of a research could have consequences for a company. Also for the researcher it is important to be able to judge his own research. A measurement process is reliable according to De Leeuw (1996) if a next measurement gives the same result without any other thing has changed.

From my point of view this research could be seen as reliable, because the method chosen has considered everyone’s view, several interviews are held with managers, relationship managers and employees of the investment teams to get a better view on the situation, also supported with internally data. In terms of validity, measure what you aim to measure, in my opinion it could be said that the measurement was good. The portfolio and the criteria found and measured were clear for everybody, through that the research was clearly defined. In this way it was clear were everybody was talking about. However, more emphasis on these two terms, through more hard data, more interviews with the employees and the managers and possibility to present summaries of the interviews would have had a positive effect on the reliability and validity.

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Recommendations and further research

For closure, this study will discuss several recommendations for the BNPP IP and asset managers in general. Besides, the overall recommendations regarding this study this section will suggest some topics for further research.

Several findings were done in the analysis of this study. The first step an asset manager has to make is formulating their direction and business strategy. This choice impacts partly the chosen set of criteria. If a company have more branches where they are active in, which was in the case of BNPP IP, the next step is to focus more on these different segments for future possibilities and new revenue drivers of the company. My recommendation in this specific situation is that they should focus more on the external distribution segment for the future. Another recommendation has to do with the legacy and the influence on the position of BNPP IP. The company should develop special tactics for their most valuable clients, like in the retail banking industry, to ensure and improve their current market position. However, to mitigate the possible cash outflows of these clients, BNPP IP should also consider the opportunity of a direct channel to retail clients. This possibility needs further research to sketch how realistic this could be and what the added value would be.

Dependency needs further research in the field of asset management. Since, minimal research is done in this field new research could help BNPP IP to gain knowledge about managing their legacy, and scholars could gain more insight in the consequences, that could arise after acquisitions and mergers etc. Besides dependency the other criteria could be tested in a positive research to enhance the generalisation of this particular set of criteria.

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CRITERIA FOR PRODUCT PORTFOLIO MANAGEMENT BNP Paribas Investment Partners