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Strategies for Entering the U.S. Retail Market: A Case Study

by Bryan Kozlowski

As the industry slowly emerges from the abyss of the previous twenty-four months, we at kasina find ourselves increasingly fielding questions about the landscape of tomorrow's investment management industry. The topic du jour seems to be focused on whether straight acquisitions are the only way to successfully penetrate the U.S. retail market. While acquisitions alone have jump started growth for many firms, our research suggests that they are more successful when pursued after a period of "market exposure and enlightenment."

One approach to answering this question is to look at the strategies foreign asset managers have used to establish toeholds in the U.S. retail market. The three primary growth strategies are:

• Acquisition
• Sub-advisory
• Organic growth

Acquisition
Macquarie Funds Group is one of a number of managers over the last few years that made a splash in the U.S. market through acquisition. While it is early to determine the success of this transaction, a look at several other managers begs the question: do acquisitions alone provide access to the "holy grail?" As we discuss in our work with clients, scale is certainly important to success in this market and acquisitions (usually) provide that in spades. However, the best deals are ones where the acquiring firms have:

• Chosen partners with differentiated products and/or services
• Upheld the core tenets of the culture at the acquired firms

Those that have approached acquisitions as partnerships have benefited more than those preferring the brute strength approach. However, it is been strong market knowledge and exposure that has made many of these partnerships work.

Sub-Advisory
While acquisitions have helped many firms make a splash, sub-advisory relationships have more subtly assisted foreign managers establish a carefully planned presence in the U.S. market. Those that have achieved success have leveraged truly differentiated product performance coupled with a strong global brand. Partnering with the largest broker/dealers and wirehouses has provided some unique advantages:

• Access to retail investors assets
• Perspective on the competitive landscape
• Better understanding of the various distribution strategies
• Key operational "dos and don'ts"
• General techniques for success

For all of its benefits, sub-advisory does have a few drawbacks:

• Relegating the manager to a support role
• Falling to help the firm effectively establish the necessary scale and brand

Despite these drawbacks, this strategy still positions a firm better than any attempt to grow organically.

Organic Growth
Of these three core strategies, organic growth has been the least successful for managers. A reason for this may be that asset managers rarely enjoy the same luck that Ray Kinsella did in the famous Kevin Costner film Field of Dreams. In this industry, hanging out a shingle reading "open for business" rarely means clients will come in droves like they did to that special Iowa farm. The go it alone strategy is not only costly, but also a time consuming expedition. Establishing a unique brand alone amidst a sea of competitors is both daunting and onerous. Those firms that have been successful (and there are a select few) have embodied:

• An intense focus and determination
• A saintly level of patience
• Exceptionally strong management teams

Without this unique combination, the typical result is a series of frustrating starts and stops, inconsistent messaging and eventually a strategy that is viewed (most importantly by advisors and investors) as a failure.

What to Do
I believe firms looking to penetrate the U.S. retail market should first consider sub-advisory relationships before exploring acquisitions. This will allow firms to establish their brand and "get smart" on the market which will better position them for an acquisition. Armed with this market knowledge, firms will be ready to make that acquisition which will provide the right degree of scale, infrastructure and product depth to effectively establish a distinct brand in the market.