The recent steep falls in stock markets and withdrawals from nervous investors have left their mark on the European fund management industry. The environment has become more cost-sensitive, with limited resources available to fund selectors in an open-architecture fund market.
Some financial assemblers and distributors are considering a move back towards guided architecture, based on a relationship with a few trusted, strategic asset management providers.
The future, though, is surely with those who understand their fiduciary responsibility to structure products and educate their clients; ensuring that new products (and existing products) are not based on fads but on long-term investment merit. We try to base our decisions on investment case durability and a thorough understanding of how our products fit in our clients’ asset allocation strategies.
New products need to be sensible components to an investment solution (i.e. specialisation in a particular asset class or strategy) or balanced investment solutions (e.g. multi-asset or multi-manager funds).
European assets by investment type March 2009 (€m)
Equity 27%; Bond 22% ; Other 10%; Mix 8%; of which; MM 32%, MM-Enh 1%
Source: Lipper FMI
What next?
As a result of UCITS legislation, the types of available funds have expanded considerably. UCITS III broadened the types of investments that could be used within a UCITS fund (including derivatives).
Investors are now more comfortable buying non-domestic funds (primarily Luxembourg and Dublin domiciled) and there is an established infrastructure to service these clients. But there have been problems. The time it takes to bring these funds to market has handicapped fund managers, as has the time and cost of maintaining registration in multiple jurisdictions. For investors, the amount of product choice has led to confusion and the undisciplined pursuit of ever-higher, short-term returns at the expense of a more durable investment approach and the fit with their longer-term needs.
Europe’s Financial Services Commissioner is determined to create an environment where the focus is on the quality of the product and the investment manager, rather than the ability to navigate through layers of expensive bureaucracy. There is also a move to focus on the quality of stewardship of client assets rather than salesmanship of product.
Ucits moves on
The introduction in 2011 of UCITS IV will make the pan-European funds market less bureaucratic and less expensive. This opens the door for strong domestic players to compete more effectively against the large international fund houses.
In addition to establishing an effective distribution capability, investment managers setting up pan-European fund distribution face three particular challenges:
1. Credible cross-border fund ranges
Today, there are still too many costly small funds, particularly compared to the profitable US market. Cross-border fund mergers will enable investment managers to concentrate their resources in a single jurisdiction (if required) and to achieve cost savings that should produce lower Total Expense Ratios (TERs).
2. Multiple jurisdictions
At present, it is the fund promoter’s responsibility to arrange the registration of the fund in European jurisdictions outside their home country. This can be laborious and time-consuming, with some regulators “gold plating” the exercise and requesting onerous additional information.
In future, it will be the responsibility of the host regulator to notify all other European regulators electronically. For investment managers, this should yield a considerable cost savings, avoiding the need to register country by country and reducing legal and internal resource costs. Investors could benefit from better value-for-money products.
3. Multiple registration
UCITS IV will also permit master feeder funds, allowing “shadow” funds to be set up without the need to manage a separate but similar portfolio. Investors will thus have easier access to established funds at reasonable TERs.
The changes outlined above present a huge opportunity for investment managers to distribute their strongest and largest investment funds across borders. Investors will have improved access to some of the best quality fund managers in Europe, who in turn, benefit from simplified procedures and flexible fund structures, providing easier and more cost-efficient access to the broader European market.
Sceptics doubt that asset managers will use this market liberalisation to improve their product proposition in relation to the risk and return characteristics of their funds. Let’s hope fears of selfish short-termism prove wrong – and that the industry doesn’t neglect its duties towards its clients. Otherwise, the outlook for a rise in long-term savings across Europe is bleak.
Cautious outlook
In the short term, caution is likely to prevail, with investors returning through bonds and perhaps some sort of guaranteed products. Recent data from Feri shows that the equity sector has seen the bulk of the asset reduction, with bonds providing the balance.
If the equity markets show strong signs of a quick recovery, the sector may attract investors fearful of missing out. But investors must avoid chasing short-term performance. Similarly, asset managers need to ensure their portfolios are a reflection of both well-informed investment decisions and their clients’ genuine needs.
Together with the reduction in barriers to cross-border distribution of funds, this should increase long-term value creation for European investors.
Christian Elsmark is managing director Europe, for Scottish Widows Investment Partnership (SWIP).
