Money managers under the microscope
Knowing me, knowing you..
For a fund company expanding out of its home market, a crucial question is whether a distribution strategy that works well locally will also work in other countries. You might call it the Abba Dilemma: Knowing me, knowing you?
The Swedish popsters’ 1977 hit single went on to suggest “there is nothing we can do”, but new research from Lipper hopes to shed some light on this issue.
The first step is to appreciate the importance of product development. At the end of 2001 the European mutual funds industry stood at 3 trillion euros ($4.2 trillion) in assets under management. By the end of the first quarter of 2011 this had grown to nearly 5.5 trillion. Of this latest total, 43 percent (2.4 trillion euros) of assets are now managed in funds that have been launched in the past nine years. In other words, 97 percent of industry growth since the end of 2001 has come from product development.
This is not just a quirk of the statistics over a longer time period. In 2010, for example, most local fund markets in Europe saw funds which were launched in previous years (referred to as ‘backlist’ funds) suffering redemptions while funds launches in 2010 enjoyed inflows.
But this is not a uniform pattern. The most successful local market in 2010 (in terms of fund sales) was the UK. And in this market the vast majority of flows were into backlist funds, accounting for 81 percent of net sales.
This market stands out in Europe for the importance of Independent Financial Advisers (IFAs) as a distribution channel. Historical data reinforces just how important this has been. The weighting of flows into funds with a track record ranges from 40 percent (2007) or 50 percent (2004) to around 90 percent (2003 and Q1-2011), but the UK industry has achieved positive net sales in every year analysed – unlike most of the rest of Europe.
While the FSA’s Retail Distribution Review (RDR) looks set to shake-up the way that intermediaries are paid, the way that platforms generate revenues (or the way they disclose this), and the formal qualifications intermediaries must have, the benefits that the current model has achieved in not simply pushing the latest product to hit the market should not be underestimated.
By contrast, those markets that suffered the greatest outflows from backlist funds are also those where banks and insurance groups have traditionally played a dominant role in mutual fund distribution: Spain, France, Italy, Germany.
An analysis of historical trends again underlines this view. In only the boom years of 2003 and 2005 did backlist funds manage a full year of positive net sales across Continental Europe.
While the retreat by banking groups from promoting their mutual fund ranges in the wake of the financial crisis has been rightly highlighted elsewhere, it is possible to establish that the slow-down actually began in the second quarter of 2006. This happened as bond funds (previously the staple diet of Continental European retail investors) entered a cycle of redemptions that they only really came out of in 2009 — and have fallen back into since the winter of 2010.
This does not inevitably put all of the blame for the appeal of new funds at the doorstep of large financial services groups (at the very least because this is aggregate data), but it is an issue that needs to be addressed. And such a process may already be underway as the European Commission looks more closely at distribution as part of broader initiatives (e.g. the original intention of the Packaged Retail Investment Products [PRIPS] initiative) and not just at products like Ucits funds.
The missing element from the picture painted so far is cross-border funds, those funds using the Ucits passport to sell into multiple countries and tending to be domiciled in Luxembourg or Ireland. Groups that have been successful with such funds have come out well through the financial crisis (in terms of sales), selling their products to professional fund buyers that will include funds of funds, private banks, banks’ open (or guided) architecture platforms, as well as institutional investors.
The cross-border sales figures are far more similar to the UK than the largest Continental European industries, with backlist funds forming between 60 percent and 80 percent of sales activity each year except during the initial sell-off in 2007-08 of the financial crisis. It is worth highlighting that new product launches actually kept the cross-border industry in positive territory in 2007, underlining the importance of product development for these groups too.
Having highlighted the broad difference between the IFA-led UK market and many bank-dominated European markets, the rise and evolution of cross-border funds adds a further twist to this story. Bank-owned and independent asset managers generated about the same level of cross-border sales in 2010, and over 70 percent of these flowed into backlist funds for both types of business.
This research provides evidence of the relationship between fund distribution channels and sales patterns, and how this varies around Europe, as well as exceptions to this in the cross-border industry. And as the European industry becomes increasingly internationalised by such developments, a steady shift away from new funds may result.
($1 = 0.713 Euros) (Editing by Joel Dimmock) ((firstname.lastname@example.org)(Twitter: @reutersJoelD)(+44 20 7542 3505))