Challenges ahead for Spanish funds

Since mid-2007, the Spanish investment fund industry has been suffering one of the biggest crises it has ever known, with market instability leading to historical net outflows. In just eight months, between July 2007 and February 2008, investors have withdrawn more than e30bn from mutual funds. After more than four years of significant growth in Spanish mutual funds, the subprime crisis has motivated that investors to choose other types of products, such as bank deposits. Another key factor fuelling this trend was the raising of banks’ savings rates to boost liquidity. These factors contributed to a 6.1 per cent fall in fund assets during 2001. But speakers addressing the PWM European Fund Series event – supported by BNP Paribas Investment Partners - in Madrid in March, cited even more arguments to explain the industry’s poor performance. According to José Manuel Pomarón, assistant secretary general of Inverco, the Spanish fund managers’s association, key factors were “the raising of the European Central Bank (ECB) rates, the rear view mirror effect that damages bond funds and changes in the fund taxes in early 2007.” The funds worst affected by the subprime crisis in terms of net outflows were money market products and domestic funds. He described Spanish equity funds as the “kind of product which has lost attractiveness for investors.” Products which gained new flows were international equity, European equity and structured bonds funds. So how can some of the current, negative trends be reversed? First of all, the industry would be helped by a normalisation of equity markets. “The future depends on the financial markets. Good news arriving, or the absence of bad news, could bring the necessary serenity to investors,” said Mr Pomarón. Another key issue is the arrival of new legislation on structured funds. A law was passed in February allowing structured products to invest in new underlying assets such as inflation, hedge funds and commodities. According to Mr Pomarón’s prognosis, once investment managers are able to launch these funds, the outlook for asset management companies will improve in a big way. Equally important in Spain, according to Mr Pomarón, is the development of hedge funds. Currently these funds boast just ?1.2bn under management, a much lower number than in other European countries. Hedge funds landed in Spain at the end of 2006, and since then, many firms have launched products. In spite of their small assets, they are expected to grow significantly in coming months, taking advantage of market turbulence. Spanish fund houses believe the hedge fund should be a central product in the portfolios of investors, because it can obtain positive returns in both bull and bear markets. Mr Pomarón also drew attention to the increasing variety of exchange-traded funds (ETFs) now available to Spanish investors. Like the hedge fund, these assets arrived in Spain in the summer of 2006, after which ETF firms have launched close to 30 products. Yet there is still some catching up to do with ETF marketing in the rest of Europe, where bigger holdings by investors and more varied types of product are prevalent. Last but not least, the conference heard about the necessity to restore investors’ confidence in money market funds, so that they will be bought by clients currently relying on bank deposits. The commercial efforts of the banks to market deposit products and the problems of the dynamic money funds sector have conspired to ensure that this supposedly conservative area has been one of the worst affected by net outflows since the start of the subprime crisis. These changes could help bring the Spanish investor model closer to the European average. Currently, Spanish savings amount to 172 per cent of Gross Domestic Product, well below the 185 per cent European figure. Also, 38 per cent of Spanish investors’ savings are in deposits, whereas the average European investor dedicates just 29 per cent of his portfolio to these products. “In Spain, we are much more familiar to deposits,” observed Mr Pomarón. However, if the ECB finally cuts European interest rates, the deposits will lose attractiveness and will give new opportunities to fund managers to recover some of their lost money. For these reasons, financial market evolution, the regulators’ policy and the end of subprime crisis will be fundamental for mutual funds in Spain.