Sorting out the thousands
With so many funds available, asset managers must ensure that they have the right mix to attract strong alliances with banks. Simon Hildrey reports.
European investors are faced with a daunting choice of investment funds. Not only do investors in each European country have thousands of domestic funds to select from but they can also buy those products distributed cross-border. As European banks have moved in varying degrees towards open architecture so they have also been confronted with thousands of funds and hundreds of fund managers to try to condense onto shortlists for their customers. Luxembourg and Dublin have been favoured for fund groups who wish to register for cross-border business, as they were the first jurisdictions to sign up for the Undertakings for Collective Investments in Transferable Securities (Ucits) directive, implemented by the EU in 1988. Their infrastructure has developed accordingly. Over 200 fund management groups are represented in Luxembourg and 265 in Dublin. But Luxembourg, which has registered 8000 funds, has nearly three times as many assets under management at €850bn, compared to €266bn in Dublin. Luxembourg SICAVs The majority of these products distributed cross-border are umbrella funds. These umbrella funds are actually an investment company with a group of stand-alone sub-funds, each of which has its own investment portfolio. This is designed to provide investment flexibility and widen investor choice. There is no practical difference between a sub-fund and an ordinary stand-alone fund apart from the fact it is cheaper and easier to switch funds within an umbrella structure. The most common umbrella fund in Luxembourg is the Société d’investissement ŕ capital variable (Sicav). These are unlisted companies. Sicavs are open-ended vehicles in which investors buy shares. The number of shares can be increased or reduced. A Société d’investissement ŕ capital fixe (Sicaf) has a fixed amount of capital. Dublin and UK versions About 50 per cent of funds in Luxembourg are Fonds common de placement (FCPs), which are umbrella funds, with sub-funds owned by the unit holders or investors and managed by a separate asset management company. These funds tend to be sold back into their domestic market by fund management companies. The other type of unlisted companies that are sold cross-border in Europe are Dublin-based Ucits and UK-based open ended investment vehicles (Oeic). The rules and regulations for all these umbrella funds and their sub-funds are essentially the same. When banks select asset management groups, the structure is one of the least important factors. European asset managers have favoured Luxembourg as a base to distribute cross-border while US groups have preferred Dublin. Indeed, US companies account for nearly half the assets managed in Dublin. The number of asset managers able to offer such a wide range has declined over the past three years. This trend is likely to continue, according to UBS Global Asset Management, the largest distributor of funds across Europe with E85bn in assets and 13 Sicav sub-funds, as measured by consultancy Fitzrovia. Robert Lengacher, head of business processes and sales support at UBS, says: “Asset management is an increasingly expensive business to be in. The number of successful and profitable managers has shrunk for two consecutive years. Large regional players are re-evaluating where their best value addition comes from. “In many cases, they will decide that it is in niche specialities, local markets or in building on the quality of their client relationships. That provides opportunities for some global asset managers like UBS.” JP Morgan Fleming is the second largest seller of cross-border funds in Europe with E54bn in assets, according to Fitzrovia and 95 funds within its Sicav. It also has 15 unauthorised alternative investment funds in Luxembourg. Adam Fairhead, head of product development at JP Morgan Fleming, says that his company has had to increase the number of sub-funds because of the demand from banks for a large range. “Six years ago, we only had 30 funds within the Sicav. It has grown rapidly because of client demand for a broad investment range, covering equities, bonds, liquidity and alternative investment funds.” Broad ranges Banks prefer asset managers with broad ranges of funds, argue the largest asset managers, so they can meet all the needs of their customers and ensure they only have to form a handful of strategic alliances. Offering a range of funds managed with different investment styles ensures asset managers can provide top performing funds in any market conditions. In conjunction with a broad range, an asset manager must also offer top performing funds across different equity and bond markets, as well as asset classes. Matteo Perruccio, head of distribution at Pioneer Investments with E32bn in 45 Sicav sub-funds, says the major change of the past two to three years has been the move by European banks towards strategic alliances. “We recently won a mandate from Banco Santander not only for our abilities to manage US equities but also because we could help the bank in other areas, such as structured and guaranteed products,” says Mr Perruccio. “Banks are looking for three or four asset management groups that can be partners and offer a full range of funds and products. Asset managers with one or two top performing funds will find it hard to get onto banks’ panels. “Pioneer, for example, has one US high yield, four European equity and three US equity funds in the top quartile. They are not the very best performing funds but they are consistently in the top quartile.” The importance of this factor, according to Mr Perruccio, is reflected in surveys in which about 45 per cent of banks said they had moved towards open architecture to offer better fund performance. Only 5 per cent said it was because of client pressure. As well as performance, banks also require good quality service and administration. Mr Perruccio adds that some asset managers have only succeeded in one or two markets because they have treated banks in the same way as pension fund mandates. “The hard work begins when a bank appoints an asset manager for one of its panels.” Mr Fairhead at JP Morgan Fleming agrees, saying “service and understanding the investment needs of clients are vital.” Stephen Wander, head of European retail marketing at Credit Suisse Asset Management, which runs E42bn in European funds, says three crucial factors in winning business from banks are service, innovative products and the ability to tailor products to the needs of the local markets. “Aside from a broad range of interesting products, it is important for asset managers to realise that Europe is not a homogeneous market. They are very well defined markets with different needs. Fund managers need to support distribution with well staffed offices in each market and local sales and marketing operations,” says Mr Wander. “Credit Suisse also ensures that we understand the needs of the bank with which we have a partnership. We become part of the total solutions package for the banks’ customers and meet the specific needs of its market.” The service factor Fidelity agrees that service is an important factor for banks. “By choosing a small number of fund companies with which to establish alliances, banks can form long-term relationships with them and market their products to customers,’ says Thomas Balk, president of mutual funds for Europe at Fidelity. As part of this process of developing relationships with banks, Fidelity, which runs E27bn in European cross-border funds, offers training to branch employees. In Germany, for example, Fidelity employs 150 people. The funds promoter also has representatives in the 12 other European countries in which it sells its funds. Other factors that help Fidelity to win places on banks’ lists, according to Mr Balk, are having a strong retail brand and independence. “Our independence is vital as banks do not want to sell funds from asset managers which are owned by other banks.” Even though Fidelity stresses its independence, having a European bank as a parent company can also help asset managers to win market share and distribution. DWS argues that being owned by Deutsche Bank has been a benefit. In Austria, Switzerland and Spain, DWS, with assets of $53bn, has been distributing funds through local banks, including those with links to Deutsche. “Being a subsidiary of Deutsche Bank has been helpful in almost all the European markets,’ says spokesman Thomas Richter. He adds that DWS has gained a 1 per cent market share in France through bank distribution. Even in Germany, however, DWS is not reliant on distribution through Deutsche Bank. The asset manager’s sales there are split almost equally between Deutsche, financial advisers and other banks. Threadneedle Investments, which was recently named best fund provider in Europe by Standard & Poor’s, says it closed its Luxembourg Sicav to reduce charges on its funds and thus improve performance. “We felt the Sicav was an expensive way to distribute funds cross-border in Europe. Keeping the Luxembourg operation would have doubled our overheads as we had an Oeic in the UK,” says Richard Eats, marketing director at Threadneedle. “Costs of Luxembourg funds are 40 to 50 basis points higher than our funds, which make a significant difference to performance over five years. If a market rises by 20 per cent over five years, a total expense ratio of 2 per cent knocks 10 per cent off an investor’s profits. But if a market only grows by 8 per cent, it knocks 25 per cent off profits.” Mr Eats also attributes Threadneedle’s success to a team approach to running money, integrated research and a flexible investment approach rather than focusing on particular styles. The largest asset managers in Europe believe banks will continue to seek strategic alliances with groups that have scale and a wide range of funds. This is only likely to be the case, however, if it is supported by strong performance.
What banks want According to the largest asset managers, European banks are interested in the following features: - brand strength
- the range of funds offered within the umbrella
- the number of asset classes
- the amount of assets under management
- costs
- investment flexibility
- investment process
Methodology For this survey PWM researched the flagship cross-border umbrella funds of the biggest and most prominent cross-border groups in Europe. Threadneedle and Sarasin were also included to add variety. Sarasin was featured as the niche funds management arm of an old-style Swiss private bank. Threadneedle was included because it is running Oeic funds out of the UK rather than Sicavs from Luxembourg or Dublin, allowing such cost structures to be compared. Rather than use annual fees provided from the groups, we have used total expense ratios from Fitzrovia International as a potentially more accurate and independent measure of these key cost criteria. To achieve consistency, Fitzrovia has compared the costs for the largest active, European equity fund segment in each group. PWM’s independent statistics provider S&P has compared performance for the largest European equity segment for each group over one, three and five years against the index. Where a fund does not have a three or five-year track record, the space has been left blank. Only Luxembourg or Dublin funds have been included in the comparison, except for Threadneedle, where the funds are registered in the form of a UK open-ended investment company. Sector Analysis has provided rankings of brand awareness, based on interviews with 800 distributors of investment funds in Europe.
