Funds industry faces reform challenge
Jean-Baptiste de Franssu, EFAMA president, tells the fund management industry that it must adopt a much more sophisticated approach to its business if it is to survive another global crisis.
The European funds industry has undergone a transformation thanks to legislation such as Ucits, Mifid and AIFMD. The changes have been radical and, for the market participants, costly and laborious to implement. Certain sectors, such as the hedge fund and private equity funds, have protested loudly at the apparently punitive and self-defeating nature of some of the provisions of AIFMD, but overall the participants have recognised the need for reform of an industry that has been seen to be serving its own interests rather than those of the end investor.
While willingly embracing reform, the funds industry has also been quietly hoping that the flow of legislation will start to slacken, if only to give them time to absorb the most recently arrived legislation. No such luck. Under the banner of investor protection, the European Commission is to unleash still more waves of far-reaching legislation.
Not short of ambition, the EC is looking at creating a level playing field for the distribution of funds in Europe, with the PRIP directive, or packaged retail investment products; Ucits IV, due out in July this year, is to be followed by Ucits V; and Mifid is set to be followed by the even more important Mifid 2.
Corridors of power
Jean-Baptiste de Franssu, president of EFAMA, and chief executive of Invesco Europe, is well acquainted with the corridors of power in Brussels and how the legislators view the funds industry. Along with other sector representatives, for example of the insurance industry, he is working to strike a balance between accepting new legislation, while making sure that bad or counter-productive legislation is marginalised.
At a conference in Milan last month, de Franssu set out four reasons why funds distribution in Europe will have to change over the coming years. The first is that distribution across Europe continues to reflect the characteristics of each market, yet the growth in cross-border funds is gathering momentum. De Franssu says: “Last year, 80% of new money flowed into cross-border funds. They now represent 45% of total assets under management, up from 20% a couple of years ago.”
For Italy, this means big changes. Fabio Galli, director-general of Assogestioni, the Italian funds trade body, acknowledges this fact.
Addressing the annual gathering of the country’s fund managers and distributors, he says: “The Italian market has distinct characteristics of supply and demand, when compared to France or Germany. But it is no longer possible to think in terms of a domestic market. The reality is Europe.”
The reality is that the new rules have sharpened competition and provided investors with a much broader selection of funds to choose from. The Italian funds market has 700 onshore funds, with as many as 2,500 registered for sale in the country.
The second feature of the distribution scene is that “the winner takes all”, says de Franssu. The polarisation of the funds market is such that 1% of funds represent about 70% of total net flows. But this is a global trend: in the US, polarisation is even stronger at 88%. As de Franssu points out, with so many investors depositing their assets with such a small number of fund managers, this represents a potential risk to the investors’ assets, and so a legitimate focus of concern for the EU legislators.
The Brussels authorities have also noted the high level of volatility of fund flows across Europe. As de Franssu says: “The level of churn is extremely high, indicating a lack of long-term focus.” For once, however, the investors are also to blame for this, whether for lack of knowledge or lack of advice, and de Franssu comes to the surprising conclusion that “the investors’ interest must not always come first”.
The cost of funds distribution in Europe has also come under the scrutiny of the Brussels legislators, which they consider to be relatively high. Reporting back from Brussels, de Franssu says: “We are on the watch list for our high fees. The average TER for European equity funds is 195bps. Bond funds have a TER of 112bps. On average, 39% of these fees is kept by the asset managers; 16% by the custodians; and 45% by the distribution networks. This is quite a high cost. What is needed here is greater fee transparency.”
In response to these factors, de Franssu makes a number of recommendations. The first of these is that the funds industry needs to ensure a harmonisation of distribution standards. “Different products have different standards, which weakens the position of the investors. We need to achieve a level playing field. We welcome the PRIP directive because it is only with the effective implementation of the PRIP directive that we will have a fair market that corresponds to the need of investors.”