Spain must transform savings into investments

Spain’s fund management industry is facing an uphill struggle trying to recover from the crisis. But managers are hopeful of a gradual upturn.

Spain’s fund management industry is struggling to overcome the financial crisis, whose domestic impact has been exacerbated by continuing uncertainty over the European economy and the Eurozone. Investor confidence remains low and until it improves, the country’s fund management industry will continue to struggle.

The typical Spanish investor is a retail client. “That makes the industry very oriented to a kind of client who is very conservative and who sees the fund industry mostly like a savings industry, not as an investment industry,” says a senior official in one of Spain’s largest banks who did not want to be named.

With the financial crisis, confidence collapsed and investors decided not to invest in any product that was not secure or guaranteed, and that is still the case, bankers say.

Road to ruin

The financial crisis and credit crunch hit Spain and its fund industry hard with a sharp drop in assets under management, which declined from €238.7bn at the end of 2007, to €138.1bn at the end of 2010. In the past 12 months alone, assets under management by Spain’s fund ­management industry declined by more than 12%.

The collapse of Spain’s housing market, a sharp decline in savings and a general loss of investor confidence from the start of the crisis accelerated the crisis.

Spanish banks which dominated the local fund industry were hit as credit conditions tightened and they found themselves shut out from external financing sources, apart from emergency lending from the European Central Bank.

A ‘war for deposits’, with rising interest rates paid on savings accounts, ­contributed to falling margins at a time when banks were already under pressure from ­government regulators to strengthen their capital base.

In such an environment, fund managers could do little to prevent investors turning away from mutual funds, especially money market and short-term fixed-income funds, to rush into bank deposits.

Bankers and fund managers say investors have always been cautious, even during the good years of fast ­economic expansion in the country.

“In those years [of expansion], we saw a slight ­improvement in risk taking from our clients and we could sell more equity funds or more risky assets – more ­value-added funds than now. But it has never been a huge part of the industry,” one manager says.

Not surprisingly, the biggest chunk of the industry and the most popular products are money market and ­guaranteed funds with a conservative profile. Such conservatism and the Spanish banks’ market predominance also affects non-Spanish and specialised institutions.

“Even if you have a boutique in Spain and you sell funds, you need to keep very close to the banks’ ­commercial networks because that’s where the clients are,” says a fund director who wished to stay anonymous.

For local fund managers operating under the corporate umbrella of a bank or banking group, it is relatively simple to reach potential investors. Clients are approached directly through the bank’s retail branches. Investment funds are simply another set of products offered by the bank.

In recent years, Spanish asset managers have had to develop and offer products that are similar to deposits or other traditional savings vehicles and which are seen as safer by their clients. This is not “normal” for the industry internationally, says one banker. It also makes it more ­difficult for international asset managers without access to a local network to enter and compete in the market.

There are more than 500 international management funds listed in Spain, down from 710 four years ago, but they represent only a fraction of the business carried out by the big Spanish banks in the retail market.

Assets under management by international funds in Spain totalled €17bn at the end of April, compared with near €139bn for the whole of the industry. Spain’s market leaders Santander and BBVA were managing assets worth €45.1bn between them at the end of April, according to Inverco, the Spanish fund management association.

 

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