Fund companies must look to their own growth, says Raiffeisen’s Bauer

As regulation bites and consolidation continues, the funds industry will be forced to focus on pro-growth strategies, says Mathias Bauer, CEO of Austria’s RCM.

“Cleaning up is necessary.” Mathias Bauer, head of Austria’s largest fund company by assets, Raiffeisen Capital Management, is certain this is the way through the undergrowth of new regulation. This boggling array of new rules ranges from Mifid 2 to the Alternative Investment Fund Managers Directive or the Packaged Retail Investment Products initiative.

The fund industry – after coming out of the undergrowth – will be much more concentrated, with fewer fund groups attracting more assets. “These rules bring about high costs without raising one euro in revenue. Every asset manager and every bank will feel the squeeze,” Bauer adds.

Bauer already sees this happening and thus tries to act proactively. His own company, with €28bn in AUM, has, for the past three years, seen net sales coming from foreign rather than domestic buyers.

“We try to push that further”, says the former head of the European Fund and Asset Management Association. As the domestic fund market has yet to recover the outflows seen in 2008 and 2009, specialised products can be sold in foreign markets.

This echoes a recent study by Lipper’s Ed Moisson. His finding: the top ten funds attract more and more of net flows in the industry and cross-border funds fare better than domestic ones in the European market. This year, fewer than 40% of European funds have seen inflows, down from 50% a decade ago.

“The European fund market will look like the US. Those fund companies with quality products, a strong brand and access to a strong distribution platform will survive”, says Bauer. In this regard the new regulations that will ultimately lead to more transparency at the point-of-sale will be “war-deciding” in the competition for funds.

This is even more important for the trained economist Bauer, as investment funds compete with certificates or other structured products for client money.

Looking to sell

Adding to the regulatory pressures, banks are increasingly looking to sell asset management units, while competition will add to the financial pressure.

But few asset managers have been willing to step into the market to make acquisitions. One of them, the Australian bank Macquarie, acquired the Austrian asset manager Innovest, but that was back in 2010.

Deutsche Bank for example tried to spin off DWS, but the bids – Macquarie was among those interested – were below the bank’s expectation.

The head of the Austrian branch of a European high street bank told InvestmentEurope the rationale behind the current thinking at the banks: “It only makes sense to sell an asset manager above the book value. Otherwise the sale will generate a capital loss and no one can afford that in the current environment.” Bauer nevertheless expects more M&A activity going forward, as “the cleaning up progresses”.

Given the tougher competition it becomes increasingly important to focus the fund range rather than outsource, Bauer claims. In Austria, clients favour – notwithstanding the debt crisis in Europe – bond funds and defensive mixed funds.

Currently, a RCM bond fund that focuses on “government bonds of good governments” such as Norway, Germany or emerging markets such as Poland or Korea, is selling very strongly. Bond portfolios are one of RCM’s core strength he wants to build upon, says Bauer, who sees more insourcing going forward.

Regulation will not only foster competition in the industry, but also distort investment choices in the future, Bauer believes.

“Solvency II and Basel III keep investors out of equities. Insurers still invest much too conservatively,” he says.

That compares to an already low equity ratio in most Austrian portfolios. “Austria is a conservative country, on average the fund industry holds a 20% equity ratio.”

Most of this conservatism flies in the face of reason, the former EFAMA-chief says. “Investors need to add corporate bonds to any bond portfolio as sovereign yields are at rock bottom. And given that dividend yields are higher than rates in most markets, you have to add equities to a portfolio,” Bauer adds.

His forecast: private investors will turn to stock markets sooner than institutional ones, as they are already looking for alternatives to bonds and less constrained in their investment approach.

Thus, Bauer sees that early movers will benefit. “There will be growth, also for the fund industry, but it will be unequally distributed.”

 

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