From a bird’s eye view the European fund market appears to be in a very healthy condition. Record numbers are posted while operating margins remain relatively high. However, a closer look reveals an industry in a state of upheaval, on both sides, the provider and the fund buyers.
Europe, the world’s second largest fund market, has experienced steady growth – in retail / wholesale funds as well as in segregated accounts, rushing from record to record. A closer look at the industry, however, shows major challenges still lie ahead. Europe, in comparison to the US, is massively overcrowded in terms of funds available with more than 35,000 funds versus approx. 9,500 in the States. Looking at fund AUMs averages, the picture becomes even more alarming. The average fund volume in Europe is just above €260m versus €1.7bn across the Atlantic. At the same time, the number of share classes offered in Europe has literally exploded in recent years. Yet, rolling out new funds remains a key asset gathering methodology for many fund houses; at least in theory.
Stellar ETF asset growth in Europe puts additional pressure on the asset management industry.
The list of active managers which have moved into passives is long and continues to grow. However, active managers, having preached the value of active management for years, may well put their brands at risk by moving into passives. In fact, we know many large gate keepers, which consider these moves as a sign of desperation, rather than intelligent and coherent business decisions. However, one could argue that active fund houses moving into passives are looking to retain active client assets at risk until their own active strategies return to form.
Some fund houses react to the current environment by lowering fees. Interestingly, no broad correlation of higher sales following lowered fees can be found in our analysis. In fact, many bestselling funds are priced on the upper end. For high alpha, including high service alpha, fund managers fees have been relatively easy to defend.
A growing number of players seek their fortune by building scale and increasing broader distribution footprints via corporate activity. Just in 2016, around 150 asset manager transactions were executed globally. A number of high-profile deals dominated industry headlines this year. We have surveyed key gatekeepers across Europe on their experiences with fund house corporate activity this spring. We witnessed large variations in their views, however, on an overall basis, a cautious, closely monitored wait and see approach appears to be the main route. In the euphoria of M&A communication, assumed scale and cost savings often overweight. However, convincing and coherent messaging about enhanced value propositions, combined with an open assessment of potential obstructions are vital to engage fund selectors in the M&A process.
All in all, in spite of positive macro numbers, large parts of the fund providers are in a state of upheaval. What’s happening on the other end of the table, on the professional fund buyer side?
The fund buyer segment has also witnessed major changes a more challenges to come. First of all, the amount of professional fund buyers and fund analysts has actually been shrinking for a number of years now. Consolidation and corporate activity, particularly in Switzerland, are some key drivers behind this. Secondly, fund selection units are being increasingly rationalised. The ban of retrocessions, which is already in place in a number of European countries and Mifid II being just around the corner, leads more banks and other wholesale players to consider fund selection units as an element of cost – not only fund analysis itself, but also the operational due diligence and on-boarding process. As a consequence, buy lists and the number of strategic partnerships with fund houses are becoming increasingly shortened. Also, a systematic trend away from open towards guided/restricted architecture can be witnessed all across Europe.
The economic model for banks distributing funds also changed. In 2016, we witnessed a blast from the past as in-house asset management moved centre stage again and climbed steadily up the net sales leaderboards, in particularly in Southern Europe. Higher margins, combined with better asset control will drive this trend further across the Continent in our view.
Also, fund selection and information gathering methodologies are changing and will take further digital routes. Most fund buyers increasingly gather information online, either directly or via third parties. The need to engage with fund house front office staff gets further delayed towards the end of decision making. More and more sophisticated B2B online solutions emerge. This also impacts the entire value chain of fund distribution as we know it.
We firmly believe, less sales people will be required in the future. We expect the number of European fund sales people to drop by at least 35% in the forthcoming years, whilst we expect a rise in very skilled client service solutions. No doubt, these are exciting times.
Philip Kalus is managing partner at accelerando associates. For further information on the trends identified visit http://www.accelerando-associates.com/downloads/