It is no secret that the European fund market is quite fragmented in some areas. But when it comes to the market concentration of fund domiciles, the picture changes from fragmented to rather concentrated. According to our European fund market report for Q1-2018, there were 34 fund domiciles in Europe, accounting for €10.54trn of assets under management. It is no surprise that the international fund hubs Luxembourg (33.56% market share) and Ireland (16.58%) were the largest fund domiciles, since the vast majority of the so-called cross-border funds (funds sold in more than one country) are domiciled in these two countries, while “local” funds (funds domiciled in a single country and mainly sold in that country) play a smaller role. That said, the combined market share of Luxembourg and Ireland (50.14%) does not look exceptionally dominant at the moment.
However, there are some underlying trends that have the potential to drive up significantly the market share of these two domiciles. One of these trends is the so-called Brexit, since the fund industry has be prepared for a no-deal environment where British asset managers relocate funds sold mainly to continental European investors to European Union onshore domiciles, i.e., to Luxembourg or Ireland. In addition, foreign asset managers who want to launch a Ucits fund also prefer the international fund hubs, since these domiciles and the respective service providers are well known by local investors, which might be quite helpful for fund distribution. This does not mean the local fund domiciles will no longer witness growth. Even though the European fund regulation opens up the EU as a single market, a number of institutional investors still prefer local funds because of local market guidelines and/or investor-specific regulations.
For ETFs the picture with regard to market concentration changes completely, since the international fund domiciles (Luxembourg and Ireland) account for 78.95% of the assets under management in the European ETF industry, and the five top domiciles account for 99.10%. That said, this kind of consolidation in the ETF segment is to be expected, since ETFs are true cross-border products, and promoters therefore prefer the international fund hubs. The need for locally domiciled funds becomes even clearer in the ETF segment, with Germany (8.87%), France (7.73%), and Switzerland (3.55%) all being markets in which especially institutional investors have regulatory- or guideline-driven demands for locally domiciled products. As an example, when iShares reported it was going to close down its German branch and relocate the funds in early 2018, it seems it got a lot of negative client feedback. So iShares decided to maintain the German branch with locally domiciled funds.
Another country where we might see a growing demand for local funds is the United Kingdom. Since BREXIT may shake up the cross-border fund regulation in Europe, there may be an increasing demand for locally domiciled ETFs in the U.K., which will drive up their assets under management and therefore the importance of the U.K. as a European ETF domicile.
All in all, it can be said that the European fund market is mainly structured by the demand of investors and fund promoters and can therefore be seen as efficient. Nevertheless, there are still some legacy product ranges that offer fund promoters room for improvement with regard to efficiencies and cost cutting without disturbing their sales efforts.
Detlef Glow is head of EMEA Research at Thomson Reuters Lipper