The Belgian asset management industry is undergoing unprecedented re-organisation, with a spate of mergers and takeovers, between domestic and international players.

Such change has been encouraged by the increasingly high priority by the banks and insurers themselves leading to increased competition domestically, while international banks begin to make inroads into the market particularly where larger funds most notably that of Belgacom is concerned.

Domestic asset managers still have many strong cards such as their ability to manage the domestic bond and equity markets better than others, good existing relationships with companies and a reliance on investment through mutual funds at which most banks excel. They may also benefit from the small size of funds, which means that bigger players internationally may not concentrate all their fire on the market.

However in what is an open market, international successes may have actually been underreported. Koen de Ryck, who heads Pragma Consulting in Belgium says: In Belgium, if we take out the larger banks' own money - which slightly distorts the figures - we see what they really manage for third parties. Of that a very high percentage, easily 35%, is managed by non-domestic managers, probably the highest percentage in Europe."

Domestic asset managers still have many strong cards such as their ability to manage the domestic bond and equity markets better than others, good existing relationships with companies and many funds' reliance on mutual funds (there is withholding tax on segregated accounts) with most local banks strongly placed to provide institutionally tailored funds.

In terms of pension funds, the Belgium market represents a half way house in Europe between the most and least developed. They invest significant proportions outside their domestic market but below the top rank - funds such as Belgacom and Tractebel - most have relatively small amounts of assets under management while large sections of the workforce remain covered by the state pay-as-you-go systems.

Levels of sophistication vary as well. As with other countries, size plays a part in this, but there is also a generational difference in the attitude of pension managers, between the younger 'fresh from finance school generation' and more traditional managers.

Some fund managers suggest that Dutch best practice is now being emulated by some in Belgium.

Jean François Schock, managing director of State Street Global Advisors in Belgium, says: "The Netherlands is years ahead and many Belgium managers now view the Dutch model as the one to copy.

"The Belgians are pioneers in terms of international allocation, when compared to the Netherlands, but as far as implementation is concerned the Dutch are more sophisticated in terms of trying to add value, with separate custodians, performance measurement and use of quant."

Johan de Ryck, manager for pension funds with the investment management division of Kredietbank says that much of the change, particularly towards specialised management, comes from the multinationals and consultants. But the M&A activity is also having an impact.

"Mergers create larger pension funds and this will pave the way for even more specialised mandates, as a matter of scale," he adds.

And there is also the Belgacom effect. "The appearance of Belgacom has made a great impact. The way it set up its pension fund is very professional. They hired consultants and used eight different managers on Anglo-Saxon lines, helping make things more sophisticated," says Freddy Van den Speigel, president of the executive committee of Fortis Investments Belgium. "It has helped in the process of asset management developing as a specific industry."

But some of the most sophisticated pension managers are still very critical of domestic standards. "In Belgium, there are only seven or eight players and there isn't really a substantial distance between them, except for some niche players," says Georges Van Acker, compensation and benefits manager at the Bfr610m MSD (Merck internationally) pension fund in Brussels.

He says that in many cases local funds are happy with the VIP treatment they receive from local banks. "Local players may have some advantages, but they will need to seek other competencies for their long term future because they cannot win new business on this basis," he adds.

They can provide balanced management, but when funds require specialist services such as a core satellite approach they should go elsewhere.

"We have done an asset manager survey very recently, realigning our fund managers and that was our conclusion," he adds.

"They will need more performance, which comes from specialised mandates and these will be from abroad. The Belgian market will be for niche players and balanced players will have hard times in five years. Also, there is no need to have a local player as part of a global team."

Karel Stroobants, deputy general manager of the Bfr14bn VKG fund, is similarly sceptical: "I do not think that Belgium based asset managers are generally well placed for managing pension fund money. Rather they are mutual fund managers."

Looking at the restructuring, he adds: "It will improve. For example with BBL and ING, it should improve the service level for pension funds because they can now take profit from the know-how of the Dutch. I see some first signs of that."

However he warns that the strength of local players is the Belgium market. "Belgium is like a small market where you really have to know what is going on. In the European market they will have problems."

Van Acker believes that, spurred by ALM studies, pension funds will implement extensive changes in the next five to seven years as companies consider all aspects of competitiveness including pension funds.

Hugo Lasat, managing director at the newly formed Cordius Asset Management, says: "Company management is becoming more committed to the pension fund while pension fund management is becoming more and more integrated into financial management."

But Stroobants says that not just market conditions but the general environment that is frustrating progress in the private sector. Contribution increases are blocked by a current wage freeze while employers and insurance companies are also not generally in favour of pension funds.

"That freeze has to be lifted otherwise everybody in the companies will fall asleep," he says acerbically. New money, according to asset managers and pension managers, will come from the semi-state sector such as Belgacom, VRT and the Flemish government employees.

"It is strange to see that in an environment where change is being blocked, there were never so many pension funds started as in 1997 and 1998. The new funds are highly professional," says Stroobants.

Asset managers themselves, not surprisingly, are robust in defence of their place in the market and their ability to compete and of changes they are making for the post-euro environment.

Generale Bank has grown by acquisition and now operates from four centres with bonds and asset allocation run from Brussels, European stock picking from Paris, Asian from Hong Kong, and US from Boston.

Pierre Yves Goemans, CEO for asset management in Brussels says that consultants mostly from the UK, have had a strong impact in terms of demands from clients, for performance measurement and asset liability modelling.

"Clients are considering whether they should get out of Belgium and move into the euro area or go more international. We work with them a lot to redirect their portfolio from pure Belgium to a European portfolio," he says.

The bank's mandates today are half Belgium and half international but in the bonds he sees a rapid shift. "More clients are asking for euro-based products and we will be moving to a 70:30 situation. On equity, even with funds that have used Belgian equities only, we are seeing a rapid shift to euro equities."

Goemans also makes a defence of the use of mutual funds by pension funds. Coupled to the fiscal advantages, he believes that the lower costs of administration, plus other issues like ease of changing funds, makes them a practical option. Management within Generale is done on the same basis with the same team. "It is a good way to externalise. For a large fund, doing its own administration, you don't need any contract, you can change manager, and you can buy five mutual funds as an easy way to diversify."

BBL largely agrees, particularly for smaller funds, which can easily achieve an international exposure at low cost for relatively small amounts of money and with less accounting difficulties.

The bank believes that its range of Sicavs tailored to institutional investors still meets the needs of the market. "The trend has been for specialised Sicavs so the investment manager can maintain his main role of asset allocator for small or medium funds," says Staf Van den Berg managing director of BBL Capital Management Corporation.

The bank, now part of ING, still considers itself a domestic player, but it is also aware that its increased global reach will give it a competitive edge with expertise in a number of diverse markets. Van den Berg says that this reach will help it in future requests for proposals (RFPs) on the lines of the Belgacom RFP. "Belgium has always been a very open country so it was not really a big surprise."

Indeed Van den Berg believes that that openness will allow Belgian managers to adapt to faster to the euro situation. "As a small country we have always had a much larger hinterland," he says, adding that BBL moved to a sectoral approach for the core emu countries two years ago.

Lasat of Cordius agrees, saying that investment abroad already exists due to the lack of depth in the Belgium stock market so changing to a European basis should be easier. "A Belgian allocation makes no sense anymore. This company is a European asset manager. The euro zone, the opt in and opt out countries that is our main investment zone where we think we offer added value and a decent service. What we are not going to do is offer value outside of Europe. That would not make intellectual sense for specialised mandates," he says.

The banking and insurance group Fortis is being keenly watched amid speculation that the operations in the Netherlands and in Belgium are to merge. It now regards itself as a major European player grounded in a strong quant style and substantial third party and internal assets.

The group believes that its emphasis on quant and performance reporting will distinguish it from other domestic groups but its most important aspect may be the international reach.

"We are now working on having a European structure, but we will still maintain close links to domestic clients," says Van den Speigel. This will still be important, he says, on grounds among others, of taxation and regulation.

Another player, Kredietbank, which has just bought another manager Cera, is fast developing European products, using mutual fund products such as European bonds, ex-Emu European bonds, corporate bonds, and European equities.

The bank, according to Johan de Ryck, is the market leader in mutual funds but has also moved to at least second for pension fund money over 1997 and early 1998.

In terms of international competition, de Ryck says that the market has seen off one failed attempt by US banks to gain significant market share adding that they will surely return. UK houses which had recently made inroads based on intelligent marketing were also losing business back to Belgium houses.

However the euro would present problems. "I am very much concerned that a lot of the specialised Belgium equity and bond mandates which Belgian banks hold will disappear," while adding that in many ways it was good that so many funds used balanced mandates as these will be easier to maintain.

Of European strategies, perhaps the most novel is that of Bank Degroof which is currently examining the possibility of setting up a network of asset management companies across Europe in which the various local asset management expertise will continue to be of relevance.

However, despite these various strategies, foreign players are convinced that they can take advantage. "In the past, the domestic managers were entrenched through their links with their local bank. We were viewed as slightly alien, but now they are starting to realise that we can give value added," says Schock.

He suggests that despite the changes many local managers will retain a Belgian bias and he recommends the quant-driven style of State Street as a means of coping with the changed liability requirements of a European market.

Koen de Ryck says that having experienced lucrative market conditions Belgian players must invest in the future, rather than concentrate on bonuses and dividends, important as they are, particularly at a time not just of the euro but with Europe looking to be one of the most attractive markets in a global context. "In Belgium, they are going to lose business. The question is how much can they compensate for this on the European side.""