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Crossing the bridge to external funding

Spain's investment management community and their clients are waiting - as ever - for the regulations to really get started. Rachel Oliver reports

The Spanish asset management and insurance community has been left almost in limbo of late. On the one hand a tremendous weight has been lifted from the shoulders of Spanish companies by the extension of the infamous May 1999 deadline until, it seems, 2001. With legislative guidelines on transferring past commitments still only in draft form, and final regulation expected imminently, the prospect of overhauling the pensions set-up in a matter of months was daunting, to say the least. On the other hand, the eager pensions pro-viders must re-apply the philosophy that patience is a virtue.

All these agents are waiting for this deadline," says Jacint Tió, consultant at William M Mercer in Madrid. The decision to choose a qualified pension plan (QPP) or insurance policy is based on a number of factors (see page 26) and no-one is quite sure who will be the main beneficiaries of the money flows. "All the market will have to wait until the last moment"

"Everything is confirmed within our group and lots of potential clients are just waiting for the regulation," says Santiago Rubio, chief investment officer of Santander in Madrid. "Some have already taken the step but it is mainly the multinationals who are more familiar with the idea and who do not mind going on before a regulatory framework is established. Very few purely Spanish companies have already taken the step, some big electrical companies, but they are the exceptions."

Meanwhile, levels of manageable pensions assets have been on the increase, albeit not at a meteoric rate. According to Inverco figures, Spanish pension fund assets rose to Pts4.05trn ($29bn) at the end of June, up 24% year-on-year, with the number of participants rising to 2.9m. And a staggering 70% of this amount is managed by just 10 providers - mainly banks but with two insurance companies, Grupo Caser and Intercaser, as notable exceptions (see table).

The rule of the banks stems largely from tradition as opposed to prudent investment choices. The main factor in choosing the gestora (qualified pension plan manager), says Rubio, is not surprisingly, past relationships. "Right now I would say that it has more to do with the historical relationship between the company and the financial institution," he says.

Santander ranks fourth in terms of corporate pension fund assets, though it is the leading personal pension provider. BBV is Spain's largest pension provider overall, holding approximately 14.1% of the pensions market (excluding the Basque market), 13.6% of corporate and industry/ association plans, 14.5% of personal plans and 10% of the Pts852bn Basque market. BBV is in fact a Basque bank, which helps. Its corporate clients include Iberdrola (electricity provider), Repsol (oil company), AT&T and GE.

"The pension schemes of the big-gest companies work with the big banks in Spain. So, the pension fund business is controlled by the banks and savings banks," points out BBV Consultores de Pensiones' director general, Luis Buey Villahoz.

The role of the gestora is enough to put many an outsider off competing. The gestora umbrella covers custodianship, administration, payment, consultancy as well as asset management. A money manager must have all of these capabilities under its belt before it can set up a gestora in Spain. Not surprisingly, few international managers have tried as yet.

Gestoras have "incredible responsibilities" admits Villahoz. "Our market is very concentrated because of this. It is very difficult to establish all these kind of things."

One of the first hurdles for foreign managers who harbour desires of setting up a gestora is the fee issue. Gestoras run assets on a very low fee basis for corporate pension funds, typically charging well below 1% on management fees, some even offering the services free for the first three years then only charging 0.2-0.3%. This raises the question of how much value international managers would be able to add if they are forced to work at those prices, but the alternative is to keep fees higher and not win as much business.

Insurance companies can also be qualified pension fund managers, though many Spanish companies will turn to non-qualified plans in the form of insurance contracts, says Javier Sanchez-Moreno at Mercer in Madrid. This is where the insurers will be in a position to attract as impressive an amount of new pensions assets as the banks. "For a lot of companies who are deciding to go to an insurance plan or a qualified pension plan (based on information disclosure and loss of investment control) - a lot of them are going to insurance policies to do this externalisation."

Insurance scheme regulations also permit a firm to use various insurance companies, spreading the spoils more fairly. "This is an agreement between two companies or three companies," says Rafael Martinez, head of pensions at BanSabadell, which runs the largest number of pension funds (including insurance ar-rangements) in Spain through its gestora business and its insurance subsidiary, BanSabadell Biba. It runs around Pts1trn in corporate and personal pension funds and mutual funds. "I think it is very strange because it is the same products, but legislation permits the co-insurance and doesn't permit pension schemes different managers."

Henry Karsten, head of pensions at Mercers, adds: "Basically the insurance companies can have two bites at the cherry. On the one hand they can offer insurance policies, which is a permitted legal vehicle, secondly they can act as qualified pension fund managers or they can set up subsidiaries which are qualified pension fund managers."

Perhaps it would be more accurate to say that the banks will have two bites at the cherry. It is not just the asset management business they have a hold on. "The banks control the insurance companies. Most of the main Spanish insurance companies belong to the banks," asserts Villahoz. BBV's link-up last year with AXA-Aurora gives it a 30% share in the life and non-life insurance company which manages Pts4.2bn in pensions assets. Equally, BanSabadell runs the assets of BanSabadell Biba, as does Santander for its insurance policies.

Outsider Allianz is on its way to becoming a significant player in the Spanish insurance market, following the planned merger of Allianz RAS, Athena and AGF Union Fenix and the sell-off of Spanish company Amaya. An equally shrewd move is Allianz's recent arrival as a major shareholder in Banco Popular, which has Pts203.4bn under management. Holding approximately 8% , and with two joint ventures in the bag, the German insurer can now sell insurance and pension funds through the Spanish bank's distribution network.

Interestingly, the leading foreign provider of pensions products is in fact an insurance company, Winterthur, holding Pts72.7bn in assets (just under 2% of market share). Barclays Bank has Pts20.7bn under management, DeutscheBank runs Pts18.1bn in pensions assets, Credit Lyonnais Pts13.5bn, BNP Pts10.2bn, and Swiss Life just under Pts10bn. Between them though, the foreign providers hold less than 5% of the Spanish pensions market.

The level of foreign interest in Spain is immense, though, with providers including ABN Amro, Flemings, Paribas, Templeton, Schroders, Credit Agricole, BNP and Mercury Asset Management (MAM). Until recently the potential for them to get their hands directly on a significant amount of institutional pension fund assets was zero unless they had a gestora set up. But legislation passed in June allows Spanish pension funds to award up to 20% of their assets to non-domestic managers as long as they are based within the EU. The money itself can be managed outside Spain, so the non-domestic provider does not need to have a presence in the country.

Even though in theory the new legislation gives non-domestic players new access to the pensions assets, gestoras will often be the ones managers will have to court to win business. There are cases where the gestora is actually present on the board of the control commission of the fund responsible for making the investment decisions. "There are funds where the control commission and the gestora are nearly the same thing," says Juan Marin, managing director of Invesco in Madrid. "You find pension funds which have a control commission, but the people within the commission work for the gestora. Everything in the end is done by the same people."

For the time being, many foreign managers are satisfying themselves with the opportunity to show off their international asset management ex-pertise or establish a solid mutual fund presence. Spain has represented ap-proximately 20% of total European growth in terms of mutual fund assets, which now stand at around Pts35trn. And the Spanish mutual fund industry is becoming increasingly competitive.

Up to 1995 the business was less than marginal, says Marin. Since then, companies such as Flemings, GT Invest, MeesPierson, JP Morgan and MAM have been able to conduct more fruitful business, particularly since legislation last year allowed funds of funds to invest in foreign funds.

But setting up a fully functional gestora is not on the agenda of many, if any, foreign managers - though the push of the multinationals to unify their investments could be a driving force for certain global asset managers such as JP Morgan to set up a fully bundled service. "We are detecting a move in this way," says Mercer's Tió, "but not a big wave. We are detecting some interest from foreign portfolio managers to establish here."

"Setting up a gestora is really tough," adds Invesco's Marin. "It costs quite a lot of money and it is difficult to get business." Invesco is now pitching for discretionary mandates as well as selling its range of GT and Invesco mutual funds, but setting up a gestora is not on the horizon.

Paribas Asset Management, which has $400m in Spanish assets under management, also decided against setting up a gestora. Says Jaime Gil Belgadot, its managing director in Madrid. "With the globalisation of the markets in Europe, we do not think we need to set up a gestora to manage the domestic markets be-cause what we are selling is diversification outside of Spain and we can say 100% of the total is outside of Spain."

Paribas' assets are sourced 40% banks and savings banks, 22% insurance companies, 10% pension funds, 8% corporates and 20% mutual funds. Paribas has one mutual fund that invests in Spanish equities but does not sell this in Spain. "We think it is important at the moment that clients look at Paribas as a global house and look at our expertise outside Spain." Paribas has not seen an increase in pension fund interest since the legislation allowed foreign companies to pursue their interests in Spain. "This legislation arrived at the peak of the markets and some but not a lot of pension fund companies thought about delegation but for the time being these decisions are on standby."

As with many foreign managers, much of Paribas' pension asset exposure comes indirectly through the gestoras, which use its mutual funds for asset allocation. But Belgadot doubts many foreign managers will try to compete, not only because of cost or distribution issues, but also because of the 'great gestora' influence on investment decisions.

"Normally the big banks have a stake in the big companies, they are members of the boards so they always try to keep the pension fund of the company. So it is very difficult for foreign players to attract this part of the business," he says.

Paribas is running international assets on behalf of insurance companies that are running pensions money. The insurance industry is in many cases interconnected with the gestoras, which will more often than not run the assets for them, as in the case of Santander. There are some exceptions, with independent companies owned by foreign companies such as AXA, Allianz and AGF outsourcing asset management to third parties. "Some of those insurance companies are independent of their mother houses and they are using global asset managers such as Paribas to make their asset allocation. And some of these insurance companies owned by Spanish banks are also using global managers for their international asset allocation," says Belgadot.

Medium-sized Spanish banks could potentially be in for a hard time on the international asset management side, losing portions of their portfolios to foreign providers. But in the cases of the larger players, the foreign managers may have more of a fight on their hands. "The big houses like Argentaria, BBV, Santander, Banco Central Hispano, are trying to set up their own capabilities in international markets and the medium ones I think will delegate and buy mutual funds from asset management houses because I don't think they are going to set up their own expertise outside Spain," says Belgadot.

BBV manages around Pts571bn in Latin America, the majority of which is sourced from Argentina. Colombia and Bolivia are also significant markets, with Mexico and Peru growing in importance. BBV's international reach outside of Latin America does not necessitate the hiring of foreign managers despite new legislation that allows this, according to Villahoz. BBV invests internationally in the US, Europe, Japan, and Latin America but currently has no exposure to the emerging markets.

BBV has been growing expertise from within, developing processes in-house instead of buying them from other providers. "For the time being we are developing our own resources and growing ourselves, so we are incorporating more and more people in the equity side," says Villahoz.

"We create diversification but we do not need someone very specialised in this. We are specialised in ourselves and our people and perhaps we don't need someone who can give us the total management of this portion of assets for the time being."

Argentaria has had experience of using non-domestic foreign managers on the mutual fund side, but Manuel Galatas Sanchez-Harguind-ey, director general of Argentaria Gestion de Inversiones, admitted recently that service has been poor. "We are using investment managers but on a very selective basis," he says, adding "Basically we are the ones that know our clients and we have to go very slowly."

Santander is managing the money in international markets for its pension fund clients and is determined to keep it that way. "We have management companies all over Latin America, Portugal and Spain, and besides we have management teams in London and in Boston," says Rubio. "We will not be looking for third party help here unless the client requests it."

Santander's current international equity exposure is approximately 15% of its pension plans' total asset mix, out of a 30% total in equities and 70% fixed income. "We have been working hard and one of our main challenges right now is to give the supervisory boards of the pension funds a crash course in financials to show them how equity investments will outperform in the long term. Probably right now it is safer to look at the long term in terms of performance."

He adds: "It is something you have to explain to most of the Spanish guys, getting a large part or at least a part of their investments in equities."

"Up to now in pension funds, the biggest growth has been in domestic equities, but secondly now to the euro area," adds Rafael Garcia, investment director at Sabadell, which plans to continue running the majority of international assets in-house. "They are mainly located in theeuro area and when you are running non-euro, mainly dollar areas you are concentrating mainly on blue chips." BanSabadell is developing its euro expertise and, according to Garcia, Spanish pension funds are feeling "very confident" about tackling the euro in their asset allocation.

But the bank is also prepared to consider outsourcing to foreign managers, though Garcia stresses it will depend on the client. "I think it may be interesting," he says cagely. European equities, however, will remain in-house, though for specialist mandates, foreign managers will be considered. "If they want to have something very specific like smaller to medium caps, let's say in Europe or US markets, with mortgage securities, or something like that, then we are going to outsource."

The foreign managers are well aware that the leading banks in many cases are not going to sit back and let 20% of their pension funds slip from their grasp, which makes for a very competitive marketplace, whether selling direct to pension plans, or persuading the gestora you can do better than they can. As Invesco's Marin says, "Unless you can convince these guys that you have something for them you are not going to be doing much business."

He adds: "It is impossible that these guys know how to manage everything. They are not experienced fund managers in foreign markets. They can be very good indexed fund managers but that's it.""

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