Distribution is key to a successful fund management operation in Europe, it was universally decided at a recent conference in Cannes. Not only that but distribution also appears to be overtaking performance in terms of importance, at least in the eyes of the fund manager.
The impetus on increasing true cross-border selling - not round trips from an offshore domicile - has united fund managers in their call that acquiring and developing effective distribution channels is the only way forward to serve the growing demands of the European retail and institutional market.
Fund managers in the past have been placing too much emphasis on performance when selling their funds, was the consensus. Robert Jenkins, CEO of Foreign & Colonial Management went as far too say that times have changed enough that the current situation is that: Performance is important but perceived performance is even more important." He added: "Clients have to believe they are getting good performance whether the statistics show it or not."
The evidence behind this statement was that service is growing more and more important to clients over time. Freddy Van Spiegel, president of Fortis Investments agreed stating that the fund management industry is vulnerable to a "downside risk in performance" saying that bad performance can be "disastrous for publicity". This has certainly been the case in the UK for the 'big four' providers of pooled pension funds in 1997 who all came out with disappointing results in the CAPS survey and were not allowed to forget it. Process, discipline and style therefore are now deemed as the most important issues for pension fund investors in particular, as the performance figures themselves "will not win the market", argued Ben Wrey, chairman of UK fund manager, Henderson Investors.
However, Tony Philips, manager of Xerox Pensions put paid to any suggestion that performance is slipping in importance amongst fund buyers and reminded managers that pension funds may well appreciate the techniques involved along the way to getting the results, but it was the results that actually mattered in the end. "The employer is going to want the same thing from the investment manager regardless," he said, "Good performance." Philips noted that this was of particular relevance at the moment where he felt that fund sponsors are currently wary of managers' promises after having their "fingers burnt".
But the shape and form of the client would appear to be changing as well, with the arrival of the 'instividual' investor on the scene. Fund managers who are marketing pension fund products throughout Europe will be expected to adapt to both the institutional and retail investor, said Adam Lessing, marketing director at Goldman Sachs, particularly if Europe goes down the defined contribution route. "You need to have both the institutional marketing capabilities and retail marketing capabilities," he said which in turn of course will point to more mergers in both the asset management and fund management in-dustry in order to acquire the re-sources needed.
This has already been evident over the past year with the search for wider distribution capabilities seen as one of the main factors driving the levels of merger and acquisition (M&A) activity in the financial services industry. In 1997, according to Credit Agricole Indosuez figures, there was over 900 M&A world banking deals, 50% of which were dominated by the European groups (see table). And in the first quarter of 1998 alone, there has been a staggering 349 deals made.
Credit Agricole Indosuez itself is continuing its expansion across Eur-ope following FastNet in Belgium and Luxembourg with the expected third office, DIFAG, to be opened soon in Paris. "Once we have Belgium, Luxembourg and France we may add Sweden, the Netherlands and so on," he said.
The expected size of the European mutual fund industry post-millennium is an obvious draw for non-European managers. Lipper Analytical research estimates, looking at currents trends in Europe, that the fund market could be worth as much as $3trn by 2000 and $8trn by 2005. "A share of that market must be worth achieving," said Sheenagh Gordon Hart, managing consultant at Lipper.
As such, Marc Boylan, chairman of SBC Brinson, warned fund managers, that in the midst of all this M&A activity, they could be left behind by their US counterparts who are aggressively marketing their services throughout Europe, and he advised domestic fund managers to keep an eye on how the US groups are developing their distribution capabilities in particular. Though he admitted that with the arrival of EMU, the market will be more or less of a level playing field for all fund managers. "No-one has an Emu track record," he said, adding "Everybody in this room has an opportunity to go for this market."
But Tim Guinness, CEO of Guinness Flight Hambro Asset Management which is making its first leap into the institutional funds marketplace, aired his concerns about the extent to which EMU will increase cross border flows. "There are all these barriers against cross-trading funds which still remain," he said pointing to language problems and cultural differences. "I am sceptical on how quickly change will occur."
Elsewhere in the conference, concerns were aired over the perceived future reliance on equities by governments and pension funds alike as a solution to their funding problems through both direct investments in the stockmarkets and via the pooled fund route. According to Lipper Analytical, 92.5% of asset growth in Luxembourg over 1997 was attributable to equity funds signalling a rapid growth in interest.
"You are supposed to buy the stock index because of the perceived future growth of certain companies in it, not just because it simply exists," said Henderson's Wrey, adding, "Governments suddenly realising equities as the solution to their pension funding problems makes me nervous."
With the 16-year bull run likely to end soon, pension funds were warned that they must try and recall the years of bad performance and not to rely on equities ad infinitum. As a result fund managers are likely to start heavily marketing alternative investment and capital protected products to schemes such as market neutral funds which are growing in popularity in both Eur-ope and the US. Foreign and Colonial is one such fund manager who has entered this market earlier this year.
Goldman Sachs' Lessing also point-ed to the opportunities available for mutual fund based pension funds, particularly in the midst of the Safir case, which he said signalled: "A clear decision in favour of portability of pension products cross-border." He pointed to three main types of mutual fund product being used in Europe at the moment as the dedicated balanced mutual funds (Belgian fonds d'epargne pension, German Altervorsorgesondervermoegen (ASfonds), and Austrian pensionsinvestmentfonds); Government-sponsored plans investing in standard mutual funds (Swedish premiepensionsystem) and hybrid company sponsored plans which are being developed in Germany (betriebs - pensionsfonds).
The German AS Fonds were made legally available in April of this year, following government approval, with the first funds being launched at the beginning of July. Up until now the German government has not recognised mutual funds as a suitable vehicle for retirement savings. More than 70 AS funds are expected to be launched by the end of this year.
The funds legislative structure do not fall under the UCITS directive, which means they are only currently available to German investors.
The Swedish funds, he said, are due to be introduced in January 1999 and will take on the form of a state sponsored retirement fund funded by compulsory pension contributions of 2.5% of salary. These contributions will be invested into government approved mutual funds. The funds will have no investment restrictions.
But he stated categorically, to anyone who may have got too enthusiastic over the developments in European mutual fund-backed pension funds: "There will be no Euro directive mandating the single European pension fund," adding "What we will have however is unified investment restrictions."