Spain’s investment management scene is not renowned for its breakneck pace of change or split from tradition. In a market that for many years has also been at the mercy of regulatory insecurity, you could forgive the slumber.
However, a combination of the need for investment diversification, emphasised by the euro’s arrival, alongside a much-heralded clarification of pension and investment guidelines is beginning to stir things up – albeit gradually.
And although the activity falls short of a bull run towards Euroland, one asset manager notes that Spain is undergoing a series of “logical steps” towards joining the herd of European institutional investment markets.
Historically the domain of generous company defined benefit pension plans, the Spanish pensions terrain could not look more different today. In terms of overall retirement saving the country’s highly competitive mutual fund market dominates, having seen assets rise dramatically to approximately Pts35trn (e210bn) this year from Pts870bn in 1989.
And Luis Abraira de Arana, head of global equities at BSCH, the Madrid-based combined asset management operation of Banco Santander and Banco Central Hispano since the banking merger in March this year, believes mutual funds will continue to grow: “People in Spain today don’t discriminate between pension funds and mutual funds as vehicles for retirement savings.”
Nevertheless, during the same period, assets within segregated pension fund arrangements have ballooned from Pts86bn to just under Pts5trn. Figures from consultants William Mercer for the end of June this year show individual plans accounting for approximately e17m of total Spanish pension assets of just over e28.3m, with employer-sponsored arrangements making up e10.5m and the less popular industry/association plans comprising around e0.8m in assets.
Little has changed though in terms of breaking the stranglehold of Spain’s banks on the institutional asset pot. Dual marketing through Gestoras – the regulatory route for pension fund management requiring asset management, custody, administration, consultancy and payment within the same company – or via insurance arrangements which enjoy the same legal status as the Gestoras, gives Spain’s large retail bancassurers unrivalled leverage. Consequently, the business is well cosseted and 70–75% remains in the hands of around 10 players.
Statistics from Inverco, the Spanish funds regulator, at June 1999 show Fonditel, the giant pension scheme of Spanish telecommunications group Telefónica, managing the largest assets, with 29.1% of the market, followed by Argentaria with 16.5% and BBV with 15%.
Foreign players have been checked in direct institutional asset management ambition by the market set-up, with only well-established Swiss insurers Winterthur and Swiss Life breaking into the top 20. And the low fees – between two and three basis points all-in, or even free for a limited period – have also hampered the outsiders.
Business margins for Spain’s banks have traditionally been balanced by retail investment, where charges sit at the more rentable level of around 2% for assets and six basis points for custody. Nevertheless, most of the Spanish investment community agree the fees issue has exceeded reasonable competition levels.
As one investment manager puts it: “In reality, these fee levels are just bad practice and we are now looking towards a completely different landscape where you won’t be able to do this. It is dampening the market.”
Such talk doesn’t necessarily mean anyone is prepared to move first, though. However, the euro’s arrival in Spain may be forcing the market’s hand. Although the single currency has prompted a measured shift to Euroland – partly restrained by strong performance in the Spanish equity market until the beginning of this year – Spanish investors are now looking beyond the 35 stocks of the Ibex.
Fernando Platón Carnicero, director general at Madrid-based Aserpensión Internacional, managing Pts10bn (e1.8bn) in retirement savings assets, including mutual funds, says the transition from a high premium bond culture, which until three or four years ago was returning an average of 12% to investors, went first to Spanish equities. “Only in the last year has there really been any need for further diversification and this has led to a gradual build up in Euroland equities. The Spanish market will eventually become the euro market although I think it may need several years before this happens.”
Juan Carlos Martinez, consultant at William Mercer’s Madrid office, adds: “Everyone was used to constant gains on the stock exchange, but now Spanish investors are having to adapt their expectations and take into account a new awareness of losses as well as gains on their investments.” He points out that the euro effect is becoming noticeable in portfolios, with fixed-income investment diversifying and equity portions rising.
Mercer’s Spanish Pension Investment Performance Services (PIPS), using figures taken from 16 Spanish fund managers, shows average fund asset allocation breakdown at 53% in Spanish fixed-income, 8% in eurobonds and a 1% tranche in ex-Euroland fixed-income – a 62% overall bond exposure. This compares to an overall bond holding of 57% at end-1998, split 53% Spain and 3% Euroland.
For equities the Spanish market still represents 13%, down from 15% last December, with Euroland shares rising to 8%, up from 4% and ex-Euroland shares hopping up a percentage point to a 3% average – giving a 25% overall equity weighting.
Real estate is unchanged at 1%, with cash and short-term bonds taking the biggest drop from 21% pre-euro down to around 13% by June this year.
“The evolution in Spanish institutional investment strategy has been quite clear in a short time, particularly when you consider that in 1996 Spanish funds were holding around 33% in cash. I think we will see a 40/60 equity bond split as the next step,” says Martinez.
Francisco Javier Serrano Roldan, financial analyst at Spanish private bank Banco Urquijo, managing pension assets for a handful of companies, notes: “For every seven pesetas being invested in equities, six are now going into Euroland.”
And Manuel Rodriguez, director of pension funds at Grupo Caser, the amalgamation of Spain’s small and medium-sized savings banks, and the country’s fifth largest company pensions manager, sums up the new investment terrain: “The real challenge ahead is to be able to increase equity and diversify into new sectors.”
The recalibration of Spain’s previously domestic bond-heavy portfolios has also begun. Eurobond exposure has clearly risen since January but, as with most European markets, the switch to corporate debt is news.
Eduardo Martinez , senior portfolio manager at Swiss Life, comments: “It is difficult sometimes to explain to Spanish funds the possibilities of going down to single-A credit levels from their normal AAA holdings. We would be looking to get the 40–50 basis point spreads on offer in these lower credits. However, most Spanish investors prefer to stay in debt issued by privatised Spanish companies, of which there have been a number in recent years.”
Jose Maria Castillon, investment director at Barclays Vida y Pensiones in Madrid, notes the paradox here: “Some Spanish corporate bonds that investors have bought had no rating at all and when you look at A-rated Euroland bond issues today they have good spreads.”
Passive investment is also beginning to make ripples in the market and may begin having a shaping effect on the structure of Spanish investment groups. Rodriguez at Grupo Caser says the company is looking very closely at the index question.
And for all the talk of market advancement, investment consultants are still not getting the kind of penetration of the developed Anglo-Saxon markets. Francisco Herrero, account manager at Aon Gil y Carvajal, comments: “We are beginning to go down the Anglo-Saxon route into issues such as perfomance measurement. Manager selection processes are also becoming more common, but business is still predominantly focused on plan implementation issues.”
Another issue being raised on the back of the increasing professionalisation and investment diversification of Spanish investment is how much the local managers will continue to carry out themselves – with few having the reach to describe themselves as global investment managers.
Luis Abraira at BSCH says the Santander/Central Hispano merger has created a group with the size to be a serious global presence. “It is difficult to create music unless you have many virtuosos and the same is true for global investment management. We are developing an industry approach along four regional lines, the US and Canada, Europe as a whole, Japan and emerging markets.”
Manuel Silva, director for institutional and alternative networks at Argentaria in Madrid, says the group’s investment strategy is now very much focused on a sector approach, but stops at managing very specialist funds. “We manage all institutional funds ourselves but for peripheral investment such as in the Far East or emerging markets we do outsource assets. At the same time we are selling our funds in markets such as Portugal and Belgium and other fund companies are using us in fund of fund arrangements. I certainly believe the Spanish banks are good enough to be competing at this level.”
Abraira at BSCH offers his vision of the future set-up of the Spanish market. “Spanish banks will be like the service deliverers in this market providing any product that clients are looking for. This might be done alone or through third party alliances.”
1998 legislation stipulates that
20% of corporate pension fund
assets can be subcontracted to any number of Euroland managers. And foreign investment managers in the market are certainly thinking along
similar lines. Gabriel Azcoitia, director of Merrill Lynch Mercury Asset Management, Spain, which opened its Madrid office in1994, points out that the group is focused on the sub advisory side in the Spanish market. “We have three lines of business here, management of segregated assets, direct investment into Luxembourg funds and distribution of Luxembourg funds through other managers. We don’t want to go into direct competition with the Spanish banks. We want to become the provider of choice for their funds.”
Azcoitia predicts a two-tier future for institutional investment in Spain. “Large Spanish institutions will manage the main mandates and the second level of specialist investments will increasingly be handled by foreign managers. For the foreign players the key will be having the service levels, because the investment management will be similar across the board.”
With the long-awaited legislation concerning the switch of company pension arrangements from the balance sheet to funded pension provision finally ratified by the Spanish parliament this month, the banks and insurers in Spain are watching closely. The choice for companies will be to transfer pensions either to qualified pension plans (QPPs) or to group life insurance policies. The QPP is tax exempt until redemption but, as Francisco Herrero at consultant Aon Gil y Carvajal explains, legally it has to be implemented as a ‘universal product’ for all company employees.
QPP regulations set by the Dirección General de Seguros (DGS) provide that at least 1% of the fund remains in cash, with no more than 10% invested in any one public issue.
Favourable tax and regulatory adaptations implemented last year have made insurance and unit-linked products more attractive, albeit slightly less so than QPPs. A fiscal sliding scale means that if an investor takes out an insurance contract for less than two years capital gains tax at 100% is applicable. The rate is gradually reduced until, at the bottom end, if a policy is retained for eight years or more, a reduction of 70% is applied. “Investors can now also switch unit link managers should they be unhappy with performance without being subject to tax on unrecognised gains,” says Herrero.
There is no doubt in Spain though that defined contribution (DC) is the future for these company pension arrangements, as Elena Perales, internal legal adviser at Swiss Life, notes: “Now is the time that Spanish companies are renegotiating contracts and no-one is advising companies to go for DB these days. Unit link is certainly being looked at because the company doesn’t carry the risk and it can be appropriate for implemention of a layered benefit and investment approach for employees.”
How the new law will shape the Spanish company pensions scene remains uncertain though. “Company circumstances, including whether they have past employment service to recognise in future retirement benefits or a powerful union lobby will decide which route they go down. In these cases the QPP is the likely route,” says Perales.
Villahoz at BBV adds: “Another factor is the set-up of Spanish industry, where just over 10% of companies have more than 500 employees and the majority of medium and smaller firms cannot afford to implement occupational pension funds.”
While the new rules are likely to include provision for smaller companies, Villahoz believes Spain needs to go further. “We could do with something like UK stakeholder plans, but of course the unions are pushing for something with more social solidarity and are still a powerful force. This is one of the reasons why the Gestoras remain so conservative today. We need something along the lines of trustee responsibility, too, where the pension fund is run to get the best returns for members.”
Whichever way the Spanish market goes at present the banks come up smelling of roses, and few predict any real change here. Access for foreign managers into Spain looks like it will only really come through merger
or acquisition.
There is little dispute in Spain that the number of players in the pensions market will shrink, as Villahoz remarks: “It can’t be possible to have around 100 Gestoras realistically competing for business in a market the size of Spain”. When and how this happens is set to be increasingly dependent on the pace of investment change and structuring in the rest of Europe.