The UCITS directive has been with us for 14 years now and despite early critics saying that its structure and intentions would never work, events have overtaken early grumblings and the concept it has found its place. The UCITS ‘kite’ mark has recognition on a global, not just a European, scale and even if investors have no idea what it means they sleep easier in their beds knowing that there is some form of regulation keeping the keepers of their savings on the straight and narrow.
The directive’s underlying intention was investor protection within a mutual fund framework and, in the spirit of EU harmonisation, the creation of a more open market, both for consumers and for the manufacturers of mutual fund products. The first part has been achieved, but the second part is open to a wide range of analysis and interpretation.
We are living “history” here and true harmonisation is still a long way off. As all Europeans know, and a minority of Americans recognise, Europe is not one mass market.
However, before looking at some of the differences, an overall perspective is helpful. With the benefit of the 1990’s stock market bull-run and the growing realisation of state pensions shortfalls, assets in European mutual fund markets have increased from 1990’s E550bn to 2001’s E3.6trn.
There has been a fantastic increase in the number of new funds launched each year. Today, we have 85% more funds to choose from than we did five years ago and equity funds, in particular, have proliferated. With the introduction of the euro and the prolonged bull markets of the late 1990s, the creativity inherent in equity fund management came to the fore and new fund launches tripled the overall numbers of equity funds available. An equity culture seems to have arrived. And, what is more interesting is that it seems to have stayed. In 2001 net sales in equity funds were ten times higher than those in the US2.
For progressive investment management groups the UCITS directive brought down the historic barriers and the cross-border dynamic is an increasing feature of the market with Luxembourg and Dublin being the key ‘manufacturing’ centres. The number of funds domiciled in the two centres have increased from 5,000 to 8,000 in the last five years3 alone. In certain countries even domestic fund management groups have found benefit from creating Luxembourg or Dublin funds for resale back into their home markets. This is sometimes on the basis of easier investment policy restrictions or quicker time to authorisation.
In the more mature European mutual fund markets the number of cross-border funds on offer to investors is increasing and in many cases outnumbers domestic offerings. For example 78% of the number of retail funds in Germany are non-domestic, 54% in Italy, 84% in Austria4, with foreign funds rather than domestic ‘round tripping’ funds being, by far, the largest part of this activity. However, although seeming a success with high numbers of foreign funds on offer, market share penetration for foreign groups in terms of assets gathered remains low, 12% in Germany and 5% in Italy for example5. A case of more noise than volume, perhaps. But, although the figures seem low, in Italy, for example, they represent around E32bn in assets – more than the total assets of many Europe’s smaller markets.
In pan-European terms, however, fund market evolution has not progressed at the same pace in every market. The barriers might be said to be down but the much talked about ‘level playing field’ for fund industry operatives still has a distinct tilt. With the exception of the UK, banks dominate both the manufacture of investment products and their distribution. They dictate the pace.
Cross-border activity, though, is the catalyst to market change and, slowly some markets are responding. The main focus for cross-border investment management groups, to date, has been on the larger markets of Germany, Italy and France.
Foreign groups have not only introduced new, exciting international investment products to the market but also increased transparency in terms of performance information and investor communication. They have strongly wooed independent distributors and non-bank distribution channels, helping them grow in stature, investor recognition and product offering. In order to defend their position domestic banks had to follow suit both in terms of product offering and service approach.
The effect has not been the same in each country however. In Germany distribution opportunities have widened to the point that it can be called an ‘open’ market. The IFA sector is gaining ground on bank distribution dominance of financial products and mutual funds. Five years ago, banks had 84% share of fund distribution compared with today’s estimate of around 72%. However, in Italy the influences have been different. Here banks have increased their market share of fund sales quite dramatically. In 1992 the banks’ share of fund distribution was 26% and independents’ 64%. Now the situation is completely reversed with banks and their controlled networks having over 90% market share. This growing ownership of distribution was primarily a factor of market consolidation. The foreign influence was felt strongest at asset management level where companies contributed their investment management skills through a variety of styles of joint ventures. In many ways Italy has been dressing itself up for the party; it has not been ready to date!
Foreign groups have concentrated most of their efforts on the markets seeming to offer not only the greatest potential financial reward, but also offering familiar and accessible distribution routes to the market. Consequently, other, seemingly more difficult, and often smaller, markets have received little attention and their market profiles have remained very much the same. France sits in the middle of this superficial assessment – it offers the greatest financial rewards, being the largest of Europe’s markets, but the strength of its dominant institutions has been such that many foreign groups have been frightened off.
Many words can be written on the differences between each market and the truth is that, superficially, we find it increasingly easy to talk about Europe as a single whole, but the deeper you look, the more difficult this is to justify. At the abstract level, harmonisation is developing but at the daily grind, practical level, change comes slowly. Cross-border activity is the engine of change but it needs to be fuelled by information and, at the moment, the information gap remains vast. Within Europe data and knowledge of the markets, whilst available at a local level, is difficult or impossible to use at a cross-border level. A prime example is in the performance measurement of funds, where comparison is dependent on idiosyncratic and country-specific categorisations. A French balanced fund cannot easily be compared with an Italian balanced fund.
The information barrier will be resolved as more of the fund powerhouses step outside their domestic markets. To date, the fund management subsidiaries of Europe’s large banks have operated on a wholly local, albeit pan-European basis, leaving the smaller Anglo-Saxon groups to fly the cross-border flags. Banks have acquired their fund management presence in new markets through acquisition or merger with other banks. ABN Amro and Deutsche Bank are good examples. Both have a presence in most European markets but each market subsidiary operates only within its local market. The promise or threat of open architecture has forced a change. The fund management subsidiaries of the large banks, faced with competition for shelf space within their traditional proprietary channels are responding by developing distribution relationships with third parties. Geographical borders are not a restriction to this activity.
As these groups build their cross-border activities, so their demand for information will increase – the engine will be fuelled and European unity will become more of a practical reality.
Rodney Williams is managing director of
European Fund Information Services in London
1FEFSI 2SalesWatch analysis, based of Trade Association data 3 ALFI/Fitzrovia 4EFIS calculations based on Lipper data 5EFIS estimates, Fund Market Access Reports – Germany and Italy