The latest gathering of investment and pension correspondents from around Europe gathered in Madrid this month to focus on developments in Spain. Early on in the discussion it became clear that reform of the tax system and changes to investment rules for private pensions cannot come soon enough for those trying to develop sales.
International fund promoters look at Spain as a country with great potential, but equally one with many structural problems to overcome before it can begin to fulfil this potential.
Spain is close to the bottom of the league in terms of pension funds as a percentage of stock market capitalisation (9%) and of GDP (5%). Now at least, there is some momentum behind the development of private pensions and a growing awareness of funds as a suitable means of diversification.
In the past three years, the percentage of equity investment has risen from 5-25%. However, this is still mostly invested in Spanish equities.
The sponsor of the European Press Club is Invesco Europe. The group’s chief investment officer, Riccardo Ricciardi, says: “The shift from bond and money market funds to equities has not been as fast as we would have expected, given the evolution of interest rates. The shift has been greater for the retail investor, but institutional mandates have been slower to adapt. The man in the street, at least, has recognised that the world has changed.”
Foreign funds are being promoted actively by the likes of BSN Banif, which has developed a successful fund of funds product, sold through Banco Santander branches.
Manuel Paraita of Spanish consultancy Peraita & Associados says the typical asset allocation for Spanish pension funds under new DC schemes already shows that investment returns won’t be good and that investment policy will not be sufficiently flexible. The constitution of management boards, including a majority of seats held by employees or unions, will make it difficult to establish an optimal investment strategy, he believes.
Another problem is the short term nature of investor attitudes. Paraita suggests that too often the funds are managed on short term exposure, for fear of announcing a downturn.
Invesco’s general manager for Spain, Juan Marin, says that most of the problems of Spain’s financial system revolve around tax. The system has been tampered with so many times, it is now working against the promotion of investment: “It is the major problem in Spain.”
Rafael Fuster of law firm Uria & Menendez confirms that Spanish tax law is a muddle. As in France, the Spanish introduced incentives to encourage use of funds, including low effective tax rates depending on the holding period. These were then withdrawn, or amended, to the point where it is now very difficult for people to invest effectively. The confused policy on switching charges, for example, causes investors not to alter their asset allocation when they ought to. The treatment of fund entities themselves is also unclear as there are no specific rules in Spanish law.
Nonetheless, an investment in a foreign fund is treated differently from investment in a foreign stock. Unincorporated funds like FCPs are subject to different rules regarding imputing of income gains. Tax haven‚ domiciled funds are taxed on the presumption of 15% returns annually.
Spain has 48 countries on its tax haven black list, including Luxembourg. It is fairly well known that the Spanish funds regulator, the CNMV, has refused to authorise funds registered in Dublin for sale in Spain. It is perhaps less well known that the Spanish tax authorities are making it equally hard for investors in Luxembourg funds. This is due to the tax authority’s view that Luxembourg is a tax haven and therefore investments in Luxembourg funds should be subject to these imputed gain provisions.
As a result, it is easier to register a French-domiciled Sicav for sale in Spain than a Luxembourg Ucits fund.
This is exactly what Invesco has done. The group’s managing director for Europe, Jean-Baptiste de Franssu is far too polite to openly criticise the stance taken by Spain. Equally, a Spanish lawyer cannot be expected to admit that this amounts to protectionism, although Fuser says he would enjoy arguing the legal case.
So, is it purely coincidence that both the major European fund domiciles are being discriminated against by Spanish rulemakers? It depends who you talk to.
Unit-linked life assurance schemes are seen as one solution to the problems of distributing effectively in Spain. But Marin says the issue of time is an obstacle: “These plans are most efficient after eight years, but Spaniards cannot think in terms of tying their money up like this.”
Discussion also focused on the new competitive environment that is now being created by the internet. European mutual fund investor attitudes are changing, and it was felt that financial institutions will have to set up electronic communities to slow the migration of funds business to new market entrants. Direct banks and fund supermarkets are part of this trend at the consumer level.
At the business to business end, financial adviser portals and integrated solutions for DC outsourcing are confirmed trends. The DC solution is already established in the US, giving businesses a web-based solution to proving their employees with pension plans at an affordable cost.
Some banks, at least, are realising that the future lies not in offering product so much as acting as a conduit. A good example of this is Credit Suisse Private Banking, whose web site,, is a genuine attempt to create choice in a business/lifestyle environment.
Ofcourse, there are as many threats as opportunities in the new economy. With the convergence of industries, particularly financial and technological, it is true to say you really can’t know who your competition is going to be tomorrow. How does the fund promoter control his market? Some of the fund supermarkets setting up in Europe require the fund manager to give up 100% of the front end fee and 70% of the management fee. Invesco’s Jean-Baptiste de Franssu says it is important for the fund firm to be coherent in managing its channels of distribution: “We wouldn’t be happy for these new outlets to sell our funds at no load.”
Richard Newell is a director of Forsyth Partners at