Top 400: Multi-asset – in search of opportunities
Europe is a varied marketplace for asset management and there are substantial pockets of fundamentally different pension assets. The UK, Sweden and Italy have a combination of pure defined benefit (DB) and pure defined contribution (DC). Most other markets have a combination of the semi DB and semi DC approaches, commonly grouped together as hybrid (see figure 1).
This has a significant effect on the degree of concentration of assets, which in turn affects their distribution. Consultants have most influence in investment buying decisions where assets are fragmented across a large number of schemes. The UK, for instance, is hugely fragmented compared with the rest of Europe, being broken into more than 200,000 pieces. As a result, assets per scheme in the UK are 450 times smaller than in Denmark (see figure 2). In Denmark, what we term ‘pension constructors’ have the most influence in the market – consultants have little.
Assets per scheme are €11m in the UK compared with €4.9bn in Denmark, the result of the latter’s collective pooling system. Even in Switzerland and Sweden where schemes are considerably smaller than in the rest of Europe, assets per scheme are still much higher than in the UK.
These structural differences cause different investment behaviour and buying patterns. According to our Institutional Money in Motion project that tracks the flow of institutional assets in Europe, the UK, Denmark, Switzerland and Italy have seen strong multi-asset inflows, while Benelux, Germany, Ireland and France have seen net outflows.
The UK, in particular, has enjoyed tremendous growth through diversified growth funds (DGFs). These funds are often used as a substitute for global equity, which has historically been more popular in the UK. DGFs are perceived to have lower volatility but similar long-term returns to global equity strategies. The funds are varied in approach. Some are an evolution of the balanced fund – often more diversified and dynamic in regard to asset allocation.
Others use leverage, relative-value bets and other more complex derivative strategies, and so are more similar to a multi-strategy hedge fund. On top of this, DGFs are used by both DB and DC funds, the latter coming with liquidity constraints due to life-platform intermediation, leading to further differences between funds branded with the same name.
Figure 3 shows the extent of these differences reflected in the underlying asset allocation of 27 UK DGFs – equity allocations vary widely from close to 70% to less than 20%.
Elsewhere in Europe, ‘multi-asset’ means something different. Italian pension funds, for example, invest mainly in balanced funds that mostly contain European investments. Global equity investments have been limited by regulations in how they can be constructed. They cannot be truly global as they are constrained by non-OECD limits. New laws will allow providers to create balanced funds that have a more global focus, incorporating global equity and bond investments.
There is unquestionably an opportunity for asset managers in European multi-asset, however, given this diversity and difference in buying behaviour. But understanding which products need to be focused on which segments and markets will be critical to success.
The fast-growing smart beta market is a second area where our research suggests that an opportunity exists for institutional asset managers with the right credentials.
Smart beta is an umbrella term, similar to diversified growth, in that it encompasses a diverse suite of underlying products and strategies. The overall European market is split between return focused (55% of the market) and risk focused (45% of the market). Different types of smart beta strategies focus on single-factor, multi-factor, minimum variance and parity strategies. At a strategy level each displays a similar level of assets, with single-factor strategies emerging as the largest (see figure 4).
Unlike the US, the European smart beta market is dominated by institutional investors, accounting for 72% of €75bn in total assets. The big challenge for managers is distribution. In the institutional market in France, Germany, the Netherlands, Switzerland and even to a certain extent the Nordic region, dominant local providers often control distribution channels. A strategic approach is required. For instance, it could be possible to sell both alternative index and advanced beta products through the bancassurance channel.
It is important that the unique product preferences possessed by these different distribution channels are taken into account. For example, an open architecture offering is becoming a critical sales criterion for the aforementioned private-banking channels.
Identifying the investment products of the future is difficult and, with investment consultants demanding a two-year track record, early identification is critical. And product developers, who are under increasing pressure for accuracy, face a near impossible task. Institutional asset flows have, to date, been poorly understood, making identification of long-term trends a challenge. With price pressure building, scale is growing more important and many asset managers have had to follow the herd – entering markets already reaching maturity or indeed in decline when it comes to net flows, but with enough assets to bolster a business case.
Market conditions and regulatory intervention can change a landscape overnight. Just look at the UK DC market following the relaxation of the rules on annuitisation to see how quickly things can change. With more accurate and up-to-date information it is possible to respond quickly to the emerging needs of institutional clients. It will be these responsive managers who take advantage of future opportunities.
Nigel Birch is institutional director and Will Mayne is institutional principal at Spence Johnson