How the changes in the fund management industry could affect pensions investment was discussed by delegates at the 11th Annual Fund Forum organised in Monaco.
Delegates discussed the crucial role that asset managers are acquiring in the retirement provision field and how this is affecting the way the industry works. Arnulf Manns, CEO and managing director at ABN Amro Asset Management, said: “The asset management industry is increasingly taking over responsibility of pension provision and the structure of the industry is already being changed in the US and the UK.” Proliferation of defined contribution (DC) plans giving more investment choice and new regulations favouring greater flexibility for managing pension fund assets represent a challenge for the industry as a whole, where both asset managers and plan sponsors face a complicated transition period.
“Plan sponsors have to understand they have to move to a more flexible environment and fund managers have to assist them during the transition process coming up with the right solutions for the pension funds,” said Jonathan Perkins, partner at lawyers Linklaters & Alliance. In terms of regulation on pension investments on a pan-European basis, Perkins noted that pension funds are still following internal and domestic guidelines and that this is not likely to change in the near future. “However these differences between member states is one of the European Commission major concerns and a large part of its proposed directive focuses on this issue,” he said. “The Commission believes that less flexible regimes result in lower returns for their beneficiaries, and wants to bring more flexibility to the investment strategies of pension funds across Europe.”
Also Perkins expressed his concerned about the marketing and registration of UCITS across Europe: “Registration as UCITS should be straightforward and quick but in practice, as many of you know, it’s still a very long process that sometimes may not be possible at all.”
The role that fund distributors are playing in the European fund management arena is now more important than ever, and fund managers have to find the way to survive in this new environment. Speakers discussed the challenges faced by fund management houses now that open architecture and third party distribution of investment funds have found their place in Europe, expressing their concern about distributors demanding too much from fund managers.
Martin Gilbert, CEO at Aberdeen Asset Management, said: “I believe that the power is shifting more and more to distributors and fund managers are loosing control over their clients.”
Yusuf Samad, head of European fund management relationships at Citibank agreed: “Open architecture has created an important distinction between the manufacturing and the distribution of funds and the competition is now greater than ever before,” he said. “In this environment there will be an increasingly growing demand for more innovation on the distribution side that have to come up with solutions that meet the investors’ requirements.”
Delegates noted that fund distributors are demanding too high percentages of revenue fees, making more
difficult for fund managers to make any gains. According to Michael Benson vice president of Amvescap, distributors are being “too greedy”. “If I had another life, I would come back as a distributor,” Benson said: “They are demanding too much and fund managers must fund ways to deal with this situation.”
However, the presence of third party funds within the different asset management houses range of products is set to increase. “The speed needed to enter new markets at the right time does not allow the creation of the necessary infraestructure and expertise to develop own new products and managers have to work with those who already have the know how,” said Tony Solway, managing director of Cogent Investment Operations. “The biggest will manage most or all of their assets themselves but, increasingly, being able to afford these manufacturing networks is becoming almost impossible and also a distraction,” he said.
With distribution houses asking for higher commissions from asset managers and an increasing pressure from governments to reduce management fees, delegates agreed on the fact that the only way to survive is by achieving significant outperformance and trust from investors.
Donald Brydon, chairman and CEO of Axa Investment Managers, commented on the current extra pressure that both managers and distributors have on the shoulders and noted that “consumers will demand greater transparency on fees, and the industry will have to provide it”.
This transparency is becoming increasingly important also due to the fact that fund of funds products and multi manager arrangements are becoming more popular among European investors. Although there was agreement on the fact that this kind of products can provide investors with greater diversification and risk control, both multi-manager and fund of funds vehicles are seeing by clients as expensive, limiting the demand for these vehicles.
Also, customers across Europe are now more aware and better informed about how the markets work and will increasingly demand specifically designed products which can satisfy their needs.
“Fund investors in Europe will become more sophisticated and performance measurement tools will become more widespread on the internet,” said Sanford Bragg, executive managing director at Standard & Poor’s. “Investors will consider more factors beyond risk-adjusted performance such as expense, style consistency and investment selection.”
Thinking about the months to come, delegates said that the fight for gaining marketshare will continue and the challenges for fund managers will be tougher than even before. “Fund managers will have to work hard to survive this new environment,” said Aberdeen’s Gilbert. “Those failing to do so will have no choice but to surrender to a takeover.”
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