&quot;Asset management is the process of investing capital with the objective of earning a strong rate of return for a given level of risk. The main clients of the industry are institutional clients, private clients and retail clients. Upon transferring the capital to the asset manager, the client will provide guidelines and benchmarks against which the asset manager must manage. The retail client gives the capital to the asset manager, who pools it with other clients’ money to create a fund of capital for investment - for this reason asset managers are also known as ‘fund managers’, synonymously.&quot; [Accenture] “ The core element of all forms of professional asset management is the process of investing investor’s money with a view to the defined investment objective. It includes the steps of research, asset allocation and asset, including security, selection and portfolio construction.” [FSAP: Progress and prospects; Asset Management Expert Group; Final Report, May 2004] “ Asset management is the process of investing client assets according to specified objectives, monitoring such investments, and changing investment allocations as market factors change.” [de Fontnouvelle, Garrity, Chu, Rosengren, Federal Reserve Bank of Boston]
1 st pillar out of the scope of this presentation; 2 nd pillar will be discussed shortly at the end of the presentation; 3 rd pillar is what the presentation is focussing at; in particular: UCITS
Just for comparative purposes … quick look at significance of discretionary mandate business: different business model – scale less important, than personalised, proximity service. However, often undertaken by private banking arm of large bank with sepaarate fund division. Uses same support functions (custody, brokerage) as fund industry.
Segmneted landscape in terms of products: UCITS Non-UCITS Alternative investments In terms of institutional players: Banks Insurance companies Independent asset managers and distributors Segemntation reflected in regulation/legislation. Contributes to relatively high costs in the European industry.
Most types of wealth management and support services can be provided on a remote basis
Growth in European Investment Fund Assets (in %)
At least a doubling in the figures in all MS; but at the same time significant differences: e.g. IT and ES started from about the same level in 1994, but IT market was almost twice the size of the ES market in 2004. IT, DE stagnant in recent years – may reflect emergence of competing products – structured securities, sale of bonds etc…
As HF are being very much discussed at the moment, one chart on their economic importance: Growth in HF stronger than in UCITS, but still only about 5% of the volume. More important than mere size of hedge funds is the impact on traditional fund strategies – traditional fund managers are borrowing some trading strategies (arbitrage and use of leverage) from hedge fund world (absolute return strategies etc). Leading to a retailisation of hedge fund strategies – some estimates that 200-300billion of assets raised by UCITS recently involve hedge fund based products.
Fund administration : Highly concentrated in a few Member States (Luxembourg, Dublin)
Huge differences in the number of funds ranging from 524 in DK to about 7500 in LUX. Last row: Huge differences in the share of non-domestic funds in total number of funds: 7,2% in LUX; 86,8% in NL; in more than half of the countries listedin the table the share of non-domestic funds is above 50% Of Non-domestic funds about 70%-90% are from LUX. At least 5 out of 6 non-domestic funds are from LUX or IE.
Fragmented national markets, but trend towards mergers and acquisitions of managers Equity funds: Luxembourg, UK, France Bond funds: Luxembourg, (France, Italy) Balanced funds: France, (Luxembourg, Italy) Money market funds: France, (Luxembourg, Italy)
Depositary / Custodian: Trend towards concentration to compensate for low margins; but requirement to be located in the same MS as the management/ investment company
While AuM in EU already only about 2/3 of the US, the average fund size is only about a fifth of the size of US funds.
The results of a study by McKinsey show that there are scale effects in asset management. These are particularly pronounced in the fund management itself. [Important to point out that this is about company size, not fund size. Unfortunately, I couldn’t find data on this. According to “anecdotal evidence” from EFAMA yearbook only a few of the top 5 funds in MS would be considered as large, and not many more as medium. Data is, however, incomplete.]
Product innovation story. This table illustrates two of the trends in the sector: The high numbers of new products on the one hand (average of 8% of number of funds in 2003), and the opposing effect of M&A on the other hand (average of 7% of number of funds in 2003): This results in a net effect of an increase in the number of funds by 1% from 2003 to 2004. Remarkable: the net decrease in the number of funds in NL by 18% within one year.
The following slides will illustrate how market and policy characteristics shape the EU funds industry.
Luxemburg, France and Germany have failed to grow domestic hedge funds – inappropriate obligations on prime brokerage Determining factors for location: attractive tax and regulatory environment for managers without penalising end investors; respecting EU state aid rules EN not enough when developing a retail-based business. Dub struggles to service large continental retail banks – Lux industry able to service DE, FR, NL and IT clients. Luxemburg moved from private banking tradition to funds, did not have to start from scratch “ first mover advantage”: need to move fast: Luxemburg was quick in implementing previous UCITS law.
The Changing Face of European Asset Management
The Changing Face of European Asset Management Niall Bohan DG Internal Market European Commission, Malta, 17th March 2006
Structure of presentation: <ul><li>Overview of the EU asset management business: </li></ul><ul><li>Key trends in European fund markets: </li></ul><ul><ul><li>Fund administration: </li></ul></ul><ul><ul><li>Management: </li></ul></ul><ul><ul><li>Distribution: </li></ul></ul><ul><li>EU policy framework: </li></ul><ul><li>Factors to buidling a successful fund business: </li></ul>
Key features of AM business <ul><li>Big business … set to get bigger; </li></ul><ul><li>Inherently tradable products and services – although some are more heavily conditioned by local labour, contract or tax law; </li></ul><ul><li>Business of managing pooled assets is very fragmented in terms of products, institutions and regulations; </li></ul><ul><li>Convergence in how business is done, who is doing it and investor base. </li></ul>
Broader/strategic considerations: <ul><li>Allocation of financial resources between savers and investors (cf. private equity; </li></ul><ul><li>Provision of innovative tools for long-term savings of individuals; </li></ul><ul><li>Competitive access to professional asset management services – for long-term savings; </li></ul><ul><li>‘ Democratisation’ of financial markets; </li></ul><ul><li>EU angle: inherently tradable products and services – many business lines well suited to organisation on pan-European basis. </li></ul>
New player in fund markets: Hedge Funds UCITS: EFAMA, 2005; HF: various sources
Occupational pension schemes <ul><li>Do not exist in all Member States … however work-related savings schemes appearing across EU; </li></ul><ul><li>Volume comparable to UCITS; </li></ul><ul><li>Move from defined benefit to defined contribution … </li></ul><ul><li>accompanied by search for more dynamic asset management strategies; </li></ul><ul><li>Local delivery … schemes adapted to local labour law, tax… </li></ul><ul><li>but search for centralised asset management (pooling, administration). </li></ul>
UCITS Market Geographical breakdown of funds by domicile
UCITS: an integrated product market? <ul><li>Increasing level of cross-border sales; </li></ul><ul><li>About 17% of UCITS are “true” cross-border funds; </li></ul><ul><li>Most new sales in Europe in past 2 years accrue almost exclusively to cross-border funds. </li></ul>
Number of funds by Domicile and Country of Notification FERI FMI 2005 47,7 72,6 40,3 86,8 7,2 68,1 37,7 80,6 28,1 70,4 20,2 59,5 77,4 (2) / (1) (%) 1332 1287 1718 1786 537 2593 516 4447 2057 819 106 1684 2928 non-dom. (2) 2794 1772 4262 2058 7475 3807 1369 5519 7321 1164 524 2831 3782 All funds (1) 1462 37 36 37 74 41 27 98 71 16 17 33 90 UK 485 1 25 SE 2544 3 ES 3 1 272 3 8 4 18 3 NL 1025 934 1472 1372 6938 2181 452 3372 1660 727 82 1441 2045 LU 1214 IT 259 211 145 193 187 308 853 435 205 45 7 82 381 IE 2 13 11 9 106 7 1 1072 17 39 308 DE 13 23 24 47 28 36 116 5264 71 40 FR 58 1 4 1 345 FI 30 12 30 30 43 418 DK 3 121 86 2 18 90 1147 19 BE 25 272 5 854 AT UK SE ES NL LU IT IE DE FR FI DK BE AT Domicile Country of fund notification
<ul><li>The power of local bank networks: </li></ul><ul><ul><li>In most Member States dominated by a few national players (esp. banks); </li></ul></ul><ul><ul><li>independent entities only in a few Member States (UK, DE, IT) of relevance; </li></ul></ul>Marketing and distribution:
Separation of management & distribution: <ul><li>Slow trend towards open architecture (18-20% of new sales): </li></ul><ul><li>Retail banks in-source funds from third parties. </li></ul>
Key trends in AM business <ul><li>Increasingly concentrated business and consolidation set to continue; </li></ul><ul><li>Specialisation of actors along value-chain (split between management and distribution); </li></ul><ul><li>High cost business and some costs (distribution, management) likely to increase; </li></ul><ul><li>Competition from off-shore locations (esp. high net-wealth products, hedge funds). </li></ul><ul><li>Business developing fast – new functions, niches, products evolve on a regular basis. </li></ul>
Objectives of European AM Policy: <ul><li>Drive efficiency and lower cost by … </li></ul><ul><li>Facilitating (cross-border) competition and specialisation </li></ul><ul><ul><li>Enable reorganisation of the different functions in the value chain to improve cost-effectiveness of industry; </li></ul></ul><ul><ul><li>Allow products and services to be sold to investors in other markets; </li></ul></ul><ul><ul><li>Allow managers to manage funds domiciled elsewhere; </li></ul></ul><ul><ul><li>Allow funds to transfer assets to custodians elsewhere. </li></ul></ul><ul><li>Without compromising investor protection. </li></ul>
Investment funds: EU and US, 2005 EFAMA, ICI Number of funds (in Thousands) Average size (€ mn) AuM (€ 1000 bn)
Product innovation – fund proliferation FERI FMI 2005 -64 106 42 1463 1527 UK -61 67 6 284 345 NL -36 43 7 532 568 SE 33 202 169 1977 2010 IT 9 397 406 5406 5397 FR 21 23 44 359 338 FI 22 12 34 463 441 DK 39 151 190 2711 2672 ES 43 44 87 879 836 AT 95 139 234 2540 2445 DE 139 151 290 2184 2045 BE Net increases /decreases Mergers/ closures new funds launched 2004 No. of funds 2003 ׀ 2004
Key Policy Characteristics <ul><li>Regulatory regimes vary still across Member States, mainly with regard to the interpretation of UCITS rules and their implementation; </li></ul><ul><li>Taxation continues to be a major concern for the industry; </li></ul><ul><li>Both elements have a strong influence on the potential of the industry, at national and European level; </li></ul><ul><li>Necessary to align these systems to realise this potential. </li></ul>
EU Asset Management framework <ul><li>Key legislation: </li></ul><ul><ul><li>UCITS Directive 85/611/EEC (amended in 2001); </li></ul></ul><ul><ul><li>MiFID (Markets in Financial Instruments Directive) 2004/39/EC; </li></ul></ul><ul><ul><li>Capital Requirement Directive 2005; </li></ul></ul><ul><ul><li>3 rd Life Insurance Directive 2002/83/EC; </li></ul></ul><ul><ul><li>IORPs (institutions for occupational retirement provision) Directive 2003/41/EC </li></ul></ul>
Issues currently under discussion <ul><li>Make product passport work: </li></ul><ul><ul><li>Notification procedure: </li></ul></ul><ul><ul><li>Clarification of eligible assets </li></ul></ul><ul><li>Help investors cope with more complex products and regulatory arbitrage between savings products: </li></ul><ul><ul><li>Dislcosure documents (simplified prospectus); </li></ul></ul><ul><ul><li>Rules on sales process (MiFiD) </li></ul></ul><ul><li>Deliver new sources of efficiency/competition: </li></ul><ul><ul><li>Management company passport </li></ul></ul><ul><ul><li>Cross-border mergers and asset pooling; </li></ul></ul><ul><ul><li>Depositary passport </li></ul></ul>
Becoming a financial centre – lessons learned: <ul><li>Legal and tax environment: </li></ul><ul><ul><li>Facilitating moving assets in and out of jurisdictions </li></ul></ul><ul><ul><li>Pooling and mergers; </li></ul></ul><ul><li>Regulatory environment: </li></ul><ul><ul><li>Needs to fit good with business models </li></ul></ul><ul><ul><li>But: need reputation for credible regulation and supervision </li></ul></ul><ul><li>Skilled labour force with the right skills: </li></ul><ul><li>Build on existing expertise/specialisation. </li></ul>