The Changing Face of European Asset Management

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The Changing Face of European Asset Management

  1. 1. The Changing Face of European Asset Management Niall Bohan DG Internal Market European Commission, Malta, 17th March 2006
  2. 2. 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>
  3. 3. Birds-eye view of asset management: <ul><li>Collective (private) investments: </li></ul><ul><ul><li>Retail investment funds (UCITS: undertakings for collective investment in transferable securities) </li></ul></ul><ul><ul><li>Other collective investments (real estate, hedge funds, institutional funds) </li></ul></ul><ul><li>Other private savings: </li></ul><ul><ul><li>Life insurance </li></ul></ul><ul><ul><li>Structured funds/certificates </li></ul></ul><ul><ul><li>Individual portfolio management (discretionary mandates) </li></ul></ul><ul><li>Occupational pension schemes. </li></ul>
  4. 4. Collective asset management: UCITS 3 rd pillar: private savings 2 nd pillar: occupational pensions schemes 1 st pillar: social-security systems Non-UCITS Equity Bonds Money market Balanced funds Long-term savings Hedge funds Private Equity Real estate Unit-linked life insurance (State) (voluntary pooled savings) (Companies)
  5. 5. Global assets under management
  6. 6. Individual portfolio management (FR)
  7. 7. 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>
  8. 8. 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>
  9. 9. Net Assets of European Investment Funds
  10. 10. AuMs in the EU 1994 - 2004
  11. 11. New player in fund markets: Hedge Funds UCITS: EFAMA, 2005; HF: various sources
  12. 12. 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>
  13. 13. UCITS Market Geographical breakdown of funds by domicile
  14. 14. 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>
  15. 15. 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
  16. 16. Fund management: a concentrated business
  17. 17. <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:
  18. 18. 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>
  19. 19. 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>
  20. 20. 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>
  21. 21. Investment funds: EU and US, 2005 EFAMA, ICI Number of funds (in Thousands) Average size (€ mn) AuM (€ 1000 bn)
  22. 22. Costs in EU fund industry
  23. 23. Economies of scale along the value chain 2004, cost margin, bp McKinsey, 2005
  24. 24. Fragmented business lines are cost driver
  25. 25. 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
  26. 26. 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>
  27. 27. 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>
  28. 28. 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>
  29. 29. 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>

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