The Changing Face of European Asset Management

1
The Changing Face of European Asset Management

• Niall Bohan
• DG Internal Market
• European Commission,
• Malta, 17th March 2006

2
Structure of presentation

• Overview of the EU asset management business
• Key trends in European fund markets
• Fund administration
• Management
• Distribution
• EU policy framework
• Factors to buidling a successful fund business

3
Birds-eye view of asset management

• Collective (private) investments
• Retail investment funds (UCITS undertakings for
  collective investment in transferable securities)
  
• Other collective investments (real estate, hedge
  funds, institutional funds)
• Other private savings
• Life insurance
• Structured funds/certificates
• Individual portfolio management (discretionary
  mandates)
• Occupational pension schemes.

4
Collective asset management
Long-term savings
2nd pillar occupational pensions schemes
1st pillar social-security systems
3rd pillar private savings
(voluntary pooled savings)
(State)
(Companies)
UCITS
Equity
Bonds
Money market
Balanced funds
Non-UCITS
Hedge funds
Real estate
Private Equity
Unit-linked life insurance
5
Global assets under management
6
Individual portfolio management (FR)
7
Key features of AM business

1. Big business set to get bigger
2. Inherently tradable products and services
   although some are more heavily conditioned by
   local labour, contract or tax law
3. Business of managing pooled assets is very
   fragmented in terms of products, institutions and
   regulations
4. Convergence in how business is done, who is doing
   it and investor base.

8
Broader/strategic considerations

• Allocation of financial resources between savers
  and investors (cf. private equity
• Provision of innovative tools for long-term
  savings of individuals
• Competitive access to professional asset
  management services for long-term savings
• Democratisation of financial markets
• EU angle inherently tradable products and
  services many business lines well suited to
  organisation on pan-European basis.

9
Net Assets of European Investment Funds
10
AuMs in the EU 1994 - 2004
11
New player in fund markets Hedge Funds
UCITS EFAMA, 2005 HF various sources
12
Occupational pension schemes

• Do not exist in all Member States however
  work-related savings schemes appearing across EU
• Volume comparable to UCITS
• Move from defined benefit to defined contribution
  
• accompanied by search for more dynamic asset
  management strategies
• Local delivery schemes adapted to local labour
  law, tax
• but search for centralised asset management
  (pooling, administration).

13
UCITS MarketGeographical breakdown of funds by
domicile
14
UCITS an integrated product market?

• Increasing level of cross-border sales
• About 17 of UCITS are true cross-border funds
• Most new sales in Europe in past 2 years accrue
  almost exclusively to cross-border funds.

15
Number of funds by Domicile and Country of
Notification
Domicile Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification Country of fund notification
Domicile AT BE DK FI FR DE IE IT LU NL ES SE UK
AT 854       5 272   25          
BE 19 1147 90 18 2 86 121 3  
DK   418 43 30 30 12 30
FI   345 1 4 1 58  
FR 40 71 5264 116 36 28 47 24 23 13
DE 308 39 17 1072 1 7 106 9 11 13 2
IE 381 82 7 45 205 435 853 308 187 193 145 211 259
IT   1214  
LU 2045 1441 82 727 1660 3372 452 2181 6938 1372 1472 934 1025
NL 3 18 4 8 3 272 1 3
ES   3 2544  
SE   25 1 485  
UK 90 33 17 16 71 98 27 41 74 37 36 37 1462
All funds (1) 3782 2831 524 1164 7321 5519 1369 3807 7475 2058 4262 1772 2794
non-dom. (2) 2928 1684 106 819 2057 4447 516 2593 537 1786 1718 1287 1332
(2) / (1) () 77,4 59,5 20,2 70,4 28,1 80,6 37,7 68,1 7,2 86,8 40,3 72,6 47,7
FERI FMI 2005
16
Fund management a concentrated business
17
Marketing and distribution

• The power of local bank networks
• In most Member States dominated by a few national
  players (esp. banks)
• independent entities only in a few Member States
  (UK, DE, IT) of relevance

18
Separation of management distribution

• Slow trend towards open architecture (18-20 of
  new sales)
• Retail banks in-source funds from third parties.

19
Key trends in AM business

• Increasingly concentrated business and
  consolidation set to continue
• Specialisation of actors along value-chain (split
  between management and distribution)
• High cost business and some costs (distribution,
  management) likely to increase
• Competition from off-shore locations (esp. high
  net-wealth products, hedge funds).
• Business developing fast new functions, niches,
  products evolve on a regular basis.

20
Objectives of European AM Policy

• Drive efficiency and lower cost by
• Facilitating (cross-border) competition and
  specialisation
• Enable reorganisation of the different functions
  in the value chain to improve cost-effectiveness
  of industry
• Allow products and services to be sold to
  investors in other markets
• Allow managers to manage funds domiciled
  elsewhere
• Allow funds to transfer assets to custodians
  elsewhere.
• Without compromising investor protection.

21
Investment funds EU and US, 2005
Number of funds (in Thousands)
AuM ( 1000 bn)
Average size ( mn)
EFAMA, ICI
22
Costs in EU fund industry
23
Economies of scale along the value chain
2004, cost margin, bp
McKinsey, 2005
24
Fragmented business lines are cost driver
25
Product innovation fund proliferation
No. of funds 2003 ? 2004 No. of funds 2003 ? 2004 new funds launched 2004 Mergers/ closures Net increases /decreases
BE 2045 2184 290 151 139
DE 2445 2540 234 139 95
AT 836 879 87 44 43
ES 2672 2711 190 151 39
DK 441 463 34 12 22
FI 338 359 44 23 21
FR 5397 5406 406 397 9
IT 2010 1977 169 202 33
SE 568 532 7 43 -36
NL 345 284 6 67 -61
UK 1527 1463 42 106 -64
FERI FMI 2005
26
Key Policy Characteristics

• Regulatory regimes vary still across Member
  States, mainly with regard to the interpretation
  of UCITS rules and their implementation
• Taxation continues to be a major concern for the
  industry
• Both elements have a strong influence on the
  potential of the industry, at national and
  European level
• Necessary to align these systems to realise this
  potential.

27
EU Asset Management framework

• Key legislation
• UCITS Directive 85/611/EEC (amended in 2001)
• MiFID (Markets in Financial Instruments
  Directive) 2004/39/EC
• Capital Requirement Directive 2005
• 3rd Life Insurance Directive 2002/83/EC
• IORPs (institutions for occupational retirement
  provision) Directive 2003/41/EC

28
Issues currently under discussion

• Make product passport work
• Notification procedure
• Clarification of eligible assets
• Help investors cope with more complex products
  and regulatory arbitrage between savings
  products
• Dislcosure documents (simplified prospectus)
• Rules on sales process (MiFiD)
• Deliver new sources of efficiency/competition
• Management company passport
• Cross-border mergers and asset pooling
• Depositary passport

29
Becoming a financial centre lessons learned

• Legal and tax environment
• Facilitating moving assets in and out of
  jurisdictions
• Pooling and mergers
• Regulatory environment
• Needs to fit good with business models
• But need reputation for credible regulation and
  supervision
• Skilled labour force with the right skills
• Build on existing expertise/specialisation.