Kate O'Neill looks at the opportunities and challenges in distributing funds in Europe and the cost-saving benefits that Ucits III brings with it
Like most other investment houses that focus purely on asset management, Henderson welcomes the changes taking place through Ucits III. We particularly welcome the introduction of simplified prospectuses and the increased opportunities for cross-border marketing. In addition, many investment managers will benefit from the cost savings arising from the ability to streamline their fund ranges under Ucits III.
However, what Ucits III will enable fund managers to actually do in offering products to investors will ultimately depend on the decisions made by regulators in individual countries. Given the substantial differences between European countries in terms of investors' needs and their levels of sophistication, local regulatory decisions have a role to play in considering the interests of end investors with regard to the suitability of specific financial instruments and investment strategies being used in retail products.
A prime example here is the use of derivatives in retail funds. The demand for higher returns in a low-growth environment makes derivatives an attractive option for investment managers who have the skills and infrastructure to use them effectively. But the desirability of making funds that use derivatives available to less sophisticated investors must be assessed carefully. Some jurisdictions may rule out the use of derivatives or the introduction of retail hedge funds in the wider market, while others may require levels of reporting and disclosure that could make meaningful use of derivatives or hedge strategies difficult.
While there is a vast appetite for a diverse range of investment products in Europe, from structured capital-guaranteed products to traditional unit-linked products, regulatory, economic and cultural differences create different effective demand in different countries. Investment managers therefore need to be very clear about how they design scalable products that will be suitable for a variety of client types and applicable in a variety of European jurisdictions. Many providers of offshore funds also need to take into account the demands of Asian investors, who are significant investors in Luxembourg Sicavs, and the requirements of Asian regulators.
We may see cases where investment managers are tempted to use specialist investment tools, such as derivatives, where they lack the skills or infrastructure to deliver good returns in a consistent, risk-controlled and cost-effective way. Needless to say, reputations, brand and investors' capital can be irredeemably damaged if what is inside the tin does not match the label.
Henderson's own product range has a core-satellite structure, in which a stable of core funds covering major asset classes and markets are complemented by specialist funds providing access to a range of strategies, including enhanced indexing, property equities, sustainability and SRI investment, private capital and hedge strategies.
In distributing our offshore funds we are focusing primarily on six major European markets where we have a developed local presence: Italy, France, Netherlands, Germany, Austria and Switzerland. In addition, the Henderson Horizon range of Sicavs is market-ready for sale in 15 countries.
Looking at the longer term, demand for investment products will undoubtedly change in each country over time, for example as ageing populations require higher-yielding, risk-based investment approaches and income opportunity. Furthermore, the inclusion of new countries in the EU will naturally widen the opportunities for distributors, and we could see some very large new markets develop. In all cases, the needs of investors must be balanced with the level of sophistication of each customer base. The investment managers who are most likely to benefits from these long-term developments are those with the ability to design and manufacture a diverse range of durable investment products across asset classes and risk/return requirements.
The underlying driver for third-party distribution is investors' demand for better choice and value for money. As investors become more sophisticated and aware of the options available to them, the more likely they are to vote with their feet and opt for fund distributors that offer a genuine choice of funds and strategies. In particular, investors will increasingly demand strategies that have traditionally been the preserve of institutions and private wealth managers.
Third-party distribution is a fiercely competitive market in which the number of investment managers and funds featuring on platforms is diminishing. The largely vacuous debate over open architecture versus guided architecture appears to have reached the commonsense conclusion that while end investors require (and increasingly demand) a choice of funds and investment managers, truly open architecture is impractical for end investors, advisers and distributors alike. The question is now one of the degree of 'guidance' which puts the spotlight firmly on quality of fund performance and clarity of investment processes. Fund managers will increasingly be called on to assist distribution partners in educating their sales force and the end investor.
But Quality is King
The ability to sell funds via third-party providers does not remove the need for strong branding and market presence. When presented with a choice of 100 funds on a platform, end users are likely to prefer funds from investment managers they recognise.
Henderson's reputation and brand in continental Europe has been built on our core range of Luxembourg-based Horizon Sicavs.
Now, our main challenge in the European market is to raise awareness of the full range of capabilities we offer - and have been providing to institutional investors for quite some time. Enhanced indexation is one example, another is hedge funds.
The potential for major cross-border mergers between European banks opens the prospect for dramatic growth in distribution networks for some investment managers. An investment manager that already has a strong, well-developed distribution relationship with, say, an Italian bank that merges with a German bank would naturally be in an ideal position to dramatically extend its distribution network.
Although Europe has seen a swathe of intra-country bank mergers - 203 of them in the late 1990s - the long-awaited frenzy of large cross-border European mergers has not come to pass. Some bank-watchers see the absorption of Abbey National into Grupo Santander and the recent bid by Italy's UniCredit for Germany's HVB, as the first indications of a merger wave. Others are not holding their breath, or maintain that cross-border mergers will not create value for banks or their shareholders.
From an investment manager's perspective, the distribution benefits of any cross-border consolidations could take some time to materialise as consolidating banks are unlikely to restructure their fund platforms overnight, and may initially focus on core elements of their banking businesses. Furthermore, consolidations are likely to create losers as well as winners as the new entities refine their strategies and inevitably spruce up the selection of investment managers available on their platforms.
Think European, Act Locally
Last, but by no means least, we firmly believe that any investment manager distributing funds in Europe, whether directly or via third parties, must have an effective, well-established local network. An essential element in this is employing local sales people who understand the cultural, economic and consumer behaviour issues in the markets in which they operate.
Increasing percentage of elderly in European population fuelling demand for income products.
True open architecture does not exist, the ideal is quality, but limited, fund choice from a distributor.
Cross-border banking mergers will have big impact of fund distribution across Europe.
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