The state of the global funds industry and prospects for investment services during these turbulent times came under discussion at the Sixth DFIA/NICSA Global Funds Conference
Distribution, regulation and alternative investments were the key themes of the sixth Global Funds Conference, hosted by the Dublin Funds Industry Association (DFIA) and the US National Investment Company Service Association (Nisca) in June.
The beginning of the conference saw the launch of the new Ucits regulation for Dublin with the establishment of a Common Contractual Fund (CCF) structure which hs significant implications for Ireland's pension industry. This new regulation allows the establishment of Ucits under corporate, trust and contract structures. It follows on from a provision in the Finance Act 2003 to allow for the CCF to be a fiscally transparent vehicle for Irish tax purposes.
This means that the country will now be able to host pooled pensions schemes. The hope is that it will attract multinational companies ' with employees working internationally ' to base corporate pension plans in the jurisdiction.
Steven Spiegel, senior managing director and chief of global distribution at Putnam Investments, talked about the increased pressure in the pensions industry. Retirement is under funded, and there is ageing population and declining birth rates, he said.
According to Spiegel, low market returns and low funding is forcing governments and institutions to revise pensions. Absolute return products are now part of the pension landscape, people have to work longer and rethink their lifestyles.
European countries have been adopting pension reforms. In Europe, there are currently two major challenges ahead for the pension industry whether to adopt a pay-as-you-go approach or have defined contributions.
Spiegel thinks the pay-as-you-go system will collapse because individuals are unaccustomed to thinking about their financial needs.
However, Spiegel's overall view of the investment industry is that, despite challenging times, it is still healthy. In 2003, he feels the investment industry is turning and investors are pulling out of cash and money markets and are starting to return to equities.
He said: 'Competition will be driven by financial markets, investment performance, geographic spread, global diversification, product mix, distribution channel, price, scale and global consolidation.'
Jeroen Tielman, chief executive officer of FundPartners, looked at consolidation in the pension fund industry.
According to Tielman there are two agents of change ' investment risks and variability in premiums, and competition introduced by the EU regulator. There has been consolidation among pension asset managers plus administrators.
He said 'The pension asset management industry will become a specialist in third-party skill selection. Pooled pension assets will provide economies of scale to smaller pension fund administrators. They will become a supplier of individual pension products to pension administrators.'
Management deal activity of European assets was discussed by Eric Weber, principal and chief operating officer at Freeman & Co.
Freeman recorded 51 corporate transactions in 2002 in Europe, with 82% being merger and acquisition (M&A) transactions.
The top five deals in 2002 accounted for nearly US$300bn in assets under management. This was down roughly US$150bn from 2001 levels of approximately US$450bn.
Despite the decline in overall deal activity, intra-Europe deals increased in 2002. There has been much more consolidation inter-country, following the introduction of the euro in January 2002. Asset management firms have been building their domestic platforms in order to protect competitive positions at home.
However, the majority of intra-country consolidation was attributable to the UK where 15 domestic acquisitions occurred during the year. The remaining intra-country deals were distributed across a number of other countries.
The majority of deal activity in 2002 involved the UK either as buyer (56% of buyers) or seller (45% of sellers), with the remaining deal activity distributed more evenly across a number of other countries.
The US made up the next largest target country with 14% of deals involving the sale of a US company; Germany and Switzerland were close behind at 10% each.
The size of the deals as measured by assets under management fell off significantly in 2002. In 2001, the five largest transatlantic deals involved greater than US $15bn in assets under management, whereas only one deal in 2002 surpassed this mark.
US acquisitions of European businesses fell 57% in 2002. Alliances dropped significantly from six to one in 2002; M&A deals were cut in half, falling from eight in 2001 to four in 2002.
William Cotter, director and chief executive officer, Bank of Ireland Asset Management, says: 'The past three years has been a bear market. This has had an impact on profitability and has had a painful integration of M&A activity to achieve scale, products, distribution and diversify earnings.'
Another area that had a major focus throughout the conference was alternative investments. Some speakers talked about alternative investments as a tool to acessing pension funds.
John Caslin, general manager, investment and financial solutions at Eagle Star Life Assurance, talked about the volatility of pension schemes.
Caslin says pension schemes can bear the short-term volatility associated with equities because of their long-term investment horizon. Pension scheme asset volatility is now a serious concern of the sponsoring employer.
Stewart Hay, investment director at Standard Life Investments, looked at private equity and the different ways to invest in it.
He outlined what private equity was and that it is not an investment listed on the stock exchange, but a negotiated purchase and sale. It is equity invested in a private company.
Investors in private equity include pension schemes, family offices, foundations as well as financial institutions. Fund of fund managers are a way of investing in private equity.
Investing in private equity involves different stages. Firstly, the company is formed and the capital is seeded; the second stage is venture capital that involves the development of recruitment and product ideas; thirdly is the development capital where the product is ready to launch; fourthly growth capital where the capital gets bigger; and lastly is change of ownership where the management buy out and buy in.
Hay gave the examples of private equity investments such as Madame Tussauds, Kwik-Fit, Coral, and Calvin Klein.
According to David McGeogh, chairman and chief executive of Vega Asset Management Group, the alternative investment market is increasingly becoming more institutional, and flows are not coming from HNWI or retail investors.
However, Alexander Ineichen, head of equity derivatives research at UBS Warburg, thinks there is room for retail investors in hedge funds.
Ineichen says: 'A diversified hedge fund portfolio is more conservative than a diversified long-only portfolio and retail investors should be able to invest.'
Another area that the conference focused on was distribution.
Thomas Karol, global director of investment management services, Deloitte & Touche, looked at whether or not global distribution particularly through third parties requires open architecture for sales and servicing.
He thinks distributors are charging more and narrowing the number of fund providers they will offer. For example, some fund providers are asking for 75% of the management fee.
At the same time, fund manufacturers are also becoming choosier about their distribution partners. For example, Janus recently closed 50% of distribution agreements.
Fewer mutual fund assets are being sold directly and US studies have shown that virtually all of the new money that enters US mutual funds is invested in four and five star Morningstar-rated funds.
According to Jim Firn, European counsel and compliance director at Frank Russell even in a bull market fund supermarkets did not meet all of investor demands. Too much choice can be confusing; investors default to brand and performance; and less than 20% of users transacted online.
Firn says although the move is toward open architecture, not all will succeed. The increasing trend is towards independent investment advice. Where tax allows, advisory fees will be unbundled. Multi-manager products will proliferate and flourish. Cross-border and domestic blends will drive cash flows.
However, Mark DeSario, director managed assets and fee-based services at Merrill Lynch International Private Client Group, says: 'To maximise global relationships the key is to develop a cohesive, consistent marketing strategy within an open architecture environment.'
Consolidation is taking place in both the investment and pension sectors across Europe.
Fund manufacturers are becoming more choosy about their distribution partners.
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