Registrations for Luxembourg true cross border funds have increased by 8% over the last year and a half, indicating a growing trend in moving fund distribution with explorations into new processes and service requirements
Banking on the increased use of third-party funds as open architecture is gaining ground in Europe, with fund promoters busy registering their funds in the key European markets.
With registrations in more than 40 countries around the world, Luxembourg funds remain the perfect vehicle for international distribution. Even under difficult market conditions, Luxembourg funds have recorded positive net sales of â‚¬57.3bn for the year 2002, the highest level in Europe, representing 6% of average Luxembourg assets.
European and international registrations of Luxembourg-domiciled true cross-border (TCB) funds, representing 80% of all TCB registrations in Europe, have increased by 8% over the last year and a half, according to Lipper. Referring to the table below, cross border registrations of Luxembourg domiciled TCB funds were flirting with the 20,000 mark at the end of September 2002. The spectrum of countries targeted remains well balanced with Germany leading the way with 11% of total registrations, but other important European markets, including France, Italy and Spain also account for 8%-9% each.
The only 'surprising' country in the list is probably Austria, but this is largely due to the easy registration process of foreign funds, particularly once the fund is notified for sale in Germany.
Also seen, not solely the big European markets are targeted with Luxembourg vehicles: Hong Kong accounts for 5% of all registrations and 18% of the total are accounted for by smaller European markets but also other international destinations.
In terms of the origin of the promoters of TCB funds, US players are by far the most active in the notification process, accounting for 35% of all registrations. Indeed, the US was the first to achieve blanket coverage in Europe, registering large ranges of funds in several markets at once. The chart opposite reveals that European fund manufacturers appear less aggressive in their pan-European distribution strategies. However, European fund manufacturers are catching up; in contrast to their American counterparts, they often use a dedicated, condensed cross-border fund range, reducing the number of required registrations.
Recognising that trends in fund distribution are moving apace, PricewaterhouseCoopers (PwC) reviews some of the most pressing issues in its second Eurofunds Survey. The report, entitled Challenging Markets: Distributing Too Many Products To Too Few Clients, explores new decision processes for fund distribution, particularly through open architecture, the selection process of third party fund providers and of external distribution partners, the service requirements of fund distributors, the levels of retrocession arrangements and the additional risks brought about by the new relationships. Some of the highlights are presented below.
The distribution of third-party funds is nothing new in the US, but the open architecture movement is only slowly making inroads in mainland Europe. While fund distributors with limited in-house fund manufacturing expertise have been open to third-party funds for some time, the biggest change is seen among those with both manufacturing and distribution capabilities. And, in contrast to the US, it is the latter, mostly banks, that continue to dominate fund distribution in Europe.
PwC's Eurofunds Survey 2002 reveals how country potentials vary. As depicted in the graph, most universal banking groups in Europe that have opened up to third-party fund providers have adopted a step-by-step approach.
The most welcoming division of universal banks continues to be private banking, while retail banking is the holy grail. A major influence in encouraging banks to adopt open architecture has been the introduction of open products such as funds of funds or multi-manager programmes, enabling the bank to retain the client relationship while providing more choice. Offering third-party funds also provides choice and useful 'good news' to discuss with clients when in-house investment performance has been poor. The acceptance of third-party funds varies widely, but the consensus is that Germany remains the most mature market, with other markets set to follow suit once open architecture is being embraced more fully.
Exploring the full potential
Fund holdings remain low in Europe. With less than 20% of households holding funds in most countries, the market still has a large untapped potential. Investment fund penetration rates remain shockingly low, even in the highest financial wealth deciles. Indeed, according to the European Savings Institute, total market participation rates of the wealthiest Europeans are well below 50% in most countries; the corresponding figure for the US lies over 90%.
While the challenge applies to all, non-bank distributors should seize the opportunity to have a head start to consolidate their position. With a strong record of service quality and personalised relationships with their clients, they could be particularly successful in tapping into the wealthy market segment.
Distributors will need to identify and target certain groups of people. Also, within their range of existing customers, they will need to analyse consumption patterns in greater detail. The investment management industry will need to improve customer segmentation methods and to concentrate on more behavioural and attitudinal segmentation criteria, including life cycles. Identification of target groups and understanding of the target groups' needs and lifestyles will provide a competitive advantage.
Aware of the legacy of a proprietary product push culture, many distributors are starting to re-assess their strategies. Though courted by many providers, distributors are now narrowing the number of fund providers with whom they wish to deal, and the selection criteria are more demanding to build long-term partnerships.
The distributors' concern has shifted to which providers will best support their sales efforts, with a preference for strong brand for easy sale to the customer. Importantly, there is also repeated emphasis on service that includes, but goes far beyond, reporting, to incorporate services such as company extranets and training.
Investors are already spoilt for choice with more than 27,000 funds on offer but have so far expressed little appetite for funds. The industry has been complicated by the arrival of new, complex products that are often only subtly differentiated. But, what retail investors are looking for are simple savings solutions targeted more specifically to their needs.
Investment managers and their distribution partners will need to co-operate closely in the design and assembly of these winning solutions, for example via improved wrappers.
The exploration of the spectrum of products from the financial services industry or even beyond that can be included in a flexible wrapper to provide customer solutions is only beginning.
Both at the manufacturer and the distributor level, skill in product assembly and solution development will become powerful differentiation tools. Since most of the final investor contact will continue to be concentrated at the final investor level, close co-operation and regular communication between manufacturers and distributors will be essential.
Although under current market conditions, cost control imperatives are pressing, it also presents a lull for the industry to address long-overdue fundamentals: investor education, product simplification, increased transparency. This will strengthen investor confidence and create the basis for a sustainable development of the fund industry.
Churning out new products is unlikely to allow investment managers to gain new clients. In an effort to serve retail investors better, investment managers and their distribution partners will need to forge strong partnerships and to co-operate more closely in the design of simple savings solutions that take into account their target markets' needs.
Success will come to those investment managers that recognise and embrace these changes.
The open architecture movement is slowly making inroads in Europe, with banks dominating fund distribution.
Investment managers and their distribution partners will need to work closely in the design and assembly of products and take into account their target markets' needs.
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