This year European distributors will move away from an open architecture back to guided architecture, taking the industry back to where it was five or six years ago , according to Cristobal Mendez de Vigo, group head of distribution and business development of F&C Investments.
Speaking about the challenges that 2009 presents to Europe’s beleaguered asset management industry, Mr Mendez de Vigo said banks - which in continental Europe remain the main distribution channels for investment products - will favour in-house solutions, including funds or saving deposits linked to funds, to try “to shore up their customer base”. There was evidence of this trend already in 2008, he said.
“This means much more competition for us asset managers and much more focus to be able to gain a share of a much smaller pie,” he said. “Banks will be much more difficult to penetrate”.
In the UK, where industry regulators are pushing for independent financial advisers to provide transparency and best of breed solutions, fund managers can still compete on a more level playing field than the rest of Europe, believes Mr Mendez de Vigo.
Fund managers houses will then have to revisit their business models and their core strengths.
“We expect fund management houses to really go back to focus on what they have got, on retaining their existing customers,” he explained.
Compared to last year, product development will decrease by more than 40 per cent in the fist half of 2009, making fund managers much more selective in their product launches, he predicted. It is vital therefore, to identify the market trends.
Investors will be looking for sustainable protected capital and income generation, said Mr Mendez de Vigo. Lifestyle opportunities will also be popular.
“There will always be pockets of investors who will be requiring high alpha seeking products that command a higher fee. But those are the niches that will be added to what is primarily a conservative, derisked, much simpler portfolio of income, capital protection and absolute returns,” he said.
The niche offerings will include themes like emerging market debt, global convertibles, climate opportunities and Asia, which can allow investors to participate in returns, when markets recover.
Time to focus
For F&C this year is going to be the year of “focus”. Having created investment expertise and built up new distribution channels and entered new markets, like Italy and Spain, “this year will be about spending time and focus on that work to see it develop.”
F&C has positioned itself as a player on niche offerings. “It wouldn’t be wise to try and immediately start distribution strategies playing the main stream offerings in countries we just entered, like Spain and Italy,” he said, “because there are too many competitors.”
Strategically, Mr Mendez de Vigo said F&C will be spending time talking to many small or mid-size banks in Europe about outsourcing options.
“Many banks will come to recognise that they are very good in distribution and client relationships, and that’s where they should focus.”
Michael Jones, head of European financial institutions at Janus Capital Group, believes “banks and insurance companies and the big distributors are going to seek to protect their revenue by keeping as much as of their revenues in-house rather than favouring open architecture, which allows revenues to creep out of the doors.”
But he believes this is a short term reaction and when markets return to a more normal environment, open architecture will revive.
Perhaps the asset managers who will more impacted by this retrenchment in the use of external providers will be those that have their funds available on open distribution platforms.
Players, like Janus, who distribute cross-border mainly through wholesale distributors, where the decision on which funds to employ in clients portfolios is made by investment professionals, - such as funds of funds, manager of managers or portfolio managed services, - will be less impacted, claimed Mr Jones.
Gavin Ralston, chairman of Emea at Schroders identified two distinct conflicting trends in the market. One is that many banks have put their asset management businesses up for sale so that “they will permanently get out of offering proprietary products.”
And secondly, that a higher demand for fixed income products always tends to be associated with a lower use of external providers.
“It is a cyclical reduction in the use of third-party funds. We saw that in 2002-2003 and we are seeing it now,” he said. “Most commercial banks tend to have particularly strong capability in fixed income, so naturally when the fixed income weight goes up, the use of internal products goes up with it.”
