Continental European asset managers represent about 31 percent of professionally managed assets in the world. But the euro zone crisis presents a major challenge. In fact, it has added to woes going back almost a decade. Between 2004 and 2010, European managers grew at a compound annual growth rate of two percent. By contrast, the U.S. and U.K. markets grew by five percent. Whats more, during the five years ending in 2010, foreign firms garnered 75 percent of new flows into long-term mutual funds in the region. But now with the European debt crisis in full swing and the future of the euro in question, continental European asset managers are facing an even bigger threat as their parent banks struggle with capital requirements and sovereign debt on their balance sheets.
To get a clearer picture of what is happening to European asset managers, Senior Writer Julie Segal interviewed Kevin Quirk, a founding partner of Casey, Quirk & Associates, a consultancy for the investment management industry.
1. We all hear daily of the fiscal and currency woes in Europe. What does this mean for the asset management industry there?
Its substantial. Virtually all of the top 30 asset managers with headquarters in continental Europe are owned by banks and insurance companies. These are obviously companies in weakened positions. So as owners of these asset managers, they have to think about what theyll do with them. Their hands are being forced in a way that they havent been before. Thats on top of a foundation that was already weakened because these asset managers dont have all the competitive boxes checked. A fair number of global asset managers noncontinental European headquartered managers have been going in and eroding the banks market share, especially in higher-fee products. Its been really painful for them.
2. What will happen as a result?
They have one or two distinct paths that they can take. One is that they can exit and sell, recognizing that asset management is not a core competency. They may want to realize some value in them and shore up their capital adequacy requirements.
The second is they can hold on but begin to make investments in the business and increase its value. We think a fair number will do this. The asset management business is fundamentally a good one for them to be in; its a diversified feature of their business, but its also potentially a higher margin business with a more stable fee base than their core businesses. If they can build a truly competitive business, then holding on to it will be a good thing.
3. But some just wont be able to sell, will they?
No. For some portion of these banks, selling wont be an option. Many of these asset management businesses today arent really worth that much because they are too integrated in the bank, and the banks havent built a really quality organization. Of the top 30, perhaps one half of them have the opportunity to sell their business in a way where it would financially make sense and a transaction is actually doable. Who will do it? Thats much more difficult to estimate.
4. You mentioned that global leaders have had some success in Continental Europe. Why?
If you look at the business broadly and globally, there are probably three or four characteristics of an asset manager that make them successful.
Its fair to say that the global leaders are better able to tick off those boxes than the Europeans are, generally. Global asset managers have better incentive alignment. Theyve found some way to link the franchise value of the asset manager to the compensation incentives for the critical people in the asset management organization. The European banks, like most banks, have not been able to do that. Theyve rewarded their management teams with bank stock and cash, creating an inherently less competitive and less stable structure.
Second, these global organizations have done a much better job of investing in third-party distribution. The European firms are reliant on the captive distribution of the parent company. When the parent company went through the financial crisis, they began to see their own customers move back into bank deposits, taking money away from asset management products. The asset management subsidiary without a well-developed third-party distribution system was a net loser in terms of assets.
The non-European headquartered firms also did a better job of investing in products and investment capabilities that the market wanted. Products that are less home country biased and more global and emerging markets, for example, as well as alternatives that have higher fees and better margins.
5. It seems that the European debt crisis will have a permanent and far reaching impact on the asset management industry.
There really is a bigger question beginning to emerge. I think these banks have an existential question they have to ask themselves. Will they and can they continue to own asset managers in reality? From a shareholders and a regulators standpoint, this will potentially come to a head over the next year or two. Its not unfathomable that in five years a lot if not most of the banks are out of the asset management business.