The long bear market ended nearly three years ago, but to some money managers it feels like yesterday. The fallout remains everywhere -- in sluggish asset growth, intensified competition and anemic retail inflows.
Consider: Last year the total assets of Institutional Investor’s Euro 100 grew by only 6.9 percent, to E15.5 trillion ($18.6 billion), despite strong stock market appreciation -- a 10.2 percent rise in the MSCI EAFE index and a 10.9 percent rise in the Standard & Poor’s 500 stock index.
Unlike their American counterparts, European retail investors remain skittish about equity funds. Although U.S. stock mutual fund net inflows totaled $178 billion in 2004, just exceeding the 2000 peak of $174 billion, comparable European inflows totaled just $25 billion in 2004. That is a far cry from their 2000 peak of $190 billion.
“After the bubble burst, first-time equity investors were scared off,” says Massimo Tosato, global head of distribution at London-based money manager Schroders. “It is a tremendous challenge to win over retail investors to equity again. That said, the quality players are doing well.”
In particular, global firms appear to enjoy an edge over those that do not stray beyond their home markets. From December 2004 to June 2005, the domestic European mutual fund market grew by 10 percent, from E3.0 trillion to E3.3 trillion; by contrast, the Luxembourg market, which sells cross-border mutual funds throughout Europe and is dominated by the big global houses, grew by 23 percent, from E551 billion to E675 billion, according to London-based research firm Feri Fund Market Information.
Though many local asset managers remain dominant in their home markets, their shares are slipping. Between December 2004 and June 2005, for example, the market share of Germany’s top five locally owned managers fell from 85 percent to 79 percent.
In Italy, three local banks, Group Sanpaolo IMI, Gruppo Intesa and UniCredit Banca, controlled 60 percent of the mutual fund market in 2000. Their collective share was down to less than 40 percent. Only UniCredit, which owns U.S. mutual fund family Pioneer Investments, hung on to its just over 15 percent share.
In the U.K., foreign firms controlled 50 percent of the institutional market, up from 15 percent in 1998. In the Netherlands, international institutional managers claimed a 40 percent share, up from about 10 percent in 2000.
Among the global players that dominate the top ranks of Europe’s money managers, UBS claims the No. 1 ranking in our Euro 100 listing for an eighth straight year. Moreover, it wins despite its asset growth’s lagging the Euro 100 average by about 4 percentage points: It gained less than 3 percent, to increase from E1.42 trillion to E1.46 trillion, partly reflecting sluggish growth in its private banking business.
Barclays Global Investors, rising from third to second place, delivers the biggest growth surge in the Euro 100, its assets rising 18 percent, from E846.9 billion to E1.0 trillion. Credit an explosion in the firm’s hedge fund business along with strong inflows into its enhanced index funds (Institutional Investor, October 2005).
Among notable gainers is Crédit Agricole Asset Management, which moves from 16th to tenth place. Its improvement reflects the big French bank’s July 2004 merger with former rival Crédit Lyonnais. The combined institutions’ assets increased from E216.7 billion to E355.1 billion.
Among global firms coping with asset declines, Amvescap, at 13th, down from 12th, reports a 5 percent drop, from E295.2 billion to E280 billion. That falloff, however, reflects the fact that Amvescap reports its assets in dollars (II converted them into euros, using year-end currency rates). In dollar terms, Amvescap’s assets increased, from $371 billion to $382 billion, for a 3 percent gain. Deutsche Asset Management’s assets, meanwhile, fell from E567 billion to E536 billion; its ranking holds steady at 6th. The drop stems largely from E20 billion in outflows from its institutional business; in July the bank announced the sale of the business to Aberdeen Asset Management.
Italian money managers had mixed results. Nextra Investment Management reported an 8 percent decline in assets last year, and Arca showed a 6 percent falloff; Nextra drops from 36th to 43rd, and Arca rises from 77th to 73rd. So far this year, Banca Intesa has had net outflows of E3.8 billion from its Italian mutual fund business, Sanpaolo IMI E2.3 billion and Banca Nazionale del Lavoro E1.2 billion. UniCredit Banca, which acquired international expertise and presence through its acquisition of Pioneer, has seen net inflows of E3.8 billion, according to Italian mutual fund association Assogestioni. In Italy, plainly, global firms command an edge over their local rivals.
Throughout Europe, money managers are feeling increasing pressure to offer their clients a range of investment products, including those produced by competitors, not simply their own proprietary funds. In the jargon, European asset management is moving from closed to open architecture, following a similar path blazed by U.S. asset management in the late 1990s.
“Clients want choice,” sums up Alain Grisay, chief executive officerdesignate of F&C Management.
For the moment, at least, the European market is a mix of U.S.-style open architecture, in which a large array of third-party funds are sold; closed architecture, in which only proprietary products are sold; and a mixed system known as guided architecture, in which a limited number of outside funds is included on a product platform.
The in-between arrangements often are the product of joint ventures. In May, for example, Italy’s Banca Intesa and France’s Crédit Agricole announced a E1.34 billion agreement to merge some of their asset management businesses. Crédit Agricole will own 65 percent of Intesa’s struggling Nextra Investment Management, creating an entity with E430 billion in assets under management, more than enough to secure a top-ten ranking in the Euro 100. Whereas before the deal Banca Intesa had been selling only proprietary funds, it will now sell third-party funds produced by Crédit Agricole and a few other managers.
In another move toward open architecture, Germany’s WestLB in September announced a joint venture between its West Asset Management subsidiary, which manages E40 billion, and the U.S.'s Mellon Financial Corp., with $738 billion. WestLB will begin selling Mellon funds, particularly global equities funds, an are in which West Asset Management has no expertise. Says Ronald O’Hanley, vice chairman of Mellon Financial in Pittsburgh and chairman of the institutional asset management group: “WestLB was looking for a partner to round out its product range for what is a formidable distribution platform. From our perspective we are always looking for privileged access to distribution.”
Says Thomas Balk, president of European mutual funds at Fidelity International in London, “The only model that will work is a true separation of manufacturing and distribution and more open architecture.”
How far will the door open? Only partway, suggests Morgan Stanley London-based specialty finance analyst Huw van Steenis, who envisions guided architecture for many European money managers. “It’s about more choice, not free choice; and guided architecture, not fully open architecture,” says van Steenis.
Other observers think that domestic fund managers will succumb to increased pressure from customers to open their product rosters to rival producers. Diana Mackay, founder and managing director of Feri Fund Market Information, sees a disturbing trend for domestic mutual fund managers. Since 1999 the European market has seen a major proliferation of funds, with more than 12,000 funds launched, of a Europe-wide total of 25,000. And here’s the problem for domestic managers: 88 percent of all fund sales are for products launched in the past 12 months. The only providers that are selling their backlists are the cross-border firms.
“What this emphasizes is the different nature of distribution these different types of firms rely on,” says Mackay. “The cross-border firms are selling their backlists through third-party distributors that want performance and track record. Domestic firms with proprietary distribution are chasing sales with new funds based on whatever crazy promise will shift product. If they disappoint, these firms are going to face problems.”
Local banks and insurers are not doomed, Mackay says. But, she adds, “they will need to get smart to grow.”
How Axa IM keeps its edge
It is both institutional and retail -- and manages insurance assets on the side. It is the biggest pan-European property manager, overseeing E25 billion ($30 billion) in bricks and mortar. Yet it also is one of the biggest players in collateralized debt obligations, raising E9.9 billion worth of CDOs in 2004. If ever an investment firm were hard to pigeonhole, it is Axa Investment Managers.
Lest Axa IM be dismissed as willfully eclectic, it should be noted that the London-based European money management arm of the big French insurer -- Axa Group ranks fourth in the Euro 100, with E869 billion as of the end of 2004 (see table) -- is also a traditional long-only fundamental manager. What’s more, it owns Axa Rosenberg, a trailblazing quant shop, and operates a joint venture with BNP Paribas, EasyETF, to sell index funds to retail consumers. On the institutional side, Axa IM is one of the biggest players in liability-driven investment, managing more than E20 billion.
Still, by rights, seven-year-old Axa Investment Managers ought to be suffering an identity crisis. However, Nicolas Moreau, its chief executive officer since May 2002, insists that the firm is as balanced as a properly allocated portfolio.
“It is true this is quite a young business, but as we have grown and matured, we have deepened the specialization of the teams,” says the former head of corporate finance at Axa Group. “We call the strategy multispecialist, and we intend to stick to it and develop it further. We would rather be excellent in specialist areas than mediocre in core markets.”
Axa Group started separating its asset management activities from its insurance business as early as 1994. But it was only with the arrival of Donald Brydon as CEO of the asset business in April 1997 that Axa IM began to come to grips with its sprawling asset management franchise. At the time, it mostly consisted of unfocused and underfunded investment divisions of insurers that Axa had acquired all across Europe. Brydon sorted out the mess.
Then in 1999 he acquired the Rosenberg Group -- whose assets have grown tenfold since then, to $70 billion. That same year, Brydon lured bond guru Robert Kyprianou from ABN Amro to head fixed income, which represents two thirds of Axa IM’s assets. Kyprianou, who now heads all securities investment, has helped to push the group into structured-credit investing and liability-driven management; together, they account for more than E25 billion of the nearly E55 billion in net new assets Axa IM has collected just since the beginning of 2004.
Indeed, the money manager’s business wins have been accelerating under Moreau. Net new money -- all from third parties -- increased by E13 billion in 2003; in 2004, the new CEO’s first full year in charge, net inflows rose sharply, to E29 billion. And this year net new money has poured in: E26 billion through August -- an increase of 39 percent over the same period last year. Add in the impact of favorable markets, and Axa IM’s assets are up more than E57 billion this year, to E402 billion as of August 31.
That’s not counting the firm’s completed acquisition in September of U.K. retail investment manager Framlington Group from HSBC Holdings for £174 million ($307 million). The deal brings in an additional £4.5 billion in assets as well as two fund managers who are highly regarded by independent financial advisers: George Luckraft and Nigel Thomas. “For me this is an extension of our strategy,” says Moreau. “U.K. onshore retail is another specialization.” Among many. -- A.C.
At Schroders, class tells
In 2001, when Schroders disclosed the first annual loss in its rich 200-year history, the schadenfreude in the City was almost palpable. The firm that helped to finance the Confederacy in the American Civil War was viewed by many as an anachronism. It was owned by a baron and staffed by stuffed shirts, around the collars of which hung Old School ties. The decision to sell its investment banking arm to Citigroup a year earlier seemed to signal an inevitable decline.
Four years later, however, Schroders is booming. The asset management and private banking firm saw its pretax profits in this year’s first half soar to £123 million ($222 million), up 69 percent from the first six months of 2004 and in sharp contrast to the loss of £8.1 million for 2001. Assets have grown to £112 billion from £87 billion at year-end 2002, and the operating margin stands at 31 percent, in line with the industry average and double the firm’s 2002 figure.
A key architect of the turnaround is a figure who hardly fits the Schroders mold: Massimo Tosato is an Italian with a Tuscan vineyard and a flair for entrepreneurship. He founded the Italian fund manager Cominvest before joining Schroders in 1995 as head of asset management in Italy. Even as Schroders chief executive officer Michael Dobson and chief financial officer Jonathan Asquith have focused on cutting £100 million, Tosato has grown the business.
In 1999, Tosato was put in charge of both European retail and institutional business, and he quickly determined that retail presented the bigger opportunity. At the time, Schroders had less than E4 billion ($4 billion) in European retail assets, mostly in the U.K. Tosato decided Schroders should become a wholesaler to big European banks and insurers.
“Open architecture was beginning,” he explains. “We specifically designed a product range that gave distributors a diversity of opportunity for different market cycles across cash, fixed income and equity, and across the risk spectrum.”
The results have been dramatic. In 2004, Schroders was the best asset gatherer in equity funds, selling E5.5 billion worth and outstripping Franklin Templeton Investment Management, J.P. Morgan Asset Management and even Fidelity International. Once almost exclusively institutional, Schroders now derives 47 percent of its gross revenues from retail.
“What you see at Schroders is the fruits of some very hard work and long-term strategic thinking,” says Huw van Steenis, a specialty finance analyst at Morgan Stanley in London. “In the firm’s retail business, almost every fund has had its guidelines changed or manager changed or something else tweaked. Its retail business is now flourishing and is a real source of strength for the group.”
Tosato, promoted to global head of distribution in 2003, is turning to fresh challenges. The main cause of the malaise at Schroders in 2001–'02 was a hemorrhage of U.K. institutional assets as British pension funds switched from traditional balanced managers to specialists. That attrition appears to have ended: In 2005’s first quarter, Schroders reported its first positive flows from U.K. institutions in six years.
Tosato’s next target is the U.S. market. He contends that mutual fund scandals, a weak dollar and a sluggish stock market, together with a shift from commission-based remuneration to advisory fees, make this a propitious time for Schroders to pitch itself. Says Tosato, “We are determined to build a retail presence and rebuild our institutional business there.” — A.C.