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Euro 100: Europe's Fund Managers Struggle Despite Market Rebound

Market rebound lifts Europe’s fund managers, but profitability remains a tough challenge.

Coming to grips with the new normal. From consumers to corporate executives to government officials, everyone in the West seems to be struggling to position themselves for a postcrisis world of slow growth, high unemployment and excessive debt. Most countries have emerged from recession, but there’s little sign of the feel-good factor that typically characterizes a ­recovery.

European fund managers know this predicament well. There is no small amount of relief in the industry at the rebound in financial markets from the depths of early 2009. The value of assets under management has risen smartly over the past year and a half, offering breathing space to money managers, and some segments, such as emerging-­markets funds, are experiencing strong inflows.

[Access the Euro 100 ranking of the region's top money managers.]

Yet the industry remains much more subdued than it was in the middle of the past decade, when buoyant markets and investor enthusiasm drove double-­digit growth rates. Revenue growth is sluggish, with many investors preferring low-risk, low-­margin products, and many managers continue to experience net outflows. Weak prospects for economic growth and concerns about a tougher regulatory environment are clouding the outlook. It’s no wonder that fund company executives sound wary.

“We’re now entering another period of anxiety,” says James Charrington, chairman of Europe, Middle East and Africa at BlackRock in London. “Investor confidence in the industry has yet to return.” Hendrik du Toit, CEO of Investec Asset Management in London, is equally cautious, saying “2011 could be tough.” He adds, “We have to expect a slower market for new ­business.”

The scars left by the crisis are clearly evident in the Euro 100, Institutional Investor’s exclusive annual ranking of the region’s largest money managers. Total assets under management of the top 100 managers rose by 7 percent in 2009, to €16.9 trillion ($23.6 trillion) at the end of the year, but that figure remained well below the recent high-­water mark of €20.65 trillion, reached at the end of 2006.

The turmoil of the crisis has also produced some dramatic changes at the top of the list, where Allianz replaces longtime leader UBS.

The German insurer rises one place to take the No. 1 spot, with €1.4 trillion in assets, an increase of 24.8 percent for the year. The firm’s ascent has been helped by big gains at its giant U.S.-­based bond specialist subsidiary, Pacific Investment Management Co., and by the January 2009 acquisition of Cominvest Asset Management, which ranked No. 61 last year, with €55.4 billion in assets. Allianz has continued to gain strength this year. Its asset management unit, Allianz Global Investors, had third-­party net inflows of €60 billion in the first half of 2010, up from €27.7 billion in the same period last year. “We are glad to see that clients who had lost trust in our industry for a while are strongly coming back,” says Joachim Faber, the unit’s CEO.

UBS slips one place to second, ending its 12-year reign at the top. The Swiss bank, which suffered massive losses on subprime mortgage securities and needed a government capital injection, saw its assets grow by 4.6 percent in 2009, to €1.3 trillion, as outflows of investor funds eroded much of the impact of market gains on its portfolios. The losses have been concentrated in the bank’s wealth management division, which caters to high-net-worth individuals, but those declines have been narrowing. The division had net inflows of Sf1.2 billion ($1.2 billion) in the third quarter of this year, compared with net outflows of Sf8.1 billion in the second quarter and outflows of Sf26.6 billion in the third quarter of 2009.

France’s AXA and ­Credit ­Suisse Group rise one place each, to claim the No. 3 and 4 spots, respectively. Amundi Group, formed by the 2009 merger of the asset management businesses of French banks ­Crédit Agricole and Société Générale, debuts in fifth place, with €669.9 billion in assets. New York–based ­BlackRock follows in sixth place, a big leap from the No. 25 spot a year earlier. Its assets surged to €663.5 billion from €157.8 billion, thanks to its 2009 acquisition of Barclays Global ­Investors.

The rebound in asset levels has been felt unevenly across the industry. “Assets under management are growing again, but revenues have not been growing in line with them,” says Dominique Carrel-­Billiard, CEO of AXA Investment Managers, the insurer’s asset management arm. “This is because much of the money has gone into relatively low-­margin fixed-­income products rather than higher-­value-­added equity or alternative products.” AXA has also continued to suffer outflows at its U.S. value-­oriented fund management subsidiary, AllianceBernstein. The net effect? Although AXA IM has seen its overall assets rise by €25 billion in the first half of this year, to €523.8 billion, the unit’s under­lying earnings declined by 15 percent in the period, to €150 million.

Other big asset managers also face some stiff headwinds. BlackRock had $2.3 billion of net outflows from its EMEA clients in the second quarter of 2010. The firm ascribed the decline to clients’ concentration issues following the BGI acquisition and to general market concerns about active quantitative management, one of BlackRock’s leading investing styles.

Yet, in spite of the challenging economic and market environment, some European managers are generating strong growth, particularly in their emerging-­markets portfolios. Aberdeen Asset Management, which has grown rapidly through acquisition in recent years, enjoyed £2.1 billion ($3.3 billion) in net inflows into its equity funds in July and August. “Asset managers have had a good run,” says CEO Martin Gilbert. “We haven’t been hit as hard as banks by the downturn, and we’ve benefited from huge inflows in equities. In certain of our Asian funds, we’ve actually had to restrict inflows.” Similarly, Investec, which ranks No. 70, with €46.1 billion in assets, had overall inflows of £4.7 billion in the financial year ended March 31. “We’re enjoying an unprecedented boom time, with record inflows and healthy profits,” says du Toit.

With performance uneven and margins being squeezed, many industry executives see continued pressure for acquisitions. The total value of M&A deals involving European asset managers declined to $7.6 billion in 2009 from $15.5 billion in 2008, according to data provider Dealogic, but deal making could pick up with asset levels recovering.

Some banks in particular need to make strategic decisions soon to avoid stagnation, says London-­based Gregory Ehret, head of EMEA at State Street Global Advisors, which is No. 17, with €262.3 billion in assets under management. “Banks will have to make some firm yes or no decisions about what to do with their asset management arms,” he says. “They will either have to boost assets by making acquisitions, or they will have to sell off or wind down their ­businesses.”

Aymeric Poizot, director of the EMEA fund and asset manager rating group at Fitch Ratings in Paris, says a wave of divestitures by distressed sellers hit hard by the financial crisis is largely over. “Now we’re more likely to see certain banks make disposals because asset management is not a core part of their business,” he says. “We will also see more consolidation because asset management is a fragmented industry, especially in difficult segments such as funds of hedge funds and in countries such as Italy.” For most banks asset management represents less than 15 percent of their bottom line, so the business is seldom regarded as indispensable, Poizot notes.

Among the potential deals is the planned sale of Uni­Credit’s money management business, Pioneer Investments. The Italian bank ran up large losses in its Eastern European network during the crisis, forcing it to raise capital twice in the past two years and, ultimately, prompting the departure of longtime CEO Alessandro Profumo in September. Natixis Global Asset Management (No. 7, with €498.5 billion), among others, has expressed interest in Pioneer, which stands at No. 24 in the Euro 100 with €175.8 billion in assets. Similar speculation is swirling around No. 20 Lloyds Banking Group’s €157.5 billion-in-assets pension and money management unit, Scottish Widows Investment Partnership. Lloyds won’t confirm or deny any sale intentions, but it faces pressure to shrink its operations to repay the bailout funds it received from the U.K. government, which owns 43 percent of the bank.

“Most banks would sell their asset management arms if they were offered a good price, because they are not core parts of their business,” says BlackRock’s Charrington. “The problem is, however, that there aren’t many buyers around.”

Still, money management is likely to remain a core business for many banks, particularly at a time when weak economies and higher capital requirements are squeezing their lending operations. “UBS is committed to asset management, and I unashamedly believe you can run a strong business within a bank,” says John Fraser, CEO of UBS Global Asset Management. But, he acknowledges, “other banks might feel it’s not a very exciting business, with profits that don’t make a big impact on the share price. It’s also true that some of the big independents are doing well.”

Other players believe banks are just as likely to be buyers as sellers. Consider Aberdeen’s Gilbert, who has more experience than most in M&A. “I think banks will be back in the market seeking to buy asset managers,” he says. “The recurring fee element makes it an attractive business.” Gilbert’s own appetite isn’t great, though. He plans to focus on organic growth after having acquired most of ­Credit ­Suisse’s non-Swiss fund management business for £250 million in July 2009 and picking up RBS Asset Management in February 2010 for £85 million. The ­Credit ­Suisse deals helped to push Aberdeen’s assets under management to €158.2 billion at the end of 2009, lifting the firm seven places in the Euro 100, to the No. 30 spot.

Another hot-button issue for fund managers looking to recover is regulation. Many executives complain that the European Union’s Capital Requirements Directive, which requires up to 60 percent of bonuses to be deferred for three to five years, as well as the U.K. Financial Services Authority’s Remuneration Code are draconian and unfairly drag money managers into regulations designed for banks. “There is a need to persuade the regulators and the public that asset management is a very different kind of business from banking,” says BlackRock’s Charrington.

In short, there are plenty of reasons to be cautious about the industry’s outlook. Yet the market recovery has given many players a boost, and indications of a renewed appetite for risk among investors is making some managers more optimistic.

“I don’t think we’ve seen the end of the postcrisis rebound,” says AXA IM’s Carrel-­Billiard. “There are signs that clients are increasingly interested in real estate and private equity as they search for more yield and capital gains in a low-­interest-rate environment.” State Street’s Ehret sees a similar recovery in animal spirits. “It’s been an interesting recovery, with passive managers enjoying a particularly strong pull in the market,” he says. “There’s now plenty of rerisking going on and a rapid move to alternative asset classes.”

At UBS, Fraser believes the worst is over. “We are finding that risk appetite is coming back, and we are enjoying good inflows from third parties into both wholesale and institutional capabilities, including hedge funds and real estate,” he says. “We took a hammering two years ago from the issues facing the bank, but these are now well and truly behind us.”

The crisis was deep and painful, though, and memories are bound to linger. No one is taking growth for granted ­any more.

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