Europe’s intermediary distributors of investment funds — as well as their clients — can expect to see the roll out of new products and potentially lower fees as investment managers fight to attract and retain assets in a challenging global investment market.
The results of the Greenwich Associates 2011 European Intermediary Distribution study reveal that investment managers are feeling the need to revise their product offerings and, in some cases, their fee structures, in an effort to remain competitive and relevant to customers at a time when market volatility is driving fund outflows and prompting many retail investors to hold onto their cash.
Distributors expect to see increased asset flows into alternative and thematic funds. As the head of fund selection at one private bank put it: “We are still in a low-return environment so our proposal has to be interesting without creating too much optimism.”
Some distributors are gearing up for a rapid pickup in exchange-traded fund (ETF) sales. Private banks have already embraced ETFs as an attractive element of wealth management solutions for their clients, and ETFs are gaining traction among other distributors as well. Retail banks in particular expect to see significant asset flows into ETFs.
Competition for assets and the proliferation of competitively priced passive funds could lead to dramatic reductions in fees in active product — especially in core equities.
ETFs have achieved traction across all intermediary channels and particularly among private banks, where 19.8% of third-party assets are now invested into ETFs. The results of the Greenwich Associates study suggest that ETF allocations are poised for future growth across all channels in coming years. European retail banks are gearing up for a significant increase in ETF sales, with current ETF allocations of 4.2% of third-party assets expected to jump to 12.1% by 2014.
“Investment managers are coming to market with new ETFs because these products align well with changes in customer preferences and demands, including a growing emphasis on costs and fees and a desire to gain specific desired exposures,” explains Greenwich Associates consultant Lydia Vitalis. “Regulatory changes, such as the Retail Distribution Review (RDR) seeking to ban commission in the UK retail market, will bring about changes in the distribution landscape that will likely increase interest in ETFs further.”
In general, the results of the 2011 study suggest that the biggest increases in product demand among retail investors in the next year will occur in thematic, specialist and alternative funds, including absolute return, commodities, new-style balanced or “diversified growth” funds, and ecological/green funds. Distributors also predict significant increases in allocations to international equities, both developed and, in particular, emerging markets.
What many of these products have in common is the opportunity to deliver growth in a generally low-return environment. Of course, these products can also deliver relatively high fees and attractive margins for fund distributors and managers — a fact that could color the future demand dynamic.
While many of the active funds now being sold through intermediary distribution channels carry fees in the 150 basis point range, some investment managers are coming to market with a range of low-cost core equity products with fees as low as 40 basis points. Investors’ increased focus on minimising expenses and managers’ growing willingness to sell low-cost, beta-focused products suggest that additional fee compression is on the way. “We anticipate fees on core equity products to come down dramatically,” says Greenwich Associates consultant Marc Haynes.
The study results also reveal a continuation of the trend toward open architecture in spite of parental pressures to the contrary in the case of some distributors. The picture across Europe is quite varied as a consequence of regional variations in channel dominance. The UK stands out as the most “open” market with 81% of assets in third-party product, which is consistent with the prominence of the UK’s independent financial advisor (IFA) industry. In France, the reverse is true, with proprietary assets dominating fund distribution and only 29% of assets allocated to third-party product, although expectations are that this will grow to 44% of total assets within the next three years.