1

The Changing Face of European Asset Management

Niall BohanDG Internal Market

European Commission,

Malta, 17th March 2006

2

Structure of presentation:

1. Overview of the EU asset management business:

2. Key trends in European fund markets:– Fund administration:– Management:– Distribution:

3. EU policy framework:

4. Factors to buidling a successful fund business:

3

Birds-eye view of asset management:

• Collective (private) investments:– Retail investment funds (UCITS: undertakings for

collective investment in transferable securities) – Other collective investments (real estate, hedge funds,

institutional funds)

• Other private savings:– Life insurance– Structured funds/certificates– Individual portfolio management (discretionary mandates)

• Occupational pension schemes.

4

UCITS

3rd pillar:private savings

2nd pillar: occupational

pensions schemes

11stst pillar: pillar: social-security social-security

systemssystems

Non-UCITS

Equity Bonds Money market Balanced funds

Long-term savings

Collective asset management:

Hedge fundsPrivate Equity Real estateUnit-linked life insurance

(State)(voluntary pooled savings)

(Companies)

5

Global assets under management

5

7

9

11

13

15

17

1998 1999 2000 2001 2002 2003 2004

$ tr

illio

n InsurancePension fundInvestment fund7

6

Individual portfolio management (FR)

7

Key features of AM business

1. Big business … set to get bigger;

2. Inherently tradable products and services – although some are more heavily conditioned by local labour, contract or tax law;

3. Business of managing pooled assets is very fragmented in terms of products, institutions and regulations;

4. Convergence in how business is done, who is doing it and investor base.

8

Broader/strategic considerations:

• Allocation of financial resources between savers and investors (cf. private equity;

• Provision of innovative tools for long-term savings of individuals;

• Competitive access to professional asset management services – for long-term savings;

• ‘Democratisation’ of financial markets;

• EU angle: inherently tradable products and services – many business lines well suited to organisation on pan-European basis.

9

Net Assets of European Investment Funds

2,34

9 3,19

6

3,54

7

3,60

1

3,32

7

3,76

3

4,19

2 5,17

0

0

2,000

4,000

6,000

8,000

1998 1999 2000 2001 2002 2003 2004 2005Non-UCITS UCITS

4,2814,6074,558

4,158

3,040

5,348

4,817

6,570

10

AuMs in the EU 1994 - 2004Asset under Management - evolution by country (I)

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

EUR million

France

Germany

Ireland

Italy

Luxembourg

Spain

United Kingdom

Source: EFAMA

11

New player in fund markets: Hedge Funds

0

1000

2000

3000

4000

5000

end 1998end 1999

end 2000end 2001

end 2002end 2003

end 2004June 2005

september 2005

0

50

100

150

200

250UCITS €bn (left axis) hedge funds €bn (right axis)

UCITS: EFAMA, 2005; HF: various sources

12

Occupational pension schemes

• Do not exist in all Member States … however work-related savings schemes appearing across EU;

• Volume comparable to UCITS;• Move from defined benefit to defined contribution …• accompanied by search for more dynamic asset

management strategies;• Local delivery … schemes adapted to local labour law, tax…• but search for centralised asset management (pooling,

administration).

13

UCITS MarketGeographical breakdown of funds by domicile

COUNTRY ASSETS % COUNTRY ASSETS %

Luxembourg 1,386,611 26.8% Denmark 63,744 1.2%

France 1,155,100 22.3% Finland 38,497 0.74%

United Kingdom 502,920 9.7% Norway 34,010 0.66%

Ireland 463,000 9.0% Greece 27,944 0.54%

Italy 381,889 7.4% Portugal 26,208 0.51%

Spain 268,597 5.2% Turkey 18,436 0.36%

Germany 262,365 5.1% Poland 15,015 0.29%

Austria 107,961 2.1% Liechtenstein 12,783 0.25%

Belgium (1) 107,177 2.1% Hungary 5,474 0.11%

Sweden 103,787 2.0% Czech Republic 4,728 0.09%

Switzerland 100,782 1.9% Slovakia 2,709 0.05%

Netherlands 79,984 1.5% Total 5,169,721 100.00%(1) As of 30 September 2005

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UCITS: an integrated product market?

• Increasing level of cross-border sales;

• About 17% of UCITS are “true” cross-border funds;

• Most new sales in Europe in past 2 years accrue almost exclusively to cross-border funds.

15

Number of funds by Domicile and Country of Notification

Domicile

Country of fund notification

AT BE DK FI FR DE IE IT LU NL ES SE UK

AT 854       5 272   25          

BE 19 1147 90 18 2 86 121 3  

DK   418 43 30 30 12 30

FI   345 1 4 1 58  

FR 40 71 5264 116 36 28 47 24 23 13

DE 308 39 17 1072 1 7 106 9 11 13 2

IE 381 82 7 45 205 435 853 308 187 193 145 211 259

IT   1214  

LU 2045 1441 82 727 1660 3372 452 2181 6938 1372 1472 934 1025

NL 3 18 4 8 3 272 1 3

ES   3 2544  

SE   25 1 485  

UK 90 33 17 16 71 98 27 41 74 37 36 37 1462All funds (1) 3782 2831 524 1164 7321 5519 1369 3807 7475 2058 4262 1772 2794

non-dom. (2) 2928 1684 106 819 2057 4447 516 2593 537 1786 1718 1287 1332

(2) / (1) (%) 77,4 59,5 20,2 70,4 28,1 80,6 37,7 68,1 7,2 86,8 40,3 72,6 47,7

FERI FMI 2005

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Fund management: a concentrated business

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Irelan

dUK US

Franc

e EU

German

ySpa

inIta

ly

Nether

lands

Portug

al

Austria

Poland

Sweden

Finlan

d

Hunga

ry

Greece

Denmark

Belgium

Slovakia

Czech

Rep

ublic

Source: EFAMA

Market share of top 5 asset managers (2004)

17

The power of local bank networks:– In most Member

States dominated by a few national players (esp. banks);

– independent entities only in a few Member States (UK, DE, IT) of relevance;

Marketing and distribution:

Share of distribution channels

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005E 2006E 2007E 2008E

Bank Insurer IFA Direct

18

Separation of management & distribution:

• Slow trend towards open architecture (18-20% of new sales):

• Retail banks in-source funds from third parties.

0

1000

2000

3000

4000

5000

6000

2004 2014E

In-house funds3rd party funds

19

Key trends in AM business• Increasingly concentrated business and consolidation set to

continue;

• Specialisation of actors along value-chain (split between management and distribution);

• High cost business and some costs (distribution, management) likely to increase;

• Competition from off-shore locations (esp. high net-wealth products, hedge funds).

• Business developing fast – new functions, niches, products evolve on a regular basis.

20

Objectives of European AM Policy:

• Drive efficiency and lower cost by …• Facilitating (cross-border) competition and specialisation

– Enable reorganisation of the different functions in the value chain to improve cost-effectiveness of industry;

– Allow products and services to be sold to investors in other markets;

– Allow managers to manage funds domiciled elsewhere;– Allow funds to transfer assets to custodians elsewhere.

• Without compromising investor protection.

21

Investment funds: EU and US, 2005

EFAMA, ICI

8

29

0

5

10

15

20

25

30

US EU

8

5

0

1

2

3

4

5

6

7

8

US EU

946

170

0

200

400

600

800

1.000

US EU

Number of funds (in Thousands)

Average size (€ mn)

AuM (€ 1000 bn)

22

Costs in EU fund industry

23

Economies of scale along the value chain

4,93,6 4,3

4,14,6 3,7

86,8

5,8

2,2

5,1

3,94,5

0,6 0,4

0,6

0

5

10

15

20

Small (€15-29bn) Medium (€50-55bn) Large (€105-110bn) Scale benefit

Sales&Marketing

Fund Management

Middle-/Back-office

IT/Support

2004, cost margin, bp

McKinsey, 2005

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Fragmented business lines are cost driver

25

Product innovation – fund proliferation

No. of funds2004 ׀ 2003

new funds launched 2004

Mergers/ closures

Net increases

/decreasesBE 2045 2184 290 151 139DE 2445 2540 234 139 95AT 836 879 87 44 43ES 2672 2711 190 151 39DK 441 463 34 12 22FI 338 359 44 23 21FR 5397 5406 406 397 9IT 2010 1977 169 202 33SE 568 532 7 43 -36NL 345 284 6 67 -61UK 1527 1463 42 106 -64

FERI FMI 2005

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Key Policy Characteristics

• Regulatory regimes vary still across Member States, mainly with regard to the interpretation of UCITS rules and their implementation;

• Taxation continues to be a major concern for the industry;

• Both elements have a strong influence on the potential of the industry, at national and European level;

• Necessary to align these systems to realise this potential.

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EU Asset Management framework• Key legislation:

– UCITS Directive 85/611/EEC (amended in 2001);– MiFID (Markets in Financial Instruments Directive)

2004/39/EC;– Capital Requirement Directive 2005;– 3rd Life Insurance Directive 2002/83/EC;– IORPs (institutions for occupational retirement provision)

Directive 2003/41/EC

28

Issues currently under discussion• Make product passport work:

– Notification procedure:– Clarification of eligible assets

• Help investors cope with more complex products and regulatory arbitrage between savings products:– Dislcosure documents (simplified prospectus);– Rules on sales process (MiFiD)

• Deliver new sources of efficiency/competition:– Management company passport– Cross-border mergers and asset pooling;– Depositary passport

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Becoming a financial centre – lessons learned:

• Legal and tax environment:– Facilitating moving assets in and out of jurisdictions– Pooling and mergers;

• Regulatory environment:– Needs to fit good with business models– But: need reputation for credible regulation and

supervision

• Skilled labour force with the right skills:

• Build on existing expertise/specialisation.