The distribution landscape – shaken but not stirred

26 February 2015
By Tiziano Giannotti
By Fiona Maciver

2014 marked another strong year for net sales of long-term funds, despite the market turbulence that was particularly prevalent during the second half of the year. The search for yield in the continuing low-interest-rate environment sustained investors’ appetite for funds – especially those with an income or multi-asset flavour. The macro-economic climate and the ongoing focus on fees inevitably yielded winners and losers across the distribution landscape. As part of its 2014 review, Fund Radar looks at the impact of the shifts in Europe’s key markets and distribution channels, and considers the latest research on consumer savings habits.


We examine the European distribution landscape through two different lenses. The first view is our estimate of the market share of funds under management for distribution channels in the nine domestic markets covered. The chart overleaf illustrates the market penetration of the various channels in each country – instructive for sizing domestic sales opportunities. Most markets, with the exception of the UK, operate on a largely fettered structure dominated by the banking sector. Our estimates aim to look through these structures to identify the decision- making entities, but analysts should keep in mind the ownership of each entity when considering market strategy. From a top-down view, the estimates for 2014 confirm no fundamental changes since the previous year. The most significant shift is a further increase in the market share of funds of funds. Appetite for funds of funds has continued to be fuelled by retail investors’ quest for better returns in markets such as Spain, Italy and Germany.

Spotlight on third-party assets

The second view of the distribution landscape concerns third-party assets under management (AUM). The overall split between captive and third-party AUM across Europe is estimated to be almost unchanged from last year at 55% third-party allocation and 45% captive. Of course, the split is very different from market to market. Captive distribution is prominent in Austria, France, Italy and Spain, although in the latter two markets, appetite for third-party funds is relatively strong. Conversely, third-party funds are used more in Sweden, the UK and the Netherlands.

This year, we have made some changes to our distribution channel categories. This is to make a clear distinction between channels serving the mass retail market and the more sophisticated, HNWI channels: advisory and discretionary private banking services. The result is that retail banks, financial advice networks and online platforms have been combined into ‘retail banking/financial advice networks’. Independent financial advisers, with the exception of the UK, command a very small market share, so they have been grouped with wealth advisers, creating a new category of ‘private client portfolios – advisory’. The classification of the other channels – insurance, private client discretionary and funds of funds – remains unchanged.

The third-party channel analysis is based on validation data collected during Fund Buyer Focus interviews. Participating distributors manage €2trn of third-party assets between them in the 10 markets covered. This accounts for over 60% of all third-party assets, according to Lipper data categorisation (excluding money market funds, funds of funds and ETFs). The data cannot be exactly matched with those of the domestic estimates but it provides a more meaningful picture for cross-border groups looking to size marketing opportunities and entry points.

Channel split TPF

The key third-party distribution channels for independent managers remain unchanged at the market level. Banks dominate in Austria, Italy and Germany. In the UK, Spain, and Belgium, the private discretionary channel is key for third party groups. The advisory channels lead France and Switzerland. In Sweden, the insurance sector prevails as the largest channel. As for developments in channel share of third-party assets over the year*, the insurance and funds of funds categories remained unchanged. The discretionary channel’s share increased from 19% to 20% at a combined European level. While it is difficult to pinpoint the exact source of growth, the UK discretionary market will have contributed, having blossomed in the wake of RDR for two reasons. Firstly, some IFAs have chosen to outsource investment services to discretionary managers. Secondly, discretionary managers have spotted the opportunity to grow their businesses by serving a new customer segment: mass-market retail investors. With banks withdrawing investment offerings from the mass retail market and consumers being priced out of the independent advice market, this has sparked a lot of product development by discretionary business models, as they look to capitalise on this through unadvised and guided advice propositions.

*The 12-month period to 30 September 2014.

As mentioned earlier, ‘retail banking/financial advice networks’ is a new category this year. Retail banks have the most influence here. As a collective group, European banks hold a very small share of third-party assets. But a complete retreat to purely captive propositions looks less likely, if the latest rhetoric on the final outcome of Mifid 2 is to be believed. This category also includes online direct-to-consumer (D2C) propositions. D2C is a relatively small but growing market – keep an eye on Fund Radar for more in-depth analysis of this in a future edition. For cross-border managers, funds of funds have often played a significant role in building a market presence at relatively low cost. While the overall channel split of third-party AUM remained unchanged at 9% in 2014, funds of funds maintained their strong sales momentum, seeing the highest inflows since 2006. Sales across Europe reached €49.4bn, of which €11.2bn was generated by the cross-border market. Spain had a phenomenal year, not only leaving other domestic markets trailing in its dust, but also surpassing the cross-border result with an eye-watering €13.9bn of net sales.

Passive vs active allocation

Taking into account the continued focus on fees and the impact of the ban on retrocessions in the UK and the Netherlands, our estimates based on responses to Fund Buyer Focus interviews suggest that approximately 16.8% of third-party funds pursue passive strategies. The level of adoption of passive products varies across markets and channels. In the Netherlands, Fund Buyer Focus estimates that nearly 30% of assets are invested in passive funds, with the Dutch advisory channel demonstrating the highest allocation. At the opposite end of the scale, the Italian market has the lowest allocation, averaging 6.6% across all distribution channels. In the UK, the growth of passive investment in 2014 was cemented by a significant movement in the net sales league, with two of the five top sellers owing their positions to strong sales of passive funds.

Passive market

Growth opportunities at market level

Fund Buyer Focus research indicates that Italy, Spain and the UK are the standout markets for potential growth in third-party fund AUM over the next 12 months. Distributors’ rationale for future increased allocations includes diversification, broadening the client proposition, attracting new clients, and reducing direct investment in individual securities – in favour of funds. With differing distribution mixes and stages of evolution of third-party fund allocation, the table above highlights the channels with the strongest forecast growth prospects.

drivers 2015