Distribution in transition

26 February 2016
By Tiziano Giannotti

By Fiona Maciver

Sales flows may have been more threadbare in the latter part of 2015 but swirling macroeconomic currents and regulatory headwinds provided plenty of action for distributors throughout the year. Captive distribution lost territory in the overall split of European assets under management but was in fine form in the fight for new business, encouraging more retail investors away from the dismal returns of deposit accounts, and into funds. In the third-party arena funds-of-funds made the most ground in capturing market share, with the Spanish market leading the charge.



A two-pronged attack is required to cut through the complexity of the European distribution landscape and examine market-sizing and sales opportunities at local and cross-border levels. As in previous years, our first view estimates the market share of distribution channels across nine domestic markets, including both captive and third-party distribution. The chart overleaf illustrates the country/channel splits. Our estimates aim to identify the principal decision-making entities in each country, but analysts should keep in mind the ownership of each entity when considering market strategy; with the exception of the UK, most markets operate on a largely fettered structure dominated by the banking sector.

Estimates for 2015 highlight some small changes in the market breakdowns, and the increasing importance of funds of funds in retail sales, particularly in Spain and Italy. The key market-level updates to note are as follows:

▪ France – With the exception of the insurance channel, there was very little change over the year. Disillusioned retail investors withdrawing from the traditionally popular Livret A savings accounts in favour of unit-linked and life assurance policies underpinned the increase in insurance market share.

▪ Germany – A record year for sales across the industry helped retail banking make further gains, supported by strong appetite from retail investors to take on more risk, particularly through mixed asset funds. This trend also helped private banks to make further headway. Elsewhere, the impact of regulation on the IFA market caused this channel’s share to slip. Declining sales of traditional life insurance products in the low-rate environment together with competition from alternative products such as mutual funds also inflicted a dent on the insurance channel.

▪ Italy – An increase in promotori finanziari and IFA business, mainly with high-net-worth clients, slightly reduced the banking channel’s share. Similar to Spain, bank-led promotion of funds of funds helped to boost this channel’s overall market share by 1.5%.

▪ Spain – Domestic third-party funds of funds in- creased their market share by nearly 12%. Using our methodology of focusing on the underlying channel rather than the parent entity, this means that there was a corresponding reduction in the retail banks’ market share. It was the parent retail banks that were behind the channel-split changes over the year, with shifts in sales-strategy emphasis from target maturity and guaranteed funds towards funds of funds. This helped propel the channel to a record year for sales (€28bn), domestically registered foreign groups faring well among fund selectors.

▪ Sweden – Very minor adjustments to market share that favoured banks. IFA business registered a small decline in market share as more business is channelled via funds of funds, which, despite continuing to attract strong net flows, in turn also lost marginal market share over 2015.

▪ Switzerland – The most notable adjustment was an increase in the market share of funds of funds.

▪ UK – Little change in the UK market over the year with the IFA channel dominating distribution but increasingly outsourcing asset allocation to asset managers and discretionary managers.

Third-party channel analysis

The second view of European fund distribution focuses on third-party assets under management (AUM). Fund Radar estimates the overall split between captive and third-party funds to have marginally changed versus last year with a slight increase in third-party AUM to 56%, and captive share dipping back to 44%. In our annual third-party channel analysis breakdown, we have altered our calculations and moved to a rolling two-year average to provide a more robust data sample. We use Fund Buyer Focus proprietary data, sourced from interviews with Europe’s major distributors, to provide an estimate of channels splits. Participating distributors from 10 markets manage €2.3trn between them (excluding money market funds, funds of funds and ETFs). While we can’t make a direct comparison with last year’s data, we estimate that funds of funds and discretionary managers have been net beneficiaries of changes to third- party market share, with a subsequent small reduction to that of banks and insurance companies.

With the dominance of investor preferences and structures differing in each market, independent asset managers need to assess them individually. With the exception of the UK, where IFAs prevail, banks are the dominant distribution channels across continental Europe. This results in distinct approaches to the selection of third-party funds. Austria and France are at the lower end of the scale for use of external managers. Captive distribution among retail banks dominates in Austria, while in France institutions are the primary channel. Meanwhile the Netherlands, Germany, Switzerland and the UK are more open to third-party providers with, on average, more than 50% allocated to third-party funds.

2015 was a record year for net sales of funds of funds, and this channel continued to capture a bigger slice of third-party business; our estimate is that it now accounts for 10% of third-party AUM. Cross-border sales were strong with sales of €12.5bn but it was Spain that took the largest share of net sales at a staggering €28.8bn. Italy also had a good year with a €9.4bn influx. Similar to 2014, the impetus was from retail investors seeking a positive return on their savings, and retail banks increasingly looking for more profitable lines of business and, in some markets, preparing for the anticipated loss of revenue from the future ban on retrocessions.


Retail banks’ use of third-party funds

Facing a low-interest-rate environment with little margin on savings products and the impending roll-out of a commission ban across Europe, many banks have returned to mutual funds with renewed vigour through packaged solutions such as mixed asset funds. Historically, continental European banks have mainly pushed proprietary products but this trend is shifting in several markets, with external managers used increasingly.

The Netherlands is keenest on external managers, with third-party products given priority since a complete ban on commission payments came into force there. This is mainly effected through managed account structures and the use of passive products. Elsewhere, Germany and Italy are two markets where fund selectors have indicated their intention to allocate more to external managers. The impetus behind this is mainly regulatory. Germany is shifting to more managed accounts and preferred-supplier relationships. Asset managers gaining access can expect bigger flows but will also have to invest heavily in sales and marketing support. In Italy, opportunities are primarily on offer through the many tied advisory channels.


In our latest review of drivers of industry change, covering the final quarter of 2015, fund selectors have reinforced their views on the top drivers of change with regulation, pricing and interest rates remaining top of mind. Movement in sentiment further down the list is worthy of a mention though. Transparency and active management have shown the biggest leaps up the pecking order since the previous analysis; however, this time we take a closer look at the aspect ‘architecture of the fund industry’.

This coalesces the impact of a number of the higher- ranked drivers including regulation and pricing pressure, together with the rise of heightened competition in the latest quarterly temperature check. Many of the views expressed by distributors on this subject reflect consolidation among fund groups, with an increase in M&A activity noted. Firms occupying the middle ground are deemed particularly vulnerable to being squeezed out of the market, unable to differentiate through scale of offering or standing out with a unique or appealing fund proposition. Italian and French distributors made the most frequent mentions of this topic over the quarter. In Italy, the introduction of fund trading on the stock market and the impact of Mifid 2 were often cited. Select comments can be seen on the next page.

Across markets, distributors demonstrate polarised views on the impact of changes to the architecture of the fund industry. In one corner, we have buyers saying the corollary of consolidation is reduced choice, which is bad for consumers, while in the opposite one is the argument for improving the quality of funds available and reducing the bewildering array of choice.



Based on indicators from fund selectors surveyed by Fund Buyer Focus and assuming investors don’t retreat to the sidelines in the current market turmoil, the best opportunities for growth of third-party AUM are on offer in Belgium/Luxembourg, Italy, Spain, and the UK, as detailed in the table above.

Direct to consumer (D2C) While there have been a lot of developments in technology-led solutions in markets such as France, Ger- many, Italy and the UK, the size of the prize is still very small. That said, there is clearly a growth opportunity to capture a wider mass market and a new generation of savers with low-cost solutions. This is low-margin business and will need scale to deliver benefits. With many bigger players including banks and asset managers now entering this market, the early start-ups could soon lose out as competition intensifies. A big indication of this channel’s future potential has come in the shape of BlackRock’s acquisition of FutureAdvisor, a US robo-adviser delivering automated portfolios, which the company expects to eventually roll out in Europe.


The current state of flux of financial markets suggests a rather gloomy outlook in the months ahead. Distributors and fund manufacturers will have to work hard to hold on to investors. Retail channels are faced with two competing forces – vulnerable and anxious investors looking for reassurance that the funds that they have been persuaded to buy (predominately mixed assets and funds of funds) will deliver in times of extreme market volatility; and banks needing to promote long-term funds to bolster income streams and position themselves for the ban on retrocessions.

If retail investors lose out again, it will be a very long route to recovery, particularly for funds of funds and retail banks. The more sophisticated end of the market is in a much stronger position, many institutions and HNW investors having retreated to safer havens before the market falls. Market corrections and volatility inevitably provide tempting buying opportunities and perhaps an environment for active managers to outperform their passive counterparts.