Dissecting the distribution pie

21 February 2017
By Tiziano Giannotti

by Fiona Maciver

The year 2016 turned out to be one replete with momentous and unexpected geo-political events, economic uncertainties, and fund buyers preparing for approaching regulatory changes. Spooked retail investors and the robust promotion of proprietary offerings by retail banks shook things up a little further, while sophisticated investors were on the hunt to profit from market opportunities.

The domestic distribution mix The first view is an analysis of nine domestic markets, encompassing both captive and third-party business’ except for the UK, distribution in most European markets is led by the banks, their proprietary products serving large captive customer bases. But even proprietary products can offer opportunities for independent fund managers, which is explored further on. The MacKay Williams estimates for 2016 reveal some modest changes but, at channel level, perhaps the most important is the decline in IFA market share in several countries as retail-investor apathy and regulatory headwinds took their toll. Taking the core markets in turn, some of the most important local developments were as follows:

▪ France – French assets under management declined over the course of the year with a drop-off in activity from mainstream retail investors filtering through to a slight fall in market share for retail banks and IFAs. The share of private banks benefited from market performance and a slight increase in sales, while that of the institutional market fell slightly.

▪ Germany – A solid year for German funds. Professional investors were the main driver of sales, benefiting institutional distributors’ market share. Appetite for funds among retail investors was nevertheless boosted by banks promoting fund-savings plans, which contributed to growth in the retail-bank channel. But the demise in IFA market share continued as regulatory headwinds weighed heavily on business models in this channel.

▪ Italy – Another good year for the Italian funds industry, producing the strongest growth in assets under management of the local markets considered here. A drop-off in product launches from the retail banks yielded a small decline in their market share while private banks increased their presence slightly. In preparation for Mifid 2, wrapped solutions formed the leading measure to protect margins in the approaching retrocession-free world.

▪ Spain – The country’s retail banks switched back from promoting third-party funds of funds, to their own offerings. As a distribution channel, the banks therefore increased market share at the expense of funds of funds. Indeed, the latter suffered outflows in sharp contrast to the record-breaking sales of 2015.

▪ Sweden – Small changes to the channel mix, which slightly favoured bank activity at the expense of IFAs. The latter’s share has been hampered by a reputation for churning. Funds of funds, though, benefited from IFA activity, with advisers directing more clients into these funds.

▪ Switzerland – With net sales dropping in 2016,it was predominately a time of money in motion, driven by sluggish retail demand and high-net-worth investors moving money to non-fund holdings including real estate, commodities and shares.

▪ UK – A poor year for the UK market. Political uncertainty exacerbated investor jitters, triggering a big rotation out of traditional equity funds. Against this backdrop the largest distribution channel, IFAs, inevitably suffered the biggest decline. Discretionary managers continued to benefit from IFAs outsourcing investment services, helping to support a marginal increase in market share for this channel.

Third-party channel analysis

Stripping out captive distribution provides a clearer view of the market opportunities accessible to external managers. But before delving into a channel breakdown, itis useful to contextualise this against the whole market. Of course, it should also be remembered that allocations to third-party funds vary from country to country and channel to channel. The countries with the highest use of independent asset managers can be seen in the table overleaf. There were some movements in overall market share across the third-party distribution channels in 2016.Changes were primarily influenced by the retreat of mass retail investors, while institutional and sophisticated investors remained in play, albeit engaged in a lot of reallocation activity as opposed to committing new money.

▪ Retail Bank / Financial Adviser (NEGATIVE) –Pending Mifid-2-driven developments and the desire to generate revenues from more profitable savings products, retail banks maintained their trend of promoting fund solutions but shifted back to proprietary products. This, combined with a decline in IFA distribution power, contributed to a small drop in the Retail Bank/ IFA channel’s share.

▪ Advisory (NEGATIVE) – This channel includes private banks and wealth managers. The fall in market share was mainly driven by the imbalance of institutional to retail investors.

▪ Discretionary (POSITIVE) – Overall, the discretionary channel was the biggest beneficiary of the year’s dynamics. Again, the shift was skewed more by retail investors’ abstinence than any significant flows of new assets. At a country level, the most notable positive swings were in Switzerland, the UK and Germany. While it was a very poor year for fund sales in the UK, retail channels were a key reason behind the growth in discretionary market share, the increasing use of model portfolios and IFAs outsourcing investment advice providing new business.

▪ Fund of funds (POSITIVE) – It was a torrid year for fund of fund net sales, falling to less than 25% of their2015 level. Despite the dramatic fall, the funds of funds channel share of assets is estimated to have trended up by two percentage points. The channel captured market share on the back of last year’s sales and underlying asset performance. At an underlying market level, Spain, Austria and the Netherlands all increased their weightings to this distribution conduit. Although Spain suffered the biggest losses in net sales over the year, with banks preferring to promote in-house products, the channel still managed to increase its local market share of third-party assets

▪ Insurance (NEUTRAL) – The insurance channel’s share of assets is estimated to have remained relatively static. Last year’s insurance assets were skewed by the inclusion of payments from the Swedish Premium Pension system, which have been shifted into the institutional channel in this year’s calculation to better reflect their nature.

Opportunities in 2017

With markets expected to remain volatile in the months ahead, we are likely to see a similar pattern in 2017, the mass retail investor feeling more comfortable on the side lines, sitting on cash rather than investing in funds. Institutional and professional investors will continue to seek chances to generate performance. Channel level asset-allocation shifts will provide asset managers with a mix of opportunities and threats but predicting exactly what these will be with so many moving parts to consider is difficult. Will any third-party channels expand their reach in 2017? With markets so uncertain, we are currently refraining from any specific predictions of actual figures but there are clearly some markets and types of distributor that enjoy a better chance than others of doing so.


Regulation and pricing have dominated the drivers-of-change rankings over the last few years, but the underlying number of mentions by third-party fund selectors across Europe spiked upwards over the final quarter of 2016. Regulatory concerns were particularly prevalent among distributors in the markets yet to introduce a commission ban – most notably Italy, Germany and France. This was less of an issue for markets like the UK and the Netherlands where the evolution towards a commission-free advice market has been underway for some time. Inevitably, pricing received a lot of comments from respondents in these two markets as well as others. Over the fourth quarter, pricing also spiked up sharply in Switzerland as a cited driver of change. The continued media focus on the cost of investing combined with an expectation that passive use will rise across markets, together suggest that fund-manager fees will continue to be squeezed. Morningstar’s study of European fund expenses published in August 2016 highlighted both the downward pressure on asset management fees and the wide discrepancy in fee levels across the region.