by Fiona Maciver
Distributors and manufacturers alike continue to grapple with challenges on many fronts in this period of rapid industry transformation. Regulation and pricing still feature heavily in fund buyers’ thoughts on the key drivers of change in their line of business. Despite all this upheaval, European selectors have an appetite to add new talent to their buy lists, and, this month, Fund Radar lifts the lid on the companies most likely to benefit from these opportunities.
DRIVERS OF INDUSTRY CHANGE
It’s six months since we last looked at what’s occupying distributors’ thoughts on the main drivers of change in the fund industry. On the final straight of Mifid 2’s implementation, some significant swings in distributors’ views on the relative importance of certain drivers are apparent, as well as some local-market variances. The chart on this page shows the current top-five concerns.
During Q1, there was a spike in responses highlighting the active/passive dynamic and the architecture of the fund industry as important drivers, with the volume of mentions stabilising in Q2. Selector comments on industry architecture reveal that many anticipate a decline in open architecture as the ripples of regulatory developments increase the cost of doing business and force changes to some distributors’ revenue models. For third-party asset managers, this will make asset gathering via certain channels more difficult, and intensify competition, with fewer places available at the top table. Alongside product-suitability requirements for retail clients, the combined impact looks set to equate to less choice for mainstream investors. The second quarter delivered a fall in the relative importance of pricing and costs. Except for the UK, all local markets placed less emphasis on this driver. But this dip should not be over-analysed; the cost of investing is, and will remain, a hot topic. While attitudes towards pricing are being shaped by Mifid 2, increased transparency is putting the whole value chain under scrutiny from consumers, the media and national regulators. The UK is a good example, where the local regulator, the FCA, continues to put pressure on the asset-management industry to improve transparency and pricing policies. As we reported last month, in the Regulatory overview chapter, the FCA’s recently published report on UK competition painted a disdainful view of the industry’s pricing policies and value for money. Splitting the data by market, pricing is the number-one perceived driver of change in the UK, alongside concerns over what Brexit will mean for the country’s fund industry.
Inevitably, the focus on price has intensified the activevs-passive debate, too. While this factor has remained in fourth position as a key driver of change, the impact is being felt across the industry, manifesting itself in a rapid increase in passive sales and market share in recent years. Some active managers have responded with a more flexible approach to fees that includes limited-period price cuts, a sliding scale of fees based on fund size, or the removal or addition of performance fees (see the Product strategy chapter for more examples). The latest Product Innovation Perspectives report from MackayWilliams includes a more in-depth look at European fund selectors’ pricing needs and expectations. Whether an active, passive or hybrid specialist, all asset managers have to demonstrate value for money these days – a point that is well made by this Dutch discretionary portfolio manager to Fund Buyer Focus (FBF):
‘A key question will be whether passive funds will continue to outperform active funds in value-for-money terms. Cost pressures, meanwhile, will be a major driver of change in that they will force the pace of consolidation in the industry. That may lead to some innovation, too, but it is unlikely to be of a kind that is very useful for the client in the end. Overall, providers need to lower their product charges or, at least, provide product performance that justifies the product cost – something that many providers have yet to manage to do.’
Only the most mentioned drivers of change have been explored here but there are of course macro issues and disruptors underpinning many of the views on what is shaping the industry. The role of technology and digital disruption is one such theme. This will be covered in more depth in a future issue of Fund Radar but some of its challenges are encapsulated in the following comment from a French fund-of-funds manager: ‘Fee competition will very much influence the market. We are still based on an old model and this fee competition will be heightened by robo-advisors and digital approaches.’