Distribution dilemmas

19 February 2019
By Tiziano Giannotti

By Fiona Maciver

Except for the first quarter, 2018 was a challenging year for fund sales after the record-breaking results of 2017. Political and economic storm clouds shook investor sentiment, with downbeat feelings gath¬ering momentum in the second half of the year. While this negativity had a detrimental impact on net sales, there were minimal changes to the market share of distribution channels at the local and cross-border level, though advisory channels appeared to lose the most ground.

Third-party channel analysis

Broadridge’s distribution lens focuses on third-¬party opportunities, stripping out captive business. Differing distribution dynamics mean that third-party opportunities vary from market to market. For example, the UK is amongs the highest users of third-party funds whereas Austria is one of the lowest.

The first pie chart overleaf visualises Broadridge’s esti¬mates of captive and third-party distribution opportuni¬ties at pan-European level. With such volumes of assets, there is little change year on year. Equally, the distribu¬tion of assets by channel (the second pie chart), remains relatively static but the data highlight some noteworthy underlying trends, particularly in retail distribution. For example, advice-based business models – and particu¬larly IFAs – have come under increasing pressure post¬Mifid 2 and are starting to contract in some markets in favour of discretionary models. In recent years the Italian market has seen a big shift from fund-of-funds wrappers in favour of unit-linked products. Meanwhile in Spain, fund-of-funds sales have flourished, albeit at a slower pace than in 2017, as the banks have continued to favour this route for their captive clients. All of these factors demonstrate the diversity of local markets and the need for fund manufacturers to build their knowl¬edge to understand and adapt to distribution nuances.

DRIVERS OF INDUSTRY CHANGE

With Mifid 2 finally implemented in January 2018, it was no surprise to see the number of interviewed fund selec¬tors mentioning regulation as a key driver of industry change dipping, particularly in the second half of the year after reaching a peak in the latter half of 2017. While pricing and costs have been a feature of the top-three drivers of industry change for some time, the ripple effect of increased transparency and competitive pressures from passives propelled this driver to take cen¬tre stage across several local markets. Austria, Belgium/ Luxembourg and Italy delivered the highest number of mentions from respondents. With the latter one of the most expensive and, until now, least transparent mar¬kets, the local industry is clearly nervous of ex-post cost disclosure reports hitting investors’ doormats soon. Meanwhile, German intermediaries showed a notable divergence, the number mentioning regulation and pricing both dropping sharply over the last six months. Drivers of change receiving an increase in mentions from this cohort include new sectors and themes, and the political and social climate (which saw a particularly pronounced uptick), with associated comments touch¬ing on geopolitics and sustainability.

DISTRIBUTION OUTLOOK

With headwinds including market volatility, political uncertainty in Europe and beyond, and no end in sight to pricing pressures, 2019 will likely be another chal¬lenging year for fund manufacturers and distributors to maintain or attract retail investors into long-term funds. Monetary policy could provide an additional obstacle – if interest rates rise, cash returns may lure European investors back to more comfortable waters. But the year will not be entirely bereft of opportunities, we expect to see more pure advisory busi¬ness models to morph into discretionary ones as they seek to capture fees in post-Mifid-2 portfolios. Hand in hand with this, we anticipate the increased use of model portfolios and sub-advisory mandates.