Changing with the times

There is no doubt that the European fund industry has seen better days. Compared to the past, what is new in this current crisis, according to the European Fund and Asset Management Association (EFAMA), is that both equity-linked and bond funds have experienced large outflows. Across the continent, the two asset classes both suffered net redemptions for around E60bn each in 2007, and outflows have increased even further in the first quarter of 2008.

Investors have moved to guaranteed and balanced funds, also at the expenses of the money market funds, generating a quite significant shift in the mix of assets sales, said Peter De Proft, director general of EFAMA, speaking at a recent FT conference on Business Excellence in Fund Management in Frankfurt. Bank deposits, offering more appealing and safe returns, as well as structured products have attracted huge money flows.

Mr De Proft reminded the audience that the excessively sales target driven asset management industry is, in reality, a client centric business and talked of the necessity to develop innovative client oriented solutions.

Diana Mackay, chief executive officer at research company Lipper Feri, said that in January alone there were equity fund redemptions of E56bn across the whole of Europe. “In 1999 and in 2000, at the top of the bubble, there were about E500bn of equity inflows in Europe. I suspect there is more of that dot com bubble money still to come out.” On the other hand Ms Mackay estimates that investors have come out of funds and moved into deposits having profit taken and broken even, and not because they have actually lost money. “This means that there is potentially a whole of money to come back at some point in time,” she said. Addressing the banks’ need for liquidity on their balance sheets, she said: “That point in time is likely to be when the big debt bank distributors no longer need their clients in cash, but they’d rather have their clients in more profitable products.

“Whether those products prove to be structured notes, certificates or mutual funds, there is a question mark there,” added Ms Mackay.

Indeed, asset managers in Europe are adapting and reacting to current uncertain market conditions by launching new funds, planning new products and promoting those in their product range that are able to compete with the safe-heaven deposits.

‘We are using all the strategies to compete alongside attractive deposit accounts’ - Elizabeth Corley, Allianz

“We are using all the strategies the fund industry should employ to compete alongside attractive deposit accounts,” says Elizabeth Corley, chief executive officer Europe at Allianz Global Investors. “High quality equity and bonds, pure defensive strategies and protection wrapped around existing products, we are doing them all,” she states.

Ms Corley says that beneath the surface of those large net redemptions, there are still flows into equity funds offering sustained long term investment quality. This is generating high turnover and changes of market shares in the equity arena.

Ms Corley claims that their high Standards and Poors rated funds such as the Allianz RCM Europe growth oriented equity fund or Allianz RCM US equity fund are gaining market shares against trend and attracting increased assets.

This ties in with Lipper Feri’s analysis, which identifies a clear trend of increasing gross sales year by year, despite net redemptions. “Distributors are turning portfolios around for profitable gain and they are trading funds as fund managers would trade underlying securities,” says Ms Mackay adding that “this is not necessarily good for investors.”

European equity

The most successful sector as far as gross sales are concerned is European equity, which is also the sector that is suffering the steepest redemptions. “I think we are dealing with a very professional distribution structure. They are working to their own performance targets. They will be moving very quickly from a fund that performs well into a fund that is performing a bit better,” says Ms Mackay.

Confirming the trend, Borja Largo, investment consulting director at Allfunds Bank, the third party funds distributor owned jointly by Abbey’s parent Banco Santander and Italy’s Intesa Sanpaolo, says that last year the fund trading activity of the bank reached a volume of E250bn, over 6 times the E40bn of the bank’s total assets under management.

The launch of new funds telling new stories, such as the one on the infrastructure theme for which Allfunds is experiencing demand from distributors, is contributing to the high fund turnover, says Mr Largo. The possibility to monitor daily Net Asset Value (NAV) also encourages investors to take rapid decisions.

“When you see a fund losing 10 per cent in one day, as we have seen recently, it is very difficult for an investor to remain invested in that fund.” But this high turnover is going against the spirit of funds, he says.

Investors’ fear of the fixed income and equity markets, combined with product innovation, especially in the alternative world, and the area of 130/30 funds and market neutral Ucits III funds, is generating gross and net sales, says Nick Phillips, head of third-party distribution in Europe at Goldman Sachs Asset Management (GSAM).

On the other hand, he says, the more “tangible products”, such as the infrastructure or water theme funds, may have contributed to the equity turnover because private clients can relate to these types of products more easily.

Also advisers are able to explain these new instruments more straightforwardly than traditional equity products, he says.

Nevertheless, if distributors demand new products, of course more fund launches will follow.

Ms Corley at Allianz confirms that their private banking clients have been asking for some time now for quite narrow equity themes, and their Bric fund and their Eco trends fund have benefited from this demand. AGI recently launched an agricultural trend fund, which is also raising assets, she says.

‘We haven’t developed products in which we had no prior experience, because we think this is no time to test new waters’ - Cirus Andreu, Banco Sabadell

It is important to launch those funds in which there is a long term sustainable interest and not only those that are currently fashionable. “We don’t launch hot funds, we always launch funds where we think there is a long term investment story that is of relevance to advisers,” states Ms Corley.

Quantitative, defensive products were some of the best sellers last year at AGI, especially in markets like Germany, Italy and Spain where traditional investors risk aversion has even deepened in market turmoil. New fund launches in this area also doing well, according to Ms Corley. The Allianz RCM defensive strategy launched at the beginning of March has gathered E125m in just once month.

Current volatile market conditions have not affected AIG’s strategy towards running the fund base, says Ms Corley. “We have around 300 products in Germany and internationally and we have a constant programme of reviewing old funds and monitoring which ones work and which ones do not and close them. But that’s something we have been doing for years and years.”

Client relationship changing

What has changed recently is the contact they have with their clients, which has intensified in the recent months. “We have probably had higher contact with clients, listening to what they want, in the past 6 months than we have ever had before. Clients are shifting into quality bonds and equities, where they need alpha they are shifting into thematic equities and some of them need protective products. So we have been adapting the support we give them in all those three areas. But I would say that there’s been no strategic shift of direction because of this.”

In Spain, where all players acknowledge a market in crisis, Banco Sabadell is responding to the dire situation by launching new products, although other Spanish asset managers seem to favour a general wait and see approach.

In the risk-averse Spanish fund industry, in the eight months to February 2008 there have been net redemptions for E30bn, mainly coming from conservative money market and domestic funds, in favour of bank deposits, which now represent almost 40 per cent of Spanish investors’ savings.

Banco Sabadell has recently expanded its product range in the area of funds of hedge funds, leveraging on the opportunities offered by the recent legal framework in this alternative space. It has also developed real estate private equity instruments, which should benefit of the combination of new stagnating residential real estate market and the current deleveraging exercise of the domestic building industry, according to Cirus Andreu, chief investment officer at E27bn Banco Sabadell.

We want to offer new investment alternatives that could be now very suitable to our mass affluent customer base, says Mr Andreu. These new products have already been used in their private banking segment. “We haven’t developed products in which we had no prior experience, because we think this is no time to test new waters,” he says.

He admits, though, that these investment opportunities will need time to mature.

“Funds in Spain have been, until now, very liquid instruments for the investors so we have to educate our advisors and clients on the sense of these investment products.”

At the same time, says Mr Andreu, their product development process has also invested in the area of fixed income, which is expected to become more appealing in the near future.

Return to normality

“Favourable times for bank deposits will not last long,” he predicts, estimating that the credit turmoil will probably come down in the second half of this year, when all banks will have fully acknowledged their losses.

“After that, the normal level of activities in the non government debt securities markets should start getting back to normal and fixed income products should become more appealing, in relative terms, to investors.”

‘When you see a fund losing 10 per cent in one day, as we have seen recently, it is very difficult for an investor to remain invested in that fund’ - Borja Largo, Allfunds Bank

Mr Andreu states that for the first time since September last year, February was a positive month for the bank in terms of inflows, which have gone mainly into both less risky products and their new funds of hedge funds and real estate vehicles.

Swedbank Robur, the asset management arm of Sweden’s Swedbank, is also adopting a similar strategy to stem slowdown in funds sales hitting the Nordic country.

Mats Lagerqvist, chief executive officer at Robur says that they are broadening their product range to ensure that they can meet all their customers’ needs. The polarisation between investors wanting to invest in high risk equity funds or in low risk or guaranteed products, shunning the plain vanilla ones, has reflected in the types of products that the E70bn Swedish firm has launched recently.

These include an Africa fund, which Mr Lagerqvist claims to be the first of its type offered by a large player in Sweden as well as a family of index funds (Europe, Usa, Asia and Sweden) and a fund, called Performa, whose fee depends on the absolute performance achieved. The Swedish fund house has also recently launched a fund called Tomorrow Equity fund. The investment focus is mainly on sectors and companies that, through their products or services, offer solutions for sustainable use of natural resources, of reduction of pollution or for improved social welfare, Mr Lagerqvist explains.

“Despite all this financial turmoil, we have all reasons to be rather optimistic,” says Mr De Proft at EFAMA. Of all 34,000 funds which are distributed through the association’s members, only 6 funds have been closed permanently and 8 have been suspended and all of them are institutional funds, he says. Net sales of Ucits funds fell from about E450bn in 2006 to around E170bn in 2007.

Nevertheless, total funds assets growth remains positive, he adds.