Fund demand reveals jobs to die for in 2004

So far, this has been a year of stabilisation in the European funds industry after a brutal 12 months in which assets under management declined, distributors retreated from open architecture and virtually everyone cut their headcount. But 2004 could be a great year for people who are working in certain areas.

In 2002/3, it was possible to earn a sizeable reward, even if it was only due to the gratitude of senior management, as a sales/marketing executive in the European funds industry. People promoting hedge funds in Switzerland, passive investment in the Netherlands or cash/money market funds in Italy, for instance, enjoyed growing demand for their products.

Six months on from March, when sentiment was generally gloomy, it appears that 2003 will be a year of stabilisation. Anecdotal evidence suggests that fund companies are increasing their headcount once more. So, what are the jobs to go for in 2004?

Opportunity 1: hedge funds in the UK

As noted previously in PWM, 2002/3 was the year in which hedge funds came of age in Europe. For many investors, they became an important and mainstream asset class. Hedge funds accounted for 2 per cent of all third-party fund assets in Europe in early 2002 and 7 per cent a year later.

However, as Chart 1 shows, the rise of hedge funds was not even. At one extreme, hedge funds in the Netherlands rose from virtually nothing to 18 per cent of third-party fund assets. In Switzerland, which had already developed as a major market for hedge funds in early 2002, they rose to 17 per cent of third-party funds. By contrast, demand was minimal in Germany, where there were legal restrictions on their use, as it was in Italy.

The chart also highlights the underdevelopment of the UK as a hedge fund market. In 2002/3, hedge funds grew from just 1 per cent of third-party fund assets to 2 per cent. Given that interest in hedge funds is helped by greater investor understanding, and that London is a leading centre for hedge fund managers, it is highly likely that demand will soar. Executives responsible for selling hedge funds in the UK should do well in 2004.

Opportunity 2: ETFs and index funds in Germany

Exchange-traded funds (ETFs) and other passively invested funds became vastly more important in Italy and the Netherlands during 2002/3, as chart 2 shows. Across Europe as a whole, ETFs and index funds grew from 15 to 23 per cent of third-party fund assets. Like hedge funds, ETFs and index funds have become part of the investment mainstream.

Something else that ETFs and index funds have in common with hedge funds is that most fund distributors cannot supply them themselves. Profitable manufacture of ETFs and index funds requires investment in specialist systems and huge scale. People trying to sell conventional funds to distributors often face competition from the distributors’ own in-house funds. People trying to sell ETFs and index funds almost never do.

All this begs the question of which is the large national market in which demand for ETFs and index funds could grow the most in 2004? The chart shows two possible answers. Passive investment grew in Switzerland during 2003/4, but is still far less well established than in Europe as a whole. For executives responsible for selling ETFs and index funds, Germany looks like more interesting territory.

Opportunity 3: national sales manager in Italy

In our surveys of Europe’s fund markets, one measure looked at is the third-party fund penetration ratio. This shows the demand for third-party funds as a percentage of demand for all funds, including distributors’ own in-house funds. The higher the ratio, the greater the importance of third-party funds. The ratio is a useful measure of distributors’ acceptance of open architecture.

Chart 3 illustrates the retreat from open architecture that took place across Europe. Third-party funds slipped from 14 per cent of the total funds market in early 2002 to 12 per cent a year later. The fall was more precipitous in Germany. Italy, however, stands out as the one major market in which open architecture became more entrenched.

A similar picture would have emerged if we had looked at absolute demand for third-party funds or the percentage of total investment assets that are committed to third-party funds. Italy is unusual in that local distributors are less willing and/or less able to provide suitable funds themselves than are their counterparts elsewhere.

We estimate that 38 per cent of Italian third-party fund assets were in cash/ money market instruments in early 2003. There is a potential bonanza next year for the national sales manager who can give Italy’s investors and distributors what they want.

Opportunity 4: retail marketing in Spain

Chart 3 shows how there was a very pronounced move away from open architecture in Spain. Third-party funds accounted for 21 per cent of all fund assets in 2002, but only 8 per cent a year later. This was because the major banks, which dominate fund distribution there, decided to promote their own, in-house, funds rather than those of other suppliers.

Chart 4 shows another significant feature of Spain’s funds market. Individual investors are far more important than they are in any other country bar Italy. Across Europe as a whole, 52 per cent of investment assets are sourced from individual clients and 38 per cent from corporate/institutional clients. In Spain, the corresponding figures are 73 per cent and 18 per cent. In both cases, the balance is accounted for by internally-sourced assets.

In other words, the senior executives of Spanish banks responsible for sales and marketing to individual investors – the retail market – are in a powerful position.

Last year’s retreat from open architecture suggests this is unlikely to change anytime soon. The recovery in global stock markets that has taken place since the end of March this year means retail marketing executives in Spain are even more influential now than they were then.

Andrew Hutchings is research director at Sector Analysis