Time to face up to some home truths

At last, some of Europe’s most prominent manufacturers and distributors of mutual funds are beginning to seriously talk about the future of their flagging industry. A recent sit-down, at which bosses of Invesco, Schroders and the Allfunds distribution platform put their heads together to try and get themselves and their compatriots out of the current swamp, was a good start. Latest figure from the European Fund and Asset Management Association, show E142bn net outflows from cross-border Ucits funds – which have been desperately marketed by both industry bodies and fund houses – in the final quarter of 2008 and E335bn for the year. What is most shocking is the lack of faith European mass affluent and high net worth investors are showing in their investment industry. Asian and US asset houses have not been so badly hit on their home turf. “Bearing in mind that the US industry is twice the size of Europe, something is going on here which is more than just a downturn,” believes Diana Mackay, CEO of consultancy Lipper FMI. She speaks euphemistically about “some structural imperfections in the value chain”, running from manufacturers, through distributors to clients. What she really means is the client is seldom the key consideration. “We offer a lot of the time what the distributor tells us the market will need at a particular point in time, not necessarily what we think is the right product,” said Massimo Tosato, vice chairman of Schroders. This concentration on what can be easily sold rather than what savers actually need is further accentuated by a lack of work among distributors and private banks on asset allocation. Products, not investment strategies, have been at the centre of the business model and clients have been slipped into one of a handful of prefabricated allocations, rather than each being treated differently. Speak to investment bankers, and they will explain to you exactly how things work. When the capital market product mob descends on a pension fund, they are talking about asset allocations, and how to match liabilities and achieve investment objectives. When the same gang visits a private bank in Zurich or Geneva, they describe the most fashionable theme, the purest payoffs, the dandiest underlyings. Private banks must start thinking seriously about which assets their clients need to be in, and which percentage to give to bonds, equities and alternatives, with further risk-related breakdowns. If they can not do this themselves, then the asset managers and investment banks certainly have the capacity to help them, providing the Swiss bankers are prepared to share information.