Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

Only a handful of firms study and analyse the evolution of distribution patterns, as it is a hard task to achieve given the European distribution structure, unclear to most and often opaque to scrutiny. Over the last three years, the financial crisis boosted change in fund distribution trends and the respectiveweight of each channel in different European countries. Before the crisis hit the fund sector so strongly, trends became clear only over a time-span of a few years. However, during 2008, at the peak of the crisis, when redemptions reached very worrying levels for the indus- try as a whole, each distribution channel tended to retain clients using any available means. Banks, the largest channel by far in Continental Europe, with a total share of 75% of European fund distribution (including retail and private banks 4 ), had the biggest client retention power by being able to shift investors’ savings from funds to bank deposits; And they did this even more after retail clients were reassured by several Continental European governments confirming that bank saving accounts would be state-protected in case of bank default. Such trends will be analysed in more depth in order to avoid making misleading conclusions on the dynamics of investment funds sales to the retail sector. Further to the fund industry revival in 2009, the distribution mix followed a slightly different path than during the pre-crisis years. However, the predominance of banks among all distribution channels still remains to be beaten. European fund management houses for the most part still have their own workforce selling only in-house products and, in several Continental European markets, this old-style integrated distribution model still represents the vast majority of total distribution. For example, the Econo- mist claimed back in 2008 that in Italy 92% of assets were “gathered directly by salesmen tied to, or employed by, the fund management group” 5 . According to Lipper FMI data as reported for 2007 and 2010, a certain reshuffle in distribution did take place, but not so much in favour of independent distribution, with Italian IFAs even loosing ground over the last 4 years (-4%). Already back in 2008, “fears were mounting that the open-architecture distribution model would disappear and become a victim of ongoing banking consolidation” 6 . Today, it is still true that open architecture’s success depends on growing markets, when money pours into funds. On the contrary, in times when the fund market is dominated by redemptions, instability rocks the financial landscape and confidence is lost, banks do not need to make the effort of offering more and more diversified ranges and focus on selling at least in-house products. Furthermore, the recent insatiable investor appetite for transparency, coupled with regulators shifting to- ward a tougher disclosure on products, may slow down the path to a real open architecture, as distributors do not want to be held responsible for third-party products that they are not able to fully control.

Over the last three years, the financial crisis boosted change in fund distribution trends and the respective weight of each channel in different European countries.

4 According to Lipper FMI, not only private banks and retail banks should be included in the banking distribution channel, but also the fund of fund sector, excluding a minimal part, and the institutional/corporate sales. In this case, the total Euro- pean estimated distribution market share of the banking sector would reach 72.8% 5 Source: The Economist, “We make, you sell”, 1 March 2008 6 Source: Ignites Europe, FT,“Open-architecture threatened by banking collapse” by Baptiste Aboulian, 9 October 2008

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