Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

Today, there are uncertainties with regards to the future of open or guided architecture if the regulators further strengthen controls and disclosure requirements, in which case distributors may want to concentrate selling efforts only toward those products that they can be held re- sponsible for. Nevertheless, open and guided architecture’s future will be more and more linked to cross-border distribution of funds: Most European asset managers expect an increase in the penetration rate for both new models as they represent an easy way of penetrating new mar- kets, especially for those asset managers that enjoy a strong, reputable brand. Open and guided architecture models may result from a wave of merger & acquisition activ- ity in the asset management sector. Further to the financial crisis and the widespread lack of liquidity of the banking sector, many European banks hurriedly put their fund management units on the market. Given the insufficient capital available in the financial industry as a whole, not many deals actually took place, but those that did, according to a 2010 Ignites Europe survey, were priced very low, most probably, too low, and will in all likelihood be regretted by sellers 10 . When commenting on survey results, a Morgan Stanley analyst reported that “as parent banks grapple with the challenge of open architecture as investors seek best-of-breed capabilities, and in view of conflicting demand for group funding which has damaged mutual fund fran- chises in Southern Europe, we see pressures on captives likely driving additional scale deals – similar to Amundi – as banks look to rationalise costs for lower growth businesses” 10 . Furthermore, on the positive side, open architecture can potentially lead to an increase in fund performance, as fund managers can focus purely on their core business, i.e. managing assets, while being exposed to a potentially higher number of investors. However, on the negative side, distribution through a third-party sales force means, for a lot of fund manufacturers, loosing the ownership of client relation, potential revenues (distribution and trailer fees), direct contact with their clients and therefore possibly client loyalty as a whole. Recent experience shows that this can lead to rapid losses for those asset managers that cannot beat the markets and whose client-base, gained through an external sales network, is not particularly attached to them; This also applies to those that have been chosen for the presence in their teams of “star managers” and that see clients follow those “stars” when they move to another fund house or set up on their own. Furthermore, in case of non-integrated distribution models, the recent crisis has created a need for extra reporting efforts to distributors and investors. Notwithstanding these issues, both open and guided architecture represent a great opportunity for foreign asset managers to gain market share over local players in European and interna- tional markets. For this reason, while national open architecture development seems to remain steady , third-party distribution of funds is strengthening, as shown by the two following graphs.

1.1

Open and guided architecture’s future will be more and more linked to cross-border distribution of funds.

10 Source: Ignites Europe “Banks too quick to sell fund ops: survey” by David Ricketts, 08/11/2010

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