Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

CONTEXT

1.

1.1

UCITS fund distribution channels and business models

1.1

1.1.1

Evolution of fund distribution channels 1 in Europe and current trends

Years ago, the fund management industry was a fully integrated value chain, with the majority of players covering both the manufacturing side (fund management) and the sell side (fund distribution). In most major markets a handful of big names, large international fund houses and local companies, often part of larger banking groups, dominated the marketplace and shared the high revenues of this money-spinning market. However, more than fifteen years ago, market experts predicted that the days when distribu- tion of investment funds in Europe was the preserve of banks and financial institutions may be drawing to an end, as investors would switch to buying fund products at “the supermarket, the petrol station or through the internet” 2 . Clearly, already back then the traditional distribution model was seen as outdated and in need of a rebirth. Some experts went as far as stating that “It wouldn’t surprise if Microsoft became the best partner for asset managers or Walt Disney where you could invest through an ‘investortainment’ channel” 2 . It was the time when the well- known expression “third-party funds” started to be replaced or accompanied by the newly coined “open architecture”. Indeed, much has changed over the following decade, and there are examples of direct sell- ing and fund platforms’ success stories. Yet, these still remain few and far between and the much-announced widespread success is yet to come: Today, the main distribution channels remain retail and private banks, Independent Financial Advisors (IFAs) and insurance wrap- pers, followed by fund platforms and direct selling. Graph 1 displays the weight of the banking distribution channel in Europe over time.

Captive distribution channel: This business model allows clients to choose only from the in-house fund range. Open architecture: This business model allows clients to choose from an extensive range of funds, manufactured by competing asset management groups. Guided open architecture or Guided architecture: This business model allows clients to choose from in-house funds as well as a complementary selection of external funds from a limited number of partners.

Graph 1: Weight of the banking distribution channel in Europe over time (including fund of funds 3 )

100%

80%

60%

90

80

40%

75

75

20%

0% 1995 weight of the banking distribution channel (%) Source: CACEIS analysis on Lipper FMI, data as reported by ZEW/OEE and Oxera, 2011 2000 2005 2009

1 Excluding funds distributed via stock exchanges (e.g. German, Luxembourg or Dutch markets) 2 Source: Reuters Limited, “Euro funds look beyond traditional distributors” by Andrew Priest, 2 July 1998 3 Note on the data used: The funds of funds channel is considered as a subset of the banking channel

Cross-border distribution of UCITS | page 7