RETHINKING DISTRIBUTION

Increased competition from SUBSTITUTE products

mutual funds which are pre-dominantly open ended and offer a regular revenue stream for asset managers and distributors over the holding period by the customer. Looking forward: Towhat extentwouldthe asset management industry be able to compete with substitute products? Investment funds protect investors through strict investment and diversification rules, efficient supervision of both the fund and themanagement company, the separation of management company and safekeeping of the assets. The European Commission aims to create a robust and coherent framework for PRIPs which will provide for consistent and effective investor protection and a level-playing field for distributors and originators. However, it is still uncertain how investment funds will be able to gainmarket share by competing in terms of product efficiency (e.g. capital protection, cost and tax efficiency…).

Financial innovation and the broader range of financial products is constantly giving investors alternative means to achieve their financial goals. In the past, money market funds substituted for bank deposits and equity funds substituted for direct holdings of equities. More recently structured products, notes and certificates intended for different investors have become close substitutes for investment funds. The threat for the fund industry is all the more important when the cost to switch to structured products and the perceived level of product differentiation are both very low. In addition, current regulation is creating distortions allowing for product and distribution channel arbitrage. Whilemost of the substitute savings products cannot deliver the same level of investor protection, as shown during the recent financial crisis, substitute products have proved tobe efficient from an investor point of view. Substitute products allow for a broad range of asset classes and investment strategies and can as well be developed and brought to themarket faster to satisfy newmarket developments and new trends. Substitute products developed by the insurance industry are often marketed with a focus on “tax optimisation”(e.g. investment life-insurance contracts). Substitute products not only provide investors with fast and targeted solutions but can also prove advantageous to distributors and issuers. With regulators demanding higher capital requirements, banking and insurance distributors are shifting their product focus tominimise the need for additional capital. In doing so, they might prefer to sell cash deposits (vs. money market funds). This could be a more difficult arbitrage going forward. Moreover, structured products are attractive to issuers and distributors who look for both quick revenue streams and churn in customer portfolio. Such products have high upfront fees and set maturities in contrast to

Figure 11

Comparative growth of funds, by investment strategies

2009 (% net sales/AuM)

2010 (% net sales/AuM)

Traditional strategies

Bond

+7.9%

+9.6%

+6.7%

+4.0%

Equity

+7.3%

+11.7%

Mixed

-3.8%

-10.2%

MM

Absolute returns ETFs

Alpha strategies

+11.9%

+19.4%

+20.2%

+15.3%

Beta strategies

Source : PwC Analysis based on Lipper FMI figures

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