The European Asset Management Industry: No Country for Small Managers

European asset managers should look to the east for growth opportunities, but may not have to go as far as Asia.  The arrival of a pan-European “passport” for investment has started a scramble by money managers in western Europe to stake out a claim in new markets, particularly the eastern ones.  Eastern European markets beckon strongly because of an explosive growth in investment assets there. In the past 3 years, the assets under management in Bulgaria and Romania have increased by close to 25%, and in the Czech Republic by over 20% . Adding to the appeal, the local asset management firms in these countries are much less sophisticated than their western counterparts, making it easier for the westerners to stake their claims.

There are drawbacks, of course. Despite the European Union’s efforts to harmonize markets in the region, many local specificities and market practices remain (taxation, local consumer protection regulations, etc.). These discrepancies will make it difficult to roll out products smoothly across Europe, as they are time-consuming and demand a significant initial investment and an ongoing annual cost to operate in each EU member state. Opimas estimates that an asset manager’s cost to deal with these obstacles and distribute a fund across the 27 European markets would be close to €3 million upfront; the annual cost would be about €1.5 million.

 The reality is that the pan-European “distribution” passport -- authorized by regulators in the Alternative Investment Fund Managers Directive and the fifth of the Undertakings for Collective Investment in Transferable Securities -- is likely to drive more concentration of European assets within the leading Tier I management firms. They have the resources, and have already implemented pan-European distribution strategies. Now, they will be relieved of the obligation to register in each European market. Another impediment for smaller firms is the restriction on paying commissions to distributors of their funds, imposed by another rule, the second Markets Infrastructure Financial Instruments Directive. That will reduce the role of so-called independent financial advisors as fund distributors, and could strengthen the hands of large banks and insurance companies that sell their own investment products to “captive” retail clients. Obviously alternatives are emerging to pursue investors in new markets, and we expect innovative fund platforms to gain momentum in the mid-term once their creators refine their business models and adapt their offerings to deliver customised advice, packaged investment solutions, and complementary products to investors.

For numerous small Tier III asset managers the changing climate might be fatal. In increasingly competitive markets, those who will survive are the ones that will focus on their core expertise (e.g. providing liquidity in specific types of investments), or move into niche markets (e.g., socially responsible investing). Alternatively, they might shift their business model and become service providers (e.g., developing an advisory service, focusing on distribution in certain niche markets) to the titans and other players.

Opimas expects that in the next few years the European asset management industry will be even more centered on western countries than it is currently. Comparing the maturity of fund managers in the core European markets with their counterparts in developing European economies, we see little doubt that Tier I asset managers operating in western Europe will syphon away business from their smaller eastern European competitors.  Already entrenched, they have what is known as the “absolute advantage of production.”

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