It’s no secret that the asset management industry is going through a period of upheaval, as changing investor preferences, regulatory pressure, and industry consolidation promise to reshape the landscape. In the face of this tumult, what will the European fund industry look like at the end of the decade and what do asset managers need to do to adjust and succeed?
To help answer these questions we partnered with Funds Europe on a survey of the European asset management industry to see how these trends may alter the industry landscape and what emerged were five clear takeaways.
1. The Future is Green
More than half of the respondents believe that having an Environmental, Social, and Governance (ESG) platform is critical to asset managers’ success this decade. Given the near ubiquity of ESG in recent years, this is hardly surprising. However, it’s worth thinking about what ESG may mean at the end of the decade. As policymakers and investors continue to push asset managers to provide more transparency and focus on ESG criteria, regardless of the fund’s investment strategy, it is likely that ESG will become even more mainstream. This raises the possibility that by the end of the decade all managers will be ESG managers to some degree.
2. Luxembourg and Ireland Lead the Way
Luxembourg and Ireland, the two leading cross-border domiciles, are overwhelming expected to maintain their dominance over the next decade. Coupled with the fact that over 70% of the respondents saying they are unlikely to launch UK-domiciled products as a result of Brexit, this indicates that the industry is not anticipating any Brexit-related challenge to Undertakings for Collective Investment in Transferable Securities (UCITS) position as the preeminent cross-border vehicle. Not having to create a UK-specific strategy fund will help firms to continue to benefit from the scale of using UCITS funds as their primary European fund vehicle.
3. UCITS Faces Challenges
Despite having weathered the Brexit storm, there are challenges on the horizon for UCITS this decade. Increased regulatory and anti-money laundering burden and limitations on investment strategies were cited as the key challenges for UCITS. While a rollback of regulations doesn’t seem to be in the cards, it’s possible the that policymakers could revisit the UCITS eligible investments rules. If not, firms will have to launch more non-UCITS funds to compensate for the investment limitations of UCITS. This may lead to more firms launching funds under the Alternative Investment Fund Managers Directive (AIFMD) framework or, alternatively, using more local funds structures. The push into more exotic investment strategies is likely to continue. So, the question is will AIFMD fulfil its promise and become a brand similar to UCITS or will it result in managers bypassing Europe for local fund domiciles.
4. Distribution Disruption is Coming
Despite efforts to improve the cross-border distribution in Europe, it remains a fragmented and complex process – which is ripe for disruption. Fund platforms and advisors were identified as the two parts of the distribution ecosystem that are most susceptible to disruption this decade. There is a certain irony in this because it wasn’t too long ago that fund platforms were seen as the disruptors, not the disrupted. Nonetheless, it demonstrates how quickly things can change. The rise of digital and FinTech enabled distribution channels present an opportunity to disintermediate portions of the EU distribution ecosystem and more directly deliver products to investors, which could aid in lowering the cost associated with distribution.
5. Consolidation Will Continue
Consolidation has been one of the biggest trends in asset management in recent years and it looks set to continue in the decade ahead, with all of the respondents expecting consolidation to stay at the same pace or increase over the next decade. The two main drivers identified for consolidation are gaining scale and cost reduction, which means the focus will be on operations to deliver on the promise of consolidation. Hidden operational costs can derail a merger and often are blamed for larger strategic setbacks. Firms should use consolidation as an opportunity to reimagine their operations and create a model that can support the business going forward because the pressure on asset management seems unlikely to abate any time soon.
Despite the inherent uncertainty in trying to predict the future, the one thing we know for certain is that the European fund landscape will continue to evolve. This evolution will present both opportunities and challenges for managers. Understanding what the trends are can help firms think about their strategy and better prepare them for any unexpected bumps in the road.
Please visit Citi Securities Services Insights to download the full The Changing European Fund Landscape report.
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