1

The Advanced Program in Accounting and Auditing Regulation

Recent Developments in European Fund Markets

Dr. Uwe Eiteljoerge

6 June 2006

2

Structure of presentation:

1. Overview of the EU asset management business

2. Key trends in European fund markets:– Fund administration– Management– Distribution

3. EU policy framework

4. Factors to building a successful fund business

3

Birds-eye view of asset management:

• Collective (private) investments:– Retail investment funds (UCITS: undertakings for

collective investment in transferable securities) – Other collective investments (real estate, hedge funds,

institutional funds)

• Other private savings:– Life insurance– Structured funds/certificates– Individual portfolio management (discretionary mandates)

• Occupational pension schemes

4

UCITS

3rd pillar:private savings

2nd pillar: occupational

pensions schemes

11stst pillar: pillar: social-security social-security

systemssystems

Non-UCITS

Equity Bonds Money market Balanced funds

Long-term savings

Collective asset management:

Hedge fundsPrivate Equity Real estate

Unit-linked life insurance

(State)(voluntary pooled savings)

(Companies)

5

Broader/strategic considerations:

• Allocation of financial resources between savers and investors (cf. private equity);

• Provision of innovative tools for long-term savings of individuals;

• Competitive access to professional asset management services – for long-term savings;

• ‘Democratisation’ of financial markets;

• EU angle: inherently tradable products and services – many business lines well suited to organisation on pan-European basis.

6

Key features of AM business

1. Big business … set to get bigger

2. Inherently tradable products and services – although some are more heavily conditioned by local labour, contract or tax law;

3. Business of managing pooled assets is very fragmented in terms of products, institutions and regulations;

4. Convergence in how business is done, who is doing it and investor base.

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Global assets under management

5

7

9

11

13

15

17

1998 1999 2000 2001 2002 2003 2004

$ t

rillio

n InsurancePension fundInvestment fund7

8

Net Assets of European Investment Funds

Assets under Management in the EU (€ billion)

0

1.000

2.000

3.000

4.000

5.000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

UCITS non UCITS

Source: EFAMA

Evolution of UCITS net assets (€ billion)

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Equity Bond Balanced Money Market

Source: EFAMA

9

New player in fund markets: Hedge Funds

0

1000

2000

3000

4000

5000

end 1998end 1999

end 2000end 2001

end 2002end 2003

end 2004

June 2005

september 2005

0

50

100

150

200

250UCITS €bn (left axis) hedge funds €bn (right axis)

UCITS: EFAMA, 2005; HF: various sources

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UCITS: an integrated product market?

• Increasing level of cross-border sales;

• About 17% of UCITS are “true” cross-border funds;

• Most new sales in Europe in past 2 years accrue almost exclusively to cross-border funds.

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Number of funds by Domicile and Country of Notification

FERI FMI 2005

Domicile

Country of fund notification  

AT BE DK FI FR DE IE IT LU NL ES SE UK Share

Netherl.                           0,7%

Finland                           0,9%

Sweden                           1,1%

Denmark                           1,3%

Austria                           2,6%

Italy                           2,7%

Belgium                           3,3%

Germany                           3,6%

UK                           4,6%

Spain                           5,7%

Ireland                           7,4%

France                           12,7%

Luxemb.                           53,3%

All funds notified 3782 2831 524 1164 7321 5519 1369 3807 7475 2058 4262 1772 2794 44496

Share of non-dom. (%) 77,4 59,5 20,2 70,4 28,1 80,6 37,7 68,1 7,2 86,8 40,3 72,6 47,7  

Share in total (%): 8,5 6,4 1,2 2,6 16,5 12,4 3,1 8,6 16,8 4,6 9,6 4,0 6,3  

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Fund management: a concentrated business

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Irelan

dUK US

Franc

e EU

Ger

man

y

Spain

Italy

Nethe

rland

s

Portu

gal

Austri

a

Polan

d

Sweden

Finlan

d

Hunga

ry

Gre

ece

Denm

ark

Belgiu

m

Slova

kia

Czech

Rep

ublic

Source: EFAMA

Market share of top 5 asset managers (2004)

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Marketing and distribution:

Investment funds distribution channels (in % of total assets)

4 7

1823

12 15

95 92

7872

84 81

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2003 2004 2003 2004

Italy Germany Europe

Other Third-party channels Proprietary networks / tied intermediaries

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Separation of management & distribution:

• Slow trend towards open architecture (18-20% of new sales):

• Retail banks in-source funds from third parties.

0

1000

2000

3000

4000

5000

6000

2004 2014E

In-house funds

3rd party funds

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Key trends in AM business

• Increasingly concentrated business and consolidation set to continue;

• Specialisation of actors along value-chain (split between management and distribution);

• High cost business and some costs (distribution, management) likely to increase;

• Competition from off-shore locations (esp. high net-wealth products, hedge funds).

• Business developing fast – new functions, niches, products evolve on a regular basis.

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Investment funds: EU and US, 2005

EFAMA, ICI

8

29

0

5

10

15

20

25

30

US EU

8

5

0

1

2

3

4

5

6

7

8

US EU

946

170

0

200

400

600

800

1.000

US EU

Number of funds (in Thousands)

Average size (€ mn)

AuM (€ 1000 bn)

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Economies of scale along the value chain

4,93,6 4,3

4,14,6 3,7

8

6,85,8

2,2

5,1

3,94,5

0,6 0,4

0,6

0

5

10

15

20

Small (€15-29bn) Medium (€50-55bn) Large (€105-110bn) Scale benefit

Sales&Marketing

Fund Management

Middle-/Back-office

IT/Support

2004, cost margin, bp

McKinsey, 2005

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Product innovation – fund proliferation

No. of funds2004 ׀ 2003

new funds launched 2004

Mergers/ closures

Net increases

/decreases

BE 2045 2184 290 151 139

DE 2445 2540 234 139 95

AT 836 879 87 44 43

ES 2672 2711 190 151 39

DK 441 463 34 12 22

FI 338 359 44 23 21

FR 5397 5406 406 397 9

IT 2010 1977 169 202 33

SE 568 532 7 43 -36

NL 345 284 6 67 -61

UK 1527 1463 42 106 -64FERI FMI 2005

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Key Policy Characteristics• Regulatory regimes vary still across Member

States, mainly with regard to the interpretation of UCITS rules and their implementation;

• Taxation continues to be a major concern for the industry;

• Both elements have a strong influence on the potential of the industry, at national and European level;

• Necessary to align these systems to realise this potential.

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Objectives of European AM Policy:

• Drive efficiency and lower cost by …• Facilitating (cross-border) competition and

specialisation– Enable reorganisation of the different functions in the

value chain to improve cost-effectiveness of industry;– Allow products and services to be sold to investors in

other markets;– Allow managers to manage funds domiciled

elsewhere;– Allow funds to transfer assets to custodians

elsewhere.

• Without compromising investor protection.

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Issues currently under discussion• Make product passport work:

– Notification procedure:– Clarification of eligible assets

• Help investors cope with more complex products and regulatory arbitrage between savings products:– Dislcosure documents (simplified prospectus);– Rules on sales process (MiFiD)

• Deliver new sources of efficiency/competition:– Management company passport– Cross-border mergers and asset pooling;– Depositary passport

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The End !

Further information:

• Financial Integration Monitor (FIM) 2006 – EU INVESTMENT FUND INDUSTRY, http://ec.europa.eu/internal_market/finances/fim/index_en.htm (as of early July 2006)