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July 11, 2016

Monday Morning Memo: Trends in the European Fund Industry

by Detlef Glow.

This Monday Morning Memo reviews the main topics of the panel discussions at the Frankfurt road show of the association of the Luxembourg fund industry (alfi) on July 7, 2016. All the panels were composed of experts from different parts of the industry. Below is a sort of anonymous summary of the conference that does not reflect all the topics or all the statements made by the panellists.

The first topic discussed at the conference was, as was to be expected, the “Brexit.” The main view of the panellists was that it is still unclear what will happen, whether the Brexit will actually take place and whether investors will experience increased volatility in the markets. One panellist raised serious concerns about whether this event will happen at all, since the referendum showed the will of the people but was not an order for politicians to act. The consensus of the discussion was that it is not foreseeable what impact the Brexit will have on the financial industry; therefore, market participants should monitor the developments very closely while they keep calm and carry on until a decision has been made.

General Trends

The panellists raised concerns about the increasing regulation of the European fund and asset management industry. All the new regulations lead to increased costs for asset managers that cannot completely be passed on to investors because European investors have become more cost sensitive over the last few years. Asset managers have to rethink their business models to become more cost efficient, i.e., they have to find ways to save costs or to increase their income from existing portfolios. The panellists stated that some asset managers use outsourcing as a tool to bring down operational costs and to lower regulatory pressures. They mentioned that they even have experienced an increase in securities lending activity, since that is a source of income that has not yet been fully exploited. The panellists also mentioned that asset managers do not respond to every trend with new products as we have seen in the past, since cost pressures force them to maintain efficient product ranges.

That said, the panellists did welcome the expected start of reserved alternative investment funds (RAIF) in Luxembourg, since this new type of funds will bring Europe closer to the U.S.; it is common in the U.S. that regulated asset managers launch unregulated products. In addition, the panellists said that these products will help them act more efficiently with professional investors, since these funds will shorten the time to market and can be easily converted to regulated vehicles, if needed.

Active Versus Passive

During the discussion of actively managed versus passive funds, the panellists came to the conclusion that passive funds are good investment tools to implement asset allocation views, but they are not the answer to client needs with regard to the risk aversion of investors. That said, the panellists assumed that passive funds are good building blocks for active asset and wealth managers, who can differentiate themselves from their competitors by using passive funds and exchange-traded funds. The panellists also assumed that “robo” advisors will be one of the growth drivers for passive funds, since these funds are the products of choice for that kind of asset allocators.

Product Trends in Luxembourg

According to the panellists at the alfi conference, the fund industry in Luxembourg sees a lot of activity in the ETF/index fund space, which includes the launch of new products as well as the arrival of new fund promoters; passive investing has become even more popular with all kinds of investors over the last few years.

With regard to fund-flow trends the panellists said they are experiencing high growth in the alternative UCITS segment, including private equity and real estate funds—mainly driven by institutional investors.

They also said that responsible investing (ESG/SRI) is a sector that enjoys good growth, but this growth is also driven by institutional investors who are mainly using mandates or segregated accounts for their ESG/SRI investments, leading to these investments not appearing in the fund-flow numbers at all. Additionally, the panellists observed that family offices are using impact investing rather than mainstream ESG /SRI funds.

The industry also is enjoying further growth in the credit segment, since fund promoters are launching credit funds with a value-added approach, i.e., funds investing in a kind of credit and using derivatives for hedging or advancing positions.

The panellists also observed that there is an increasing interest in Asia and China funds, leading to a number of new funds within the respective peer groups.

In addition, the panellists noticed that the trend in the multi-asset segment is still continuing, especially in the wealth management segment. They recognized the launch of new multi-asset funds that are either funds managed by a single manager or multiple managers. In addition, they have witnessed a number of new multi-asset funds of funds.

More generally speaking, the panellists have experienced fund distributors starting to launch funds in association with asset managers (white-label products) to overcome possible struggles from the MiFiD 2 regulation. In addition, the panellists have experienced the launch of master/feeder funds for which the master fund is domiciled outside the EU.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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