By Sinead Cruise and Kathrin Jones
LONDON/FRANKFURT, April 8 The rising cost of
running vast numbers of investment funds is outpacing the money
available to flow into them, prompting European managers to
shake up what they sell.
The moves - which could help the firms earn better returns
for savers and bigger profits for themselves - contrast with the
response to the financial crisis in 2007.
Back then most fund firms started offering the biggest
possible range of investment products across all asset classes,
seeing such diversification as the smartest way to hold onto
fickle investors and to secure survival.
But things are changing in the 8.9 trillion euro European
industry, according to Ben Phillips, partner at investment
management consultant Casey Quirk.
"Going forward, it's going to be difficult to be all things
to all people. Clients are now much more discerning about
strategy," he said. "It's not impossible but firms who want to
do that will have to be best in class in each offer. That's a
tall order to fill."
So fund firms based in Britain, the home of Europe's
financial services industry, are racing their German peers to
transform bloated product ranges and trim costs, as competition
heats up and inflows slump.
Last year's European mutual fund sales dwindled to 185.9
billion euros ($239 billion) - the third lowest in a decade.
"Everyone is posing the question: where am I really good?
The process has only just begun," said Dirk Klee, head of
Germany at the world's biggest fund manager, BlackRock.
Data from Thomson Reuters research house Lipper shows 16,589
funds have been merged or liquidated since 2008, only marginally
more than the 15,014 new products launched over the same period,
indicating the likely scale of consolidation that lies ahead.
Aviva Investors, the fund arm of Britain's second-largest
insurer, is seeing the benefits of such an approach.
It axed its London-based European, Emerging Markets, Global
and Sustainable Responsible Investments equity desks in January
2012 in favour of growing its fixed income, real estate and
multi-asset fund lines.
Assets managed for external clients have since grown by 4
percent to 54 billion pounds ($82.3 billion) and the manager has
outperformed competitors on almost 70 percent of funds.
Other firms are merging funds they see as uneconomic to
manage or that duplicate effort and costs unnecessarily.
M&G Investments, the funds arm of insurer Prudential
is folding the 81 million pounds M&G UK Select Fund into the
549.5 million pounds M&G UK Growth Fund.
Both products are run by the same manager and follow a very
similar investment approach, M&G said, arguing that a merger
would negate the need to construct two separate funds.
More unusual still, Edinburgh-based fund houses Kames
Capital and Baillie Gifford are slashing costs of a number of
their funds to remain competitive in a tougher marketplace.
Kames has scrapped the performance fee on its 100 million
pound UK Equity Absolute Return Fund after clients requested a
simpler, more streamlined cost structure, while Baillie Gifford
has cut fees on a range of international investment trusts.
Germany's flagship asset managers are also shaking out their
business models as a price war threatens to erupt.
Allianz asset managers hold around one fifth of
the 2 trillion euro market, while Deutsche Bank
group, Union investment and Deka together account for
around 25 percent, trade body BVI said. All are pursuing
internal overhauls in the hope that better product offering,
performance and service will cut costs and win them market
"Mid-sized players without a clear profile will fall by the
wayside," predicted Victor Moftakhar, CEO of Deka Investments,
asset manager to the country's powerful savings banks.
"Simply swimming along with the rest won't wash."
Deutsche Bank is merging DWS, DB Advisors, Deutsche
Insurance, real estate unit RREEF and exchange traded fund
business X-trackers. The effort, referred to internally as 'the
billion dollar start-up,' involves axing about 1,000 jobs.
Union Investment, the fund manager for Germany's
co-operative banking sector, is trimming around one tenth of its
2,400 employees by 2015 in a bid to ratchet up efficiency.
Its cost-to-income ratio, which most asset managers guard
fiercely as a trade secret, stands at around 66 percent,
according to sources familiar with the data, meaning it spends
66 cents to attract and manage every euro of revenue earned.
Others in the sector have managed to achieve cost-income
ratios of less than 60 percent.
"We didn't just run a lawn mower over every department with
the simple aim of cutting costs," said Union Investment CEO Hans
Allianz Global Investors, which alongside PIMCO manages
money on behalf of Europe's biggest insurer, is also merging
units and trimming its product palette. Its cost-income ratio
was 73 percent in 2012, above a targeted 65 percent or better.
PIMCO, which manages 1.5 trillion euros in assets, had a
cost-income ratio of just 51 percent and contributed 2.6 billion
euros to Allianz group operating profit last year, dwarfing the
350 million euros from AllianzGI.
The examples highlight the hard choices facing fund firms as
they try to reshape their businesses for an uncertain future.
By focusing on one or two fields, managers hope to improve
returns, while investors may find it easier to allocate capital
if performance between managers is more clearly differentiated.
"While there's a natural inclination to cover the
waterfront, covering every asset class to the same degree may
not yield the same result in terms of earnings," Phillips said.
"And that can break down to geography too. Successful global
firms are global but not uniformly global. They pick their
battles and they pick them well."