Fund supermarkets first appeared in Europe back around the turn of the millennium. It wasn’t a great time to start. A market crash quickly ensued. Everyone struggled – but the new platforms struggled more than most. “A lot of local fund supermarket players had a rough time after 2000,” says Zin Bekkali, head of business development and processes at Fortis Investments. “They didn’t succeed in quickly covering their set-up costs.” The supermarkets survived, however, and recent news has been more positive. In the UK, which some argue is more suitable for supermarket platforms than mainland European countries because of the high percentage of funds sold through individual financial advisers (IFAs), high-profile platforms such as Cofunds and Fidelity’s FundsNetwork have started to gain market share. Cofunds, for example, which is owned by a consortium of financial services firms comprising Legal & General, IFDS, Newhouse Capital Partners, Threadneedle, Jupiter and Prudential, now claims to be the fifth largest administrator of UK stocks-and-shares ISA (individual savings account) business and the seventh largest onshore bond provider in the UK. It puts its assets under administration at 30 June 2007 at £13.4bn (e20bn), up 45% on the previous year. These kind of figures indicate, if not rip-roaring success, at least viability. “In the UK, it took a long time for fund supermarkets to become profitable,” says Alec Hoffman, head of transfer agency at the consultancy Etheois. “They are only just arriving at a profitable situation now.” Meanwhile, in the business-to-business space the undisputed leader among fund platforms is Allfunds. The Spanish-Italian joint venture, which is co-owned by Grupo Santander and Sanpaolo IMI, has e42bn under administration and distributes 8,000 funds from 150 asset management companies to some 140 financial institutions in Europe and Latin America. Allfunds says it is “the largest third-party mutual fund platform in Europe”. It is also the platform with the greatest claim to be pan-European. In Europe, Allfunds is currently present in Spain, Italy, Portugal and the UK, its activities in the latter being supported by its ownership of Abbey. Other platforms have a cross-border presence, but none has achieved the scale of Allfunds. An example is Cortal Consors, the product of a 2002 Franco-German merger, now owned 100% by BNP Paribas. Despite its multinational heritage, the group has failed to achieve substantial volumes. Its AUM today is e13.7bn, down from e18.6bn in 2004, and only a part of that is funds, as the platform also offers share trading and other services. In fact, scale is an issue across the board. Chart 1 shows how low penetration is by supermarkets in most European countries. And this is a business where scale is important. Fund supermarkets’ raison d’être is their ability to offer choice at a low price. Fund supermarket sponsors therefore have to drive substantial volumes through their platforms to have any hope of making money. The exacting economics of online platforms is one factor that has inhibited the development of pan-European platforms. “Until now platforms have been too small to think about expansion beyond their local markets,” says Bekkali. “But now they are getting big enough. We are at the tipping point where these players will have positive cashflows.” True pan-European platform
A true pan-European platform would, of course, be hugely beneficial to fund managers operating a cross-border business in Europe. At the moment, with the quasi-exception of a few private banks, there is no one that can offer fund managers distribution across the board in Europe. “Even the biggest banks in Europe did not succeed in building dominant positions in more than two countries,” says Bekkali. “Deutsche Bank is strong in Germany, but it has almost no distribution presence in other key European markets such as France. Distribution is still controlled by the biggest local names.” You might think, then, that anyone who could create a pan-European distribution platform would be able to clean up. Hoffman laughs at the suggestion. Anyone attempting to set up a pan-European supermarket would be making “a long-term investment for the future” and would face four key obstacles. First up is the legal framework. “Ucits 3 has been helpful in the distribution of funds,” says Hoffman, “but implementation hasn’t been perfect. Some member states could be accused of protectionism. The regulation of distribution must improve, then platforms will come after.” Other issues are the operational processing of funds, which is not yet standard across markets or paper-free, and systems. “The required complexity in systems would be high,” says Hoffman. “We are just starting to see transfer agency systems that can handle requirements in different markets.” The other issue identified by Hoffman is “the individual tradition in distribution networks and methods in each local market”. The UK, which is the European market where fund supermarkets have flourished best, has a tradition of selling funds through intermediaries. Mainland European markets are more bank-dominated and investors may therefore feel less comfortable buying through a fund supermarket. Some suggest that mainland European banks also do not wish their clients to be picking and choosing from among hundreds of fund providers on a fund supermarket and therefore have not encouraged the development of platforms.
An eBay for funds is some way off, though by no means an impossibility. Like eBay itself if may be achieved through acquisitions. In the meantime, fund managers are doing business anyway. Figures show that cross-border funds’ share of the European market is increasing (see Chart 2). The European market may be difficult, but it is not impossible, and as long as that remains the case, fund managers will try and build a business there. Indeed, many are now targeting other markets that are more complex still. “A lot of fund managers are turning their attention to Asia-Pacific where it’s even harder and there’s no equivalent of the European Union,” says Cook. © fe October 2007