February 2014

INSIDE VIEW: The power of proximity

ProximityAsset managers face a dilemma: How to keep close to their clients as the industry itself internationalises? This is where social media becomes crucial, though it has its challenges, says Rafael Aguilera of EY. Asset managers produce products, distributors sell them and nobody has questioned or challenged it. Until now. The asset management industry seeks to address the changing economic, regulatory and social landscape, but in order to do so the industry must reshape and accelerate its professionalisation and enter into a digital strategy. Distribution is often the first line of investor interaction. It has a critical role to play in introducing the investor to the full potential of the asset manager and embedding the more client-centric, relationship-driven model. A client-centric model can only be achieved by creating a closer, deeper client relationship. Distribution is no longer a one-way track. Asset managers need to develop partnerships with their distributors, providing them with in-depth understanding of their products and the services they require to advise best their clients. Distribution is not only about Ucits anymore; the Alternative Investment Fund Managers Directive (AIFMD) has introduced a first step to a sui generis (of its own kind) unilateral recognition of non-EU-domiciled alternative investment funds (AIFs) to be sold within the EU to professional investors. The one-way recognition introduced by the AIFMD for non-EU-domiciled AIFs to be marketed within the EU as from 2015, could transform primarily non-EU fund distribution jurisdictions into fund manufacturing jurisdictions. Until a few weeks ago, AIFs were regulated at national level and asset managers willing to market their AIFs within the EU had to face 28 different regimes. AIFMD has put an end to this by introducing a single marketing regime to professional investors. Just like for Ucits some 25 years ago, AIFs through their managers will be granted a European passport which will also at later stage be available to non-European managers and funds that comply with comparable regulation. This will create for the AIFs a regulated cross-border fund distribution market and will initiate the first step to a sui generis mutual recognition of non-European AIFs to be marketed within the EU. This is the first step in having a recognition regime for non-EU funds in Europe whereby it may result in having a mutual recognition of EU AIFs outside Europe as a further development over the coming years.
If we have a quick dive into the European AIF market today, we notice that the market is still strongly driven by onshore products. The AIFMD will allow economies of scale and the setting of real cross-border marketing strategies. Today, France, the UK and Germany represent 50% of the real estate market within the EU. France and Germany are predominantly driven by onshore products, while the UK is known as an offshore market.
Luxembourg products, which account for 30% of the market, are typically pan-European products or they hold Asian assets and target mainly EU investors. The remaining market share is held by offshore products, which under the AIFMD will be subject to marketing restrictions within the EU and will have to rely on reverse solicitation until 2015. The European real estate market is subject to lower performance and has become highly regulated compared with the US market. This may result in questioning the attractiveness for asset managers outside the EU to enter the European market to reach professional investors. Segmentation of clients and products on a regional basis could be considered as a result of the introduction of the AIFMD. The private equity market has a stronger proximity with its investor base compared with any other type of investment products and therefore a change in marketing and distribution strategy is instrumental to fully profit from the marketing opportunities offered by the directive. Pension funds are known to access hedge funds mainly through fund of hedge funds (FoHF) platforms. FoHF providers effectively carry out a single request for proposal process for dozens of pension fund clients. Direct access to single managers by pension funds will be enhanced by the AIFMD marketing rules. The directive is set to change the way AIFs are marketed and may attract more institutional investors. SOCIAL MEDIA
There is no way around the need to be online and making sure your information is accessible and that people can understand who you are and what you do. This implies a revolution in how investment products are marketed and sold. We need to connect with clients better and understand what they want rather than telling them what they need. What is the best way to optimise client proximity?  The challenge is to create interesting content that speaks about their business and gives a personal dimension to their world. The supply-led, product-push distribution model is no longer the most appropriate. Investors are looking for managers to evidence a deeper understanding of their needs and provide better value, products, services and solutions. As a result, power and influence is shifting to those nearest the clients. Many asset managers today manage relationships in a fragmented way. Investors and distributors often have multiple touch points with a client and limited internal dialogue to co-ordinate coverage. Therefore, how to better leverage internal and market data, intelligence and insights to better inform and shape client conversations will be the challenge of a digital strategy. But regulations, tone, jurisdiction and the suitability of content for different markets and client groups are just a few of the issues that need to be addressed by asset managers using social media, for if anything it proves the old adage “just because you can doesn’t mean you should”. It will require the same due diligence as other communications. The asset managers will need to improve the use of internal and external market data to better direct sales and distribution effort and enhance the quality of clients’ conversations. The asset manager succeeds in cross-border distribution will be the one that excels in providing the best suited products for client needs within their market segments and transparent, comparable and easy to understand information for investors through a more focused and productive dialogue with their distributors and investors through social media. Rafael Aguilera, global fund distribution, EY Luxembourg ©2014 funds europe

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