July 2007

PAN EUROPE: Falling Funds

Investors are turning away from markets, writes Nick Fitzpatrick, reporting from the Irish funds conference 07_07_falling_fundsThe bull market is failing to entice many European investors to put their money in equities or fixed income, meaning that Asian populations are increasingly important to fund manager profitability. Investor memories of the bursting of the dotcom bubble, along with current distractions, such as high interest bank accounts, are denting the funds industry in Europe, the  IFIA/NICSA Conference heard. Diana MacKay, managing director at Feri FMI, a funds information company, said European retail trends were “perverse” in light of the booming markets, because many European investors would rather invest in safe havens like money market funds. She warned that money is flowing from equity funds partly because investors who lost money in the dotcom bubble are seeing “every uptick in the index as a sell message” in an attempt to claw back their losses, particularly in Germany and Italy. Bleak retail forecast
MacKay and her colleague Mauro Baratta, business development and project director at Feri, delivered a bleak overview of the state of the retail funds industry, noting that despite stock market indices doing well in 2005 and 2006, net sales of mutual funds were weak. And it isn’t just equity funds losing: bond outflows are also dramatic and were continuing in Q1 2007. Money market funds have seen three-quarters of the inflows, MacKay said. “Money markets are a safe haven, but the background is that equity markets are booming – yet investors will not go anywhere near them!” Asian investors accounted for 12.9% of assets in European funds (ex-money market) distributed internationally in 2003. But since Europeans have deserted equity and bond funds, Asians now account for 14.1% of assets, according to Feri’s figures. South Korea, Taiwan and Hong Kong are particularly important to sourcing assets. France was the largest market in terms of net sales (ex money market) in Q1 this year and funds of funds were dominant. Baratta said this was important to foreign fund managers, who were selling core equity skills in sectors such as North Europe, Japan and North America. But Germany’s sales were very disappointing, he said. Offering an explanation, Baratta said the drop in sales in Germany in 2006 could be partly down to the “millennium effect”. This refers to the lasting shock of the stock market crash following the dotcom boom. But another explanation is the rise in sales of structured notes, which are being pushed by the powerful bank distribution networks in Germany as a safer alternative to funds. Baratta also said Italy’s fund sales had disappointed asset managers, with outflows (ex money market) reaching e40bn last year. He noted that the Bank of Italy is lobbying the government to synchronise tax rules of Italian-domiciled funds with those of foreign funds. A portion of outflows from domestic funds headed for Luxembourg, some of which were captured by foreign groups. In Spain, banks are pushing high interest accounts at clients rather than funds, Baratta said. MacKay said: “Funds are not top of the agenda where investors are concerned. Asset managers have to think about new products.” She encouraged managers to use UCITS III rules, which have allowed asset management groups to redefine their fund range. Overall, MacKay believes 2007 will be a year in which domestic firms are more successful than foreign managers, who are still in some cases trying to gain market entry through multi-manager platforms, particularly in France and Spain. However, she said the UK had growing importance to foreign groups. “Before 2006 you would have to set up a business in the UK to conquer it. All that has now changed.” © fe July 2007

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