A slump in equity values and a major outflow from investment funds resulted in Europe’s investment management industry suffering a significant decline in assets in 2008. However, if not for the industry’s policy of asset diversification the situation could have been far worse. Jeremy Woolfe reports.
The €2.7 trillion ($3.6 trillion) drop in the European investment management industry’s total assets in 2008, as reported by Brussels-based industry body the European Fund and Asset Management Association (EFAMA), was a serious downfall but not the drenching cloudburst that had been expected.
This is especially true, the EFAMA summed up, when allowing for the harsh financial weather caused by the collapse in stock prices which, indicatively, saw the benchmark MSCI World (Equity) Index falling by a massive 41 percent in US dollar terms in 2008.
In its latest asset management report, EFAMA says €10.7 trillion was estimated to be under management at the end of 2008, down 21.3 percent compared with €13.6 trillion at the end of 2007, a total up slightly from €13.4 trillion in 2006.
Overall, the figures makes Europe, after the US, the second-largest market for asset management in the word – embracing more than a third of the €40 trillion global assets under management at the end of 2007. Europe’s investments are equal to 102 percent of European GDP.
The decline in 2008, said EFAMA, was estimated on the basis of the observed drop in assets in the undertakings for collective investment in transferable securities (UCITS) market, which represents about 75 percent of Europe’s investment fund market worth €6.9 trillion at the end of 2007 and an estimated €5.4 trillion at the end of 2008.
Market losses were responsible for 77 percent of the 21.7 percent decline in UCITS assets while outflows added the remaining 23 percent.
EFAMA explained that there are three main factors behind the outflows: the massive losses recorded in stock market across the globe that led many investors to pull out savings from equity funds; the liquidity crisis and the fear of credit and counter-party losses following the bankruptcy of US investment bank Lehman Brothers that accelerated outflows from bond funds; and the competition from structured products and the war for deposits that escalated when European governments decided to provide guarantees to all bank deposits.
Commenting on the reductions in total asset values, Bernard Delbecque, the federation’s director of economics and research, told LII that worse was been avoided by virtue of the principle of asset diversification by the fund managers among EFAMA members, with their professional personnel finding the “right frontier”. The plunge would have been all the larger if the proportion of investments in equity had been higher.
Delbecque continued: “Discretionary mandates, that is, portfolios managed by asset managers on behalf of clients, typically insurance companies and pension funds, continued to attract positive inflows in 2008.”
He praised the merit of “solid nerves” of the investors who continued to make net contributions to life insurance products and occupational pension plans. He also applauded the value of these contracts, noting the long term nature of these investments.
Commenting generally, Delbecque pointed out that Europe’s investments amount to as much as a third of what is managed globally. In EFAMA’s asset management report, which was published for the first time last year and was initiated as a response to the lack of an encompassing perspective on the asset management industry, it notes that major centres of asset management in Europe are the UK, France, Germany and Italy.
The combined total of funds under management in these three countries at the end of 2007 was €9.4 trillion. Other important management centres are in Belgium and the Netherlands.
Reflecting the size of the domestic savings market, the degree of development of the local financial services sector and the level of delegation to asset management companies by institutional investors, the UK, France and Germany accounted for 66 percent of total assets under management in Europe at end of 2007. Italy and Belgium followed in this ranking with a combined market share of 10 percent.
The report continued that European investment funds represented 51 percent of assets managed in Europe at the end of 2007, with discretionary mandates accounting for the remaining 49 percent.
Discretionary mandate funds are in general more conservatively invested, having a relatively higher exposure to bonds. At the end of 2007, for example, the average discretionary mandate fund had a 40 percent exposure to bonds, 37 percent to equity, 13 percent to the money market and 10 percent to other assets. However, there were significant variances with the UK having the highest average equity exposure at 44 percent and Germany the lowest at 11 percent.
In contrast to the average discretionary mandate funds, investment funds assets are on average more heavily invested in equity. Although there are large differences across countries, on aggregate, the dominant asset classes were equity and bonds, with 40 percent and 30 percent of total under management, respectively, at end 2007.
But again there were significant variances, with investment funds managed in the UK having, at 74 percent on average, the largest exposure to equity and, at 17 percent, the lowest exposure to bonds. At the other end of the scale were Portuguese investment funds, with an exposure of 15 percent to equity and 43 percent to bonds.
Banks dominance not universal
In most European countries, banking groups represent the foremost parent category, controlling more than half of all asset management companies in Greece, Italy, Austria and Portugal.
The main exceptions to the bank dominated model are primarily the UK and France, where insurers accounted for 60 percent or more of all asset management companies, as well as Hungary and Germany where they accounted for almost half.
In the largest asset management category in Europe, institutional funds insurance companies represent the largest institutional client category, accounting for 42 percent of the total of €8.84 trillion in institutional funds 2007. In the institutional category, which accounted for 65 percent of Europe’s total asset management industry in 2007, pension funds held the second position with a share of 30 percent.
One common feature among most European countries is that insurance companies represent a very large source of institutional assets under management.
The highest contribution was in the UK where insurers accounted for 76 percent of institutional funds in 2007. The UK was followed by France at 61 percent, Germany and Hungary at 58 percent and Portugal at 54 percent.
In other countries insurance companies accounted for a smaller yet significant proportion of institutional investors. These included Italy and Belgium, both at 38 percent.
The top three investment fund domiciles in terms of assets are Luxembourg, France and Germany, followed by the UK, Ireland, Italy and Spain. The strong market shares of France, Germany, the UK, Italy and Spain primarily reflect the significant size of the domestic savings market in these countries.
By contrast, the position held by Luxembourg and Ireland is attributable to the importance of these countries in the distribution and administration of cross-border UCITs in Europe and other parts of the world.
For Europe as a whole, the asset management industry represents not only a major source of income but of employment as well, with EFAMA estimating that 70,000 people work directly in asset management companies.
EFAMA adds that, by taking in related services, such as accounting, auditing, custodianship, marketing, research, order processing, and distribution, the level of direct and indirect employment linked to asset management companies would increase to a significantly higher figure.