Institutional Managers Look to Europe

Terry Flanagan

Institutional managers are capitalizing on their success in Europe’s defined contribution segment and marketing “institutional” products, such as asset allocation and diversified growth funds, direct to mainstream investors.

“Institutional alternative managers who deviate from their traditional fee structure in order to tackle the mass market may well win new business, but they could face two significant problems,” said David Walker, a Cerulli associate director.

“For one thing, having a cheaper rate card on a new fund may significantly irk existing clients who have paid higher fees for the manager’s talents on older offshore products, maybe for years. A second potential danger is that, if a strategy is being run pari passu in offshore and onshore vehicles, then the cheaper option may cannibalize clients from the pricier one over time.”

Either way, to enter the U.K. retail landscape an institutional fund manager will at least need an attractive fee schedule. But cheap fees on their own will probably not convince retail buyers to commit-whether in an institutional or retail milieu, before all else it is performance that counts.

“Ultimately, performance and fees may count for little if managers are unwilling to engage in a marketing push,” said Cerulli director Barbara Wall. “The world of roadshow gatherings and wooing independent financial advisors may be somewhat foreign to institutional fund managers that are more acquainted with private placements, or one-to-one meetings with institutional clientele.”

Adapting to the practices of the U.K. retail distribution world may prove as difficult, if not more so, than simply swallowing a fee cut to attract assets.

Next to the United Kingdom, Sweden is considered the most open market for external mandates, but ongoing reviews of Sweden’s AP funds could yet derail their attractiveness, according to Cerulli.

Managers entering Sweden must therefore look beyond the AP funds and target the large insurance platforms as well as the country’s Pillar II system, at about SEK1.6 billion (US$249 billion). At the very least managers should have a presence on the Premium Pension Platform (PPM), even if Swedes have devoted less than 5% of their pension savings to PPM.

Mandatory pension fund systems from Mexico to Chile are doubling in size every five to six years, and as they amass large sums of assets, it will be imperative for them to channel greater percentages of their assets outside their borders. Cerulli expects local pension managers to turn over greater amounts of their holdings to external managers, as opposed to investing directly in foreign equities and bonds as they have tried doing-with mixed results-in the past.

Japanese institutional investors are demanding. They want constant yield and will not tolerate poor performance. Many products that were once popular have since lost their shine because of performance issues. Risk-parity funds have fallen out of favor, as have emerging market products. While interest in equities is gradually picking up, especially among financial institutions, investors often request a specific management style and prefer separate accounts (minimum investment amount is ¥10 billion), rather than commingled funds.

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