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Barcelona: The 7.4 trillion euro ($11.68 trillion) European fund management industry is set to emerge from the current bear market in markedly different shape as banks and insurers sell fund units and weaker firms fall by the wayside.
European fund managers face a period of unprecedented strain on asset flows and profits, as nervous investors flee equity and bond mutual funds in favour of safer and lower margin products.
As banks and insurers grapple with subprime writedowns and slower future growth, a non-core asset manager with its own lack of profit growth is likely to look less and less attractive to own, especially at a time when making disposals offers a way to raise capital.
Fund executives are now openly discussing the future shape and ownership of the industry as the bear market takes hold.
"I think... profits are going to come under pressure for a lot of fund management groups and I think that might lead to a desired shakeout of the weaker players, particularly the weaker performers," Helena Morrissey, chief executive of Newton Investment Management, told this week's Fund Forum 2008 in Barcelona.
"I think we will likely see that [consolidation] if the bear market continues because [with] a lot of the bank-owned companies the banks and the shareholders will lose patience and will try to cut out the costs."
In the first quarter of 2008, UCITS (Undertakings for Collective Investment in Transferable Securities) funds saw net outflows of 31 billion euros.
Worrying trend
It was the first time a third consecutive quarter of outflows had been recorded, according to the European Fund and Asset Management Association (EFAMA).
Worryingly for asset managers, equity funds, which tend to command higher margins, saw net outflows of 77 billion euros. Investors are instead putting their money into lower-margin money market funds, which saw net inflows of 82 billion euros. Such different conditions from previous bear markets, like the one at the start of the decade, are likely to be one of the drivers of more fund firm failures, mergers or takeovers.
"It's totally different. 2000 to 2003 was a bubble. ... But people were investing in bond funds, which you don't see now ... The industry is seeing revenues going down and sales going down," said Peter de Proft, director general of EFAMA.
In such a tough environment, many smaller players, especially those failing to deliver adequate performance, are likely to be squeezed out - as is already happening in the faster-moving $2.6 trillion hedge fund industry.
A second dynamic is the pressures faced by financial institutions, which are often the owners of asset managers.
"I think some banks may take a decision it's not core or strategic for them. I think some independents may find their cost structure has got out of whack and they maybe need to look at different models of distribution. I think a lot of small niche players may find they are too niche," said HSBC's McCombe.
The pressure on banks and insurers with low-growth fund arms could mark the real difference to the last bear market, where the FTSE 100 halved over three years but consolidation failed to gather pace.
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