Fund management houses which have reshaped their businesses in line with the UCITS IV legislation – which paved the way for groups to market funds EU-wide without the need to have a separate management company in every country – could see their earnings rise by at least 15%, in McKinsey’s view.
McKinsey data reveals industry-wide profits were €10.3bn across western Europe in 2012.
“It’s a massive opportunity for the industry, if they change their mindset,” said Philipp Koch, a partner at the consultancy. “We consider it to be a €1bn opportunity for the industry to really piggyback on some regulatory drivers and clean up their legacy business and operating models. It will benefit themselves as well as their customers.”
McKinsey estimates that Europe’s asset managers could raise their profits by €600m a year as a result of consolidating their operations and support functions at a pan-European level. These typically account for 40% of costs, which could be cut by 15%, said the consultancy.
In addition, if asset management firms were to downgrade most of their country operations to branches linked to a single management company, it could avoid some of the complexities of multiple legal entities while preserving local distribution. McKinsey estimates this could cut legal bills by 20% and simplify governance, reducing costs by a further €200m.
“A branch does not need as many support functions as a real asset management company, just really distribution and sales support,” said Koch. “There is duplication all over the place.”
McKinsey also claims fund management houses which centralise their investment activities would reap both economies of scale and better performance, with the inflows attracted by the latter likely to raise profits by a further €200m a year. Koch highlighted the fact groups with centralised investment functions saw net inflows of around 7% of assets between 2009 and 2012, while those with diverse structures had suffered outflows of 9%. Managers with a centralised approach also typically have more highly rated funds.
Koch said some fund managers see the UCITS IV regulations, which came into force in 2011, as a threat rather than an opportunity. “I think there was a myth you had to have a fully fledged investment company on the ground in a country to be successful, to be respected by partners and institutional investors.
“Fund houses feared losing assets or losing investment managers if they downgraded any operations.”
