Asset Management In Europe - EFAMA

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Asset Management in EuropeAn Overview of the Asset Management IndustryNovember 202012th editionFacts and Figures

TABLE OF CONTENTSINTRODUCTIONTable of ContentsKey Findings and Figures . 2Introduction . 41.Role of Third-Party Asset Managers. 51.1.Introduction . 51.2.The role of asset management in the economy . 61.3.A standalone industry. 82.Assets under Management in Europe . 92.1.Evolution of European AuM . 92.2.AuM in investment funds and discretionary mandates . 103.Clients of the European Asset Management Industry . 133.1.Clients at the European level . 133.2.Clients at country level . 144.Asset Allocation in Europe . 164.1.Investment portfolios . 164.2.Asset allocation of investment funds and discretionary mandates . 175.Financing of the Euro Area by European Asset Managers . 195.1.Funding contribution of euro area investment funds . 195.2.Overall funding contribution of asset managers . 215.3.Financing of the economy outside of the euro area . 236.Industry Organisation . 246.1.Asset management companies . 246.2.Profitability . 256.3.Employment . 26Data Annex . 28Contacts . 31Endnotes . 31Asset Management in Europe1

KEY FINDINGS AND FIGURESINTRODUCTIONKey Findings and FiguresThe role of asset managersKey Role of Asset Management in the EconomyAsset managers help investors managetheir savings by offering products andsolutions to channel savings into capitalmarket instruments. They select investmentopportunities and engage with investeecompanies to hold companies accountable,not least for their ESG performance.In this way, they also help the economy byfunding new investment projects andproviding liquidity to the markets. Thisgenerates returns for clients, taking intoaccount the specific risk appetite andinvestment horizon of each client.Assets under management in EuropeAssets managed by third-party assetmanagers in Europe rose continuouslybetween 2012 and 2017, thanks to thestrong performance of the financialmarkets.Assets under Management in EuropeEUR trillions, percent of GDPThe sharp drop in stock markets at the endof 2018 led to a decline in assets undermanagement. AuM rebounded in 2019 butthe Covid-19 crisis brutally reversed thistrend, which led to an estimated 11%decline in the first quarter of 2020. AuMpicked up again in the second quarter.AuM in European countriesAuM in European Countries at the End of 2018EUR trillions, percent of totalAsset management in Europe is mainlyconcentrated in six countries where almost85% of the asset management activitytakes place.The United Kingdom is the largestEuropean asset management market,followed by France, Germany, Switzerlandand Italy. The presence of large financialcentrescanexplainthemarketconcentration in these countries. TheNetherlands follows in this ranking thanksto the size of Dutch occupational pensionfunds.Asset Management in Europe2

KEY FINDINGS AND FIGURESINTRODUCTIONClients of the industryThe asset management industry has twomain types of clients: retail clients andinstitutional clients, primarily pension fundsand insurers.Breakdown of Clients by AuM at the End of 2018percentThe share of institutional clients in the totalAuM rose to 72% in 2018. The rise inmarket volatility in 2018 eroded retailinvestor confidence and contributed to thisevolution. Also, the steep drop in stockmarkets at the end of 2018 had a greaterimpact on retail clients who tend to be moreheavily invested in equity than institutionalclients.Asset allocation in EuropeAt the end of 2018, bond assets accountedfor 42% of investment portfolios managedby asset managers in Europe, compared to28% for equity assets and 6% for moneymarket and cash equivalents. Theremainder of the portfolio (24%) was madeup of other assets.Asset Allocation at the End of 2018share in total AuMThe predominance of fixed-incomeinstruments reflects the importance ofinstitutional clients, who generally considerbonds as safe instruments for preservingcapital and generating income.Financing of the economyThe overall contribution of asset managersin the financing of the euro area economycan be estimated on the basis of data fromthe European Central Bank (ECB). Weapproximate this by considering the amountof debt securities and listed shares issuedby euro area residents and held byEuropean asset managers.Debt Securities and Listed Shares Issued in theEuro Area held by European Asset Managersin percentage of total issuance at the end of 2018Asset managers in Europe held anestimated 25% of debt securities and 30%of listed shares issued by euro arearesidents at the end of 2018. When usingthe free-float market capitalization, it isestimated that they held 53% of the valueof the listed shares issued by euro arearesidents.Asset Management in Europe3

INTRODUCTIONINTRODUCTIONIntroductionThe EFAMA Asset Management in Europe report provides a precise picture of the Europeanasset management industry, focusing on the countries where assets are managed. Itcomments on recent developments and outlines the role of asset managers in the economy.The report is divided into six main sections. Section 1 provides an overview of the role of assetmanagement in the economy, the services they provide to investors and the specificitiescompared to other financial service institutions. Section 2 highlights the trends in total assetsunder management (AuM) in Europe, with a breakdown by country and by investment fundsand discretionary mandates. Section 3 provides an overview of the industry’s clients, whileSection 4 focuses on the asset allocation of European asset managers.Section 5 estimates how much the investment fund industry contributes to the financing of theeconomy. Finally, Section 6 looks at the industrial organisation of the asset managementindustry, its profitability and its contribution to the European economy in terms of employment.The report is primarily based on data provided by eighteen EFAMA member associations onthe value of the assets managed at the end of 2018: Austria, Belgium, Bulgaria, Croatia,Denmark, France, Germany, Greece, Hungary, Italy, Netherlands, Poland, Portugal, Slovenia,Switzerland, Spain, Turkey and the United Kingdom. Additional internal and external datahave been used to estimate the assets managed in the other European countries.The report also provides an estimation of the assets under management in Europe at the endof December 2019 and June 2020. Finally, for the first time, the report presents data fromMcKinsey on the European asset managers’ share of overall European financial assets, thegrowth of active/passive investment strategies and the profitability of the industry.Asset Management in Europe4

1. ROLE OF THIRD-PARTY ASSET MANAGERS1. ROLE THIRD-PARTY ASSET MANAGERS1. Role of Third-Party Asset Managers1.1. IntroductionThird-party asset managers (hereafter "asset managers" for the sake of simplicity) manageassets on behalf of retail and institutional investors to achieve a specific investment goal asset out by their clients, taking into account their investment style preference, risk tolerance andfinancial situation.Asset management companies are the most important type of buy-side institutions. Otherexamples of buy-side institutions are pension funds and life insurance companies, which areoften clients of asset managers. On the opposite side are sell-side institutions, such asinvestment banks and brokerage firms.According to McKinsey, the share of European financial assets managed by European assetmanagers was at 29% at the end of 2019, with EUR 18 trillion being managed for institutionalclients and EUR 8 trillion for retail clients. i Since 2010, the share of externally managedfinancial assets has increased by 5 percentage points. For institutional investors, this shareincreased from 23% in 2010 to 28% in 2019, while for retail investors it rose from 28% to 34%.In the institutional market, the trend toward greater outsourcing has been buoyed by the lackof opportunities in “vanilla” fixed income, inducing asset owners to search for third partymanagement in fixed income high-yield strategies and alternatives. In the retail market, thistrend has been supported by a sustained equity bull market coupled with zero or negativeeffective rates, which led to an increase in the demand for investment funds.EXHIBIT 1.1Europe Total Financial AssetsEUR trillionsEXHIBIT 1.2European Financial Assets%Share managed by third-party asset managersSource: McKinsey & Company Global Growth CubeLooking forward, there remains a massive opportunity for asset managers to increaseconversion of unmanaged and internally managed assets, particularly in the institutionalmarket, where internally managed assets reached EUR 48 trillion in 2019.It is also expected that the implementation of the European Commission’s new action plan forthe Capital Markets Union, which was presented in September 2020, will lead to a largernumber of European households shifting some of their savings from bank accounts to capitalmarket instruments, such as investment funds.Asset Management in Europe5

1. ROLE OF THIRD-PARTY ASSET MANAGERS1. ROLE THIRD-PARTY ASSET MANAGERS1.2. The role of asset management in the economyChannelling savings towards investmentA crucial role of asset managers is to channel savings toward investment. Asset managershelp investors manage their savings to achieve a specific investment goal. They do so bycreating different products and solutions that match investors’ needs and investing with a viewto maximising returns while taking into account the different risk appetites of their clients.Linking investors and the real economyBy providing equity capital in both primary (IPOs and private placements) and secondarymarkets, as well as debt financing to corporations and governments, asset managers helpthese entities meet their short-term funding needs and long-term capital requirements. In thisway, they play an important intermediary role in the financial system by funding new investmentprojects and generating returns to millions of savers and investors.EXHIBIT 1.3Key Role of Asset Management in the Economy and the MarketsAsset Management in Europe6

1. ROLE OF THIRD-PARTY ASSET MANAGERS1. ROLE THIRD-PARTY ASSET MANAGERSServing the needs of investorsAsset managers give their clients access to a wide range of traditional and alternative productofferings to diversify their portfolios among various financial instruments, asset classes,industries and geographical locations and achieve their investment goals in a way that mightnot be available to them otherwise. This yields substantial benefits for the asset managers’clients. Lower investment riskAsset managers can help reach the right level of diversification for their clients byproviding access to a broad range of asset classes. They have access to ample qualityresearch as well as professional databases and software packages that help themreduce risk by monitoring developments in industries, countries and regions in whichthey invest, with the purpose of screening out bad investment opportunities anddetecting advantageous ones. Liquidity provisionAsset managers closely monitor the liquidity situation in the markets and the profile oftheir clients in order to anticipate the evolution of inflows and outflows and the risk ofrapid and large net outflows. They also have in place risk management policies andportfolio management procedures to ensure that they can meet their liquidity provisionobligation in stressed market conditions. Lower costsAsset managers’ ability to trade in large blocks of securities allows them to reducetransaction costs. Taking into consideration that monitoring activities have a cost,asset managers benefit from economies of scale that households and many otherinvestors would find very difficult to achieve.Engaging and improving the governance of investee companiesAsset managers also play an important role as stewards of the companies in which they investwith the aim to maintain and enhance the long-term value of companies for investors.Concerns are communicated through engagement, which includes direct contact withmanagement or boards and voting at shareholder meetings. Divestment is often a last resort,when engagement has failed.More broadly, engagement with investee companies enables asset managers to holdcompanies accountable, not least for their ESG performance.Asset Management in Europe7

1. ROLE OF THIRD-PARTY ASSET MANAGERS1.3. A standalone industry1. ROLE THIRD-PARTY ASSET MANAGERSAsset managers exhibit a number of distinguishing features that set them apart fromcommercial banks, investment banks, insurance companies and pension funds. Four mainfeatures help differentiate asset managers from other financial services providers.Agency business modelAsset managers are bound by regulation to act in the best interest of their clients and invest inaccordance with a predefined set of rules and principles. As such, they owe a number offiduciary duties to their clients, including duties to exercise reasonable care, to discloseconflicts of interest and to act in good faith. Asset managers must provide the informationnecessary for investors to make informed decisions and report regularly on how theirinvestments are doing. These fiduciary duties arise as a matter of common law, as a matter ofstatute and/or as a matter of contract. As a result, investors have a remedy in case of breachof duty and the interests of fund managers and investors are aligned.Limited balance sheet riskAsset managers do not act as providers of credit to individuals or corporations, nor do theyprovide custody or related services. They do not act as counterparties in derivatives, financingor securities transactions. Moreover, they are bound by specific constraints as to the use ofleverage and operations with borrowed money and are required to hold sufficient regulatorycapital, all of which under the supervision of the relevant national authority. In this way, thereis no asset-liability mismatch on their balance sheets, which are very small compared to thebalance sheets of banks and insurance companies.Protection of client assetsAsset managers are subject to a robust regulatory framework, which requires them to, amongother things, establish comprehensive risk management and compliance policies andprocedures. Investment fund assets must generally be entrusted to depositories, which havesome oversight responsibilities in addition to the safekeeping of fund assets. In mandatedasset management, there is a requirement that client assets be held separately from the firm’sassets. These regulatory regimes protect clients from a liquidation or failure of their assetmanager, in particular as the clients’ assets remain outside the reach of the creditors of theasset manager at all times.Fee-based compensationAsset managers generate revenue principally from an agreed-upon fee based on the client’sAuM. This is in contrast with commission-based compensation, in which a firm makes moneybased on the amount of trades carried out or the amount of assets sold to the client. Fee-basedasset management aligns the investor's and adviser's goals as, if the client's assets grow, thecompensation of asset managers increases and vice-versa. It also implies that reduced AuM,due to market movements or client withdrawals, results in decreased revenues.Asset Management in Europe8

2. ASSETS UNDER MANAGEMENT IN EUROPE2. ROLE THIRD-PARTY ASSET MANAGERS2. Assets under Management in Europe2.1. Evolution of European AuMAssets managed by European asset managers amounted to EUR 23.8 trillion in 2017, anincrease of 120% since the end of 2008. Assets rose continuously between 2012 and 2017,thanks to the strong performance of the financial markets and net new money flowing intoinvestment funds and discretionary mandates. In 2018, the sharp drop in stock markets in thefourth quarter led to a decline in AuM but assets rebounded in 2019 due to strong performancein the bond and stock markets. The Covid-19 pandemic in 2020 brutally reversed this.According to our calculations, AuM in Europe fell by 11% during the first quarter of 2020 andthen picked up again by 8.3% in the second quarter. iiIn relation to European GDP, European AuM rose from 81% at the end of 2008 to 149% at theend of 2019. In 2020, the AuM/GDP is estimated to have slightly fallen during the first quarterbefore increasing rather sharply during the second quarter thanks to the rebound of stockmarkets against the background of a severe decline in economic activity.EXHIBIT 2.1European Assets under ManagementEUR trillions, percentAsset management in Europe is mainly concentrated in six countries where almost 85% of theasset management activity takes place.The United Kingdom is the largest European asset management market, followed by France,Germany, Switzerland and Italy. The presence of large financial centres can explain themarket concentration in these countries. The Netherlands follows in this ranking thanks to thesize of Dutch occupational pension funds. iiiAsset managers in Denmark, Spain, Belgium and Austria also manage sizeable amounts ofassets. The share of the rest of Europe (10.5%) is attributable to other European countries forwhich no survey data is available, such as Sweden, Luxembourg and Ireland, where assetmanagers are also active.Asset Management in Europe9

2. ASSETS UNDER MANAGEMENT IN EUROPE2. ROLE THIRD-PARTY ASSET MANAGERSEXHIBIT 2.2European Assets under Management at the End of 20182.2. A

Asset management in Europe is mainly concentrated in six countries where almost 85% of the asset management activity takes place. The United Kingdom is the largest European asset management market, followed by France, Germany, Switzerland and Italy. Thepresence of large financial centres can explain the market concentration in these countries. The

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