Cross-Border Distribution of UCITS

Context

UCITS fund distribution channels and business models Fund sales trends in Europe Analysis of UCITS cross-border distribution market

Cross-border distribution of UCITS

Fund distribution models & players

The CSD and TA models The global TA model Players’ roles and responsibilities

Challenges & opportunities

May 2011

Administrative and regulatory requirements Taxation issues Information referencing issue Operational workflow Distribution networks and trailer fee management

Regulation references

Profile

A top-ranking banking Group specialised in asset servicing

CACEIS is a global player committed to designing reliable, cutting-edge services and building long- lasting relationships with clients. A member of the Crédit Agricole Group, CACEIS is rated A+/A-1 by S&P, which reflects the financial support of its principal shareholder. Through offices across Europe, North America and Asia, CACEIS delivers a comprehensive set of high quality services covering depositary/trustee and custody, clearing, transfer agency, fund administration and issuer services. CACEIS also provides a broad range of additional high-value services, notably fund distribution support, middle-office outsourcing, liquidity management & securities financing solutions. As at 31 December 2010, CACEIS ranked 1st among fund administrators in Europe with €1,150bn in assets under administration and 9th among custodians worldwide with €2,379bn in assets under custody. CACEIS’s 3,500 highly experienced employees are committed to upholding quality of service in terms of responsiveness, accuracy and expertise.

DEPOSITARY/TRUSTEE No.1 in Europe €705bn

CUSTODY No.9 Worldwide €2,379bn

FUND ADMINISTRATION No.1 in Europe €1,150bn

A+/A-1

figures as at 31 December, 2010

Our clients Asset managers Mutual funds Insurance Companies Pension funds Central banks & Sovereign institutions

Hedge funds Distributors Broker-dealers Banks Corporates

Germany Netherlands

Ireland Belgium France Switzerland

Canada United States

Luxembourg

Hong Kong

With its international presence - notably in France, Luxembourg, Ireland, Hong Kong and North America -, CACEIS has developed a broad range of services registered under the name of Prime TA® to support cross-border fund distribution and help clients take full advantage of new business opportunities. An efficient "follow the sun" organisation and North America to exploit the differences between time zones by processing information as soon as possible and providing its clients with the best possible service. Furthermore, CACEIS favours local contact with both asset managers/fund promoters and distributors through its different offices, which allows us to circumvent time differences and overcome cultural & language barriers. International Fund Distribution Services CACEIS also uses its presence in Asia, Europe

CACEIS, your development partner

CACEIS can assist you at all stages of your funds’ distribution, in any market

ORDER GATEWAY & MIRRORING SERVICES

REGISTRATION & POST-REGISTRATION

PRIME TA ®

> By combining local servicing and global processing, CACEIS can

DATA TRANSMISSION & REPORTING SOLUTIONS

DISTRIBUTION NETWORKS, HOLDINGS & TRAILER FEE MANAGEMENT

efficiently support its clients in their sales development and global organisation.

The different services offered can be activated separately and progressively, following your evolving business requirements

Dedicated experts & robust capabilities to serve you

At CACEIS, we work hard to help you successfully market your funds cross-border Distributing funds internationally requires the capacity of asset managers & fund promoters to handle new requirements, should they be legal, operational or even technical. Geographical coverage with sharpened cultural approach is also a key point to ensure close interaction with local authorities, distributors and end- investors. Building a strong partnership with a service provider such as CACEIS that demonstrates expertise in these different areas, has a local presence, the financial strenght, enough flexibility to rapidly overcome all these new challenges and the right technical infrastructure to interact with all the industry players is now crucial for asset managers & fund promoters seeking to control their costs while being able to offer high- quality services.

CACEIS’s dedicated international fund distribution experts are committed to provide you with the best services across the whole value chain covered. They are supported by solid and integrated back office capabilities to manage all operational aspects, as well as a sophisticated fund distribution IT platform.

FOREWORD

Since the introduction of the UCITS (Undertakings for Collective Investments in Transferable Securities) Directive in 1985, UCITS funds have become widely used by asset management companies looking to distribute fund products outside their national borders. Today cross- border distribution of UCITS spreads to a broad range of domiciliations and not only Luxem- bourg and Irish-domiciled funds. Furthermore, although UCITS were developed originally to harmonise Europe’s fund struc- tures and promote fund distribution between Member States, nowadays they have also be- come a “gold standard” recognised by a host of countries worldwide. Their flexibility for cross- border investment and their highly regulated nature has firmly established their popularity among investors. The UCITS IV Directive is set to intensify the attractiveness of this fund brand even further. The new business opportunities arising in regions outside of Europe, such as Asia, Latin America and the Middle East, will enable European management companies to continue their expansion in both financial and geographic terms. More than ever, cross-border distribution is now a strategic issue for CACEIS’s clients. They have to face new challenges, notably in the context of a fast changing environment, in terms of geographic areas of distribution, technol- ogy and regulation. As an experienced player in the domain, CACEIS has a thorough understanding of this rapidly changing fund distribution environment, including sales and market opportunities, players’ roles and responsibilities, tax and regulatory issues, information and operational workflow complexity, and management of complex third-party distribution networks. It is this experi- ence, expertise and know-how, gained through supporting many clients over the years that we share in this document. The combination of a fund distribution environment that is continuously increasing in com- plexity and a significant rise in the number of clients seeking support for their cross-border distribution plans have led CACEIS to develop this comprehensive document which covers the many different aspects of cross-border UCITS distribution (the first edition was published in November 2008). Herein, you will find a detailed assessment of the current market environ- ment, the industry players and the challenges and opportunities faced, as well as copies of, or references to the principal legal texts regulating the activity. This publication also gives details of our support services, explaining how CACEIS can facilitate the administrative side of your operations and ensure your business complies with the rules and regulations in place in each country of distribution.

We trust you will find this publication both relevant and informative.

Laurent Majchrzak , Global Head of Fund Distribution Services

EXECUTIVE SUMMARY

UCITS have become both a European standard and a respected global brand. The number of UCITS launched continues to grow at an unparalleled pace across Europe, with Luxembourg and Ireland out front and other national domiciled UCITS (such as German, French and British) also increasingly open- ing to cross-border distribution. Pan-European distribution develops in line with changing distribution models from the predominance of a vertically integrated value-chain to third party distribution, and to- day’s most valued distribution model is guided architecture. Further afield, cross-border distribution of UCITS continues to expand worldwide, with new countries opening to UCITS every year.Furthermore the industry is currently eying distribution opportunities in a few big economies that are still closed to distri- bution. Within the European domestic markets, two main competitive fund distribution models coexist: The Transfer Agent model and the Central Security Depository model. Each Member State has developed the model best suited to its national financial industry requirements, however despite functioning well at a domestic level, the fragmentation causes barriers to efficient order routing, settlement and custody in a cross-border environment. Since a few years, a new fund distribution model has emerged to facili- tate cross-border distribution: The global TA model. Although the UCITS Directive’s objective of developing a unified regulatory framework for mutual funds across Europe is largely achieved, asset managers looking to market their funds beyond domestic bor- ders continue to face a number of key issues in terms of: • Administrative and regulatory requirements, as registration and post-registration duties can be oner- ous and time-consuming in certain countries; • Taxation, as they have to ensure compliance with all fiscal obligations in countries where they distribute their products; • Access to reliable and updated information, as there is no pan-European fund database; • Operational workflow, as the growing cross-border business and open architecture trend tends to in- crease operational complexity in an industry where manual processes and lack of standardisation re- main widespread; • Distribution agreements and trailer fee management, as their distribution networks are increasingly complex. However, major initiatives have emerged which aim to tackle these issues, at least at the EU level: • European regulations are constantly adapted to steadily knock down barriers and favour the develop- ment of cross-border distribution, with the recent UCITS IV Directive being a prime example; • Major tax discrimination against foreign UCITS has disappeared in the EU due to pressure from the European authorities; • Under the guidance of the EFAMA, the development of the Fund Processing Passport is opening the way for the electronic communication of operational information on funds; • Numerous steps have been taken over the past years by market place groups, such as SWIFT, ICSDs and other players including transfer agents, to increase the levels of automation and uptake of stand- ards, which has in turn given rise to a broad range of automated fund platforms; • Some service providers have started to position themselves as intermediaries between distributors and promoters/management companies. One of the major challenges to come is putting the theoretical model of full-STP processes for the fund industry into practice. The key benefits for the industry are greater efficiency, reduced operational risk and enhanced service. Industry players must continue working closely together in order to develop and implement the necessary standards and best practices.

CONTEXT................................................................................................................................................................... 7 1.1 UCITS fund distribution channels and business models............................................................. 7 1.1.1 Evolution of fund distribution channels in Europe and current trends.................... 7 1.1.2 Open and guided architecture................................................................................................. 10 1.2 Fund sales trends in Europe................................................................................................................. 15 1.2.1 Fund sales to insurers, pension funds and other financial intermediaries........ 15 1.2.2 Fund sales to the retail sector................................................................................................ 17 1.2.3 Direct sales of funds to the retail sector, an analysis by distribution channel....... 18 1.3 Analysis of UCITS cross-border distribution market................................................................. 21 1.3.1 The leadership of Luxembourg and Irish hubs ............................................................... 22 1.3.2 The cross-border distribution of domestic products ................................................... 26 1.3.3 Top target markets for cross-border distribution in Europe ................................... 27 1.3.4 Distribution perspectives outside Europe ......................................................................... 28 FUND DISTRIBUTION MODELS & PLAYERS.......................................................................................... 33 2.1 The CSD and TA models......................................................................................................................... 33 2.1.1 The CSD model: The French example.................................................................................. 33 2.1.2 The TA model: The Luxembourg example.......................................................................... 34 2.1.3 Comparative analysis of both models.................................................................................. 35 2.2 The global TA model.................................................................................................................................. 37 2.3 Players’ roles and responsibilities for the principal distribution markets........................ 37 2.3.1 Players shared by both CSD and TA models.................................................................... 37 2.3.2 Players specific to the CSD model......................................................................................... 39 2.3.3 Players specific to the TA model............................................................................................ 39 CHALLENGES & OPPORTUNITIES.............................................................................................................. 41 3.1 Administrative and regulatory requirements................................................................................ 41 3.1.1 Registration requirements for foreign funds................................................................... 41 3.1.2 Post-registration requirements...................................................................................................... 44 3.2 Taxation issues............................................................................................................................................ 47 3.2.1 Taxation of funds and investors.............................................................................................. 47 3.2.2 Tax representative appointment and reporting to local fiscal authorities......... 48 3.3 Information referencing issue.............................................................................................................. 49 3.3.1 The lack of a pan-European fund database penalises cross-border distribution.. 49 3.3.2 The Fund Processing Passport, an EFAMA initiative.................................................... 49 3.4 Operational workflow ............................................................................................................................... 53 3.4.1 The growth in cross-border business and open/guided architecture tends to exacerbate operational complexity .................................................................................... 53 3.4.2 Various initiatives have emerged to increase automation and standardisation... 55 3.4.2.1 Market place groups’ initiatives............................................................................ 56 3.4.2.2 Electronic messaging initiatives............................................................................ 57 3.4.2.3 Fund platforms.............................................................................................................. 58 3.5 Distribution networks & agreements and trailer fee management.................................. 65 3.5.1 Open architecture has resulted in ever more complex distribution networks....... 65 3.5.2 The lack of standardisation in distribution agreements creates inefficiencies...... 66 3.5.3 Trailer fee management has become a key issue............................................................. 66 3.5.4 Recent initiatives to improve fund sales agreements...................................................... 67 3.5.4.1 Recommandations issued by EFAMA................................................................... 68 3.5.4.2 DMFSA’s initiative.......................................................................................................... 68

1.

2.

3.

BIBLIOGRAPHY.................................................................................................................................................... 71

APPENDIX: REGULATION REFERENCES............................................................................................................ 75 • Regulation at the European Union level • Regulation at domestic level as at April 2011

Cross-border distribution of UCITS | page 5

INDEX OF TABLES AND GRAPHS

FIGURE

TITLE

PAGE

Graph 1 Graph 2

Weight of the banking distribution channel in Europe over time (including funds of funds) 7 Key drivers contributing to the development of the open architecture business model Total European mutual fund assets under management by distribution channel, 2008-September 2010 Total cross-border mutual fund assets under management by distribution channel, 2008-September 2010 Cross-border distribution channels’ growth potential as viewed by Cerulli Associates survey respondents, January 2011

10

Graph 3

12

Graph 4

12

Graph 5

13

Graph 6 Graph 7 Graph 8 Graph 9 Table 1 Graph 10 Graph 11 Graph 12 Graph 13 Graph 14

Main financial assets of insurers and pension funds Main financial assets of other financial intermediaries Main financial assets of households in the Euro area Household direct investment fund ownership in Europe in 2009

15 16 17 17 18 21 23 23 24 25 27 28 29 30 33 34 37 41 26

European assets by distribution channel Number of true cross-border funds registered

Evolution of Luxembourg and Ireland market share for cross-border fund registration Evolution of asset classes in the Luxembourg UCITS industry 1997-2009 Evolution of total net assets of Irish domiciled funds (2000-2010)

Country of domiciliation of sophisticated UCITS

Overview of the overall openness of European fund markets to the cross-border activity as at 31/12/2010

Table 2

Graph 15 Graph 16

Top 25 target markets for cross-border fund distribution in Europe

Luxembourg domiciled funds breakdown by distribution regions (in number of funds) Top countries for registration of foreign funds by region outside Europe in 2010

Table 3

Graph 17 Graph 18 Graph 19 Graph 20

Asian markets maturity levels overview

The French CSD model

The Luxembourg TA model and the investment fund distribution process

The global TA model

Table 4

Major issues faced by asset managers distributing their funds cross-border

Table 5

Comparison of registration requirements in the top 7 target countries as at January 2011

42

Table 6

Comparison of post-registration requirements in the top 7 target countries

45

Table 7

Fiscal requirements for the top 7 target markets

48

Graph 21

FPP initial principles

50

Table 8

FPP benefits for fund managers and fund distributors

50

Graph 22

Operational challenges of third-party distribution

54

Table 9

Key drivers and benefits of automation

55

Graph 23

Actors, processes and components at stake for streamlining fund processing

55

Graph 24

Overview of commercial offerings and market initiatives

59

Graph 25

Illustration of a distribution network with 4 levels

66

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CONTEXT

CONTEXT

1.

1.1

UCITS fund distribution channels and business models

1.1

1.1.1

Evolution of fund distribution channels 1 in Europe and current trends

Years ago, the fund management industry was a fully integrated value chain, with the majority of players covering both the manufacturing side (fund management) and the sell side (fund distribution). In most major markets a handful of big names, large international fund houses and local companies, often part of larger banking groups, dominated the marketplace and shared the high revenues of this money-spinning market. However, more than fifteen years ago, market experts predicted that the days when distribu- tion of investment funds in Europe was the preserve of banks and financial institutions may be drawing to an end, as investors would switch to buying fund products at “the supermarket, the petrol station or through the internet” 2 . Clearly, already back then the traditional distribution model was seen as outdated and in need of a rebirth. Some experts went as far as stating that “It wouldn’t surprise if Microsoft became the best partner for asset managers or Walt Disney where you could invest through an ‘investortainment’ channel” 2 . It was the time when the well- known expression “third-party funds” started to be replaced or accompanied by the newly coined “open architecture”. Indeed, much has changed over the following decade, and there are examples of direct sell- ing and fund platforms’ success stories. Yet, these still remain few and far between and the much-announced widespread success is yet to come: Today, the main distribution channels remain retail and private banks, Independent Financial Advisors (IFAs) and insurance wrap- pers, followed by fund platforms and direct selling. Graph 1 displays the weight of the banking distribution channel in Europe over time.

Captive distribution channel: This business model allows clients to choose only from the in-house fund range. Open architecture: This business model allows clients to choose from an extensive range of funds, manufactured by competing asset management groups. Guided open architecture or Guided architecture: This business model allows clients to choose from in-house funds as well as a complementary selection of external funds from a limited number of partners.

Graph 1: Weight of the banking distribution channel in Europe over time (including fund of funds 3 )

100%

80%

60%

90

80

40%

75

75

20%

0% 1995 weight of the banking distribution channel (%) Source: CACEIS analysis on Lipper FMI, data as reported by ZEW/OEE and Oxera, 2011 2000 2005 2009

1 Excluding funds distributed via stock exchanges (e.g. German, Luxembourg or Dutch markets) 2 Source: Reuters Limited, “Euro funds look beyond traditional distributors” by Andrew Priest, 2 July 1998 3 Note on the data used: The funds of funds channel is considered as a subset of the banking channel

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CONTEXT

Only a handful of firms study and analyse the evolution of distribution patterns, as it is a hard task to achieve given the European distribution structure, unclear to most and often opaque to scrutiny. Over the last three years, the financial crisis boosted change in fund distribution trends and the respectiveweight of each channel in different European countries. Before the crisis hit the fund sector so strongly, trends became clear only over a time-span of a few years. However, during 2008, at the peak of the crisis, when redemptions reached very worrying levels for the indus- try as a whole, each distribution channel tended to retain clients using any available means. Banks, the largest channel by far in Continental Europe, with a total share of 75% of European fund distribution (including retail and private banks 4 ), had the biggest client retention power by being able to shift investors’ savings from funds to bank deposits; And they did this even more after retail clients were reassured by several Continental European governments confirming that bank saving accounts would be state-protected in case of bank default. Such trends will be analysed in more depth in order to avoid making misleading conclusions on the dynamics of investment funds sales to the retail sector. Further to the fund industry revival in 2009, the distribution mix followed a slightly different path than during the pre-crisis years. However, the predominance of banks among all distribution channels still remains to be beaten. European fund management houses for the most part still have their own workforce selling only in-house products and, in several Continental European markets, this old-style integrated distribution model still represents the vast majority of total distribution. For example, the Econo- mist claimed back in 2008 that in Italy 92% of assets were “gathered directly by salesmen tied to, or employed by, the fund management group” 5 . According to Lipper FMI data as reported for 2007 and 2010, a certain reshuffle in distribution did take place, but not so much in favour of independent distribution, with Italian IFAs even loosing ground over the last 4 years (-4%). Already back in 2008, “fears were mounting that the open-architecture distribution model would disappear and become a victim of ongoing banking consolidation” 6 . Today, it is still true that open architecture’s success depends on growing markets, when money pours into funds. On the contrary, in times when the fund market is dominated by redemptions, instability rocks the financial landscape and confidence is lost, banks do not need to make the effort of offering more and more diversified ranges and focus on selling at least in-house products. Furthermore, the recent insatiable investor appetite for transparency, coupled with regulators shifting to- ward a tougher disclosure on products, may slow down the path to a real open architecture, as distributors do not want to be held responsible for third-party products that they are not able to fully control.

Over the last three years, the financial crisis boosted change in fund distribution trends and the respective weight of each channel in different European countries.

4 According to Lipper FMI, not only private banks and retail banks should be included in the banking distribution channel, but also the fund of fund sector, excluding a minimal part, and the institutional/corporate sales. In this case, the total Euro- pean estimated distribution market share of the banking sector would reach 72.8% 5 Source: The Economist, “We make, you sell”, 1 March 2008 6 Source: Ignites Europe, FT,“Open-architecture threatened by banking collapse” by Baptiste Aboulian, 9 October 2008

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CONTEXT

The true “open architecture” distribution model also presents some limits: How can a non- experienced retail investor surf the web and choose from the thousands of products that he/ she can purchase at any on-line fund supermarket? The discussion was on, as mentioned, during the late nineties when internet became mainstream, and it is on again in the early 2010’s with the surge of huge, new, web-based retail platforms such as Amazon or I-Tunes. What will happen to the “traditional” distribution channels if all of a sudden these platforms open up to selling funds to differentiate product offerings? Will retail investors be sent emails explaining what fellow buyers bought and suggesting certain funds only on the pure basis of peers’ past sales, without any advice? Although most European investors are not accustomed to directly paying for advice, with the notable exception of the UK and to a certain extent Germany, most Continental European inves- tors are however accustomed to buying investment funds through retail banking channels or insurance products, and hence having the impression of receiving free advice from the bank employee. In both cases, distribution fees are quite often not presented in a transparent man- ner to the end-investor, but are rather included into a more general fee (e.g. “management fee”). In the UK, where IFAs account for a big portion of fund distribution, they are directly remunerated and thus retail investors are used to the concept of paying for receiving financial advice. This also applies to Germany, a mature market, where investment funds are directly held by as much as 57% of households 7 and where the IFA market has been rising in influence over the past years. This trend seems to be continuing as investors still need guidance. Hence, the third step in the evolution of fund distribution, toward the so-called “guided architecture”. Guided architecture allows fund distributors such as IFAs to offer a pre-selected range of funds, targeting the choice given to the final investor. It should be noted that distribution is soon to be profoundly changed in Great Britain when the new Retail Distribution Review (RDR) regulation comes into play. Set to be enforced at the end of 2012, it will apply to all advisers in the retail investment market, regardless of the type of firm they work for (e.g. banks, product providers, IFAs or wealth managers). “To improve the inter- actions between consumers and the industry, (…) the RDR is set in three measures: Improve the clarity with which firms describe their services to consumers; Address the potential for adviser remuneration to distort consumer outcomes; And increase the professional standards of investment advisers” 8 . The extent to which RDR will reshape the distribution pattern in the UK is a much-talked-about subject and yet there is still not a preferred outcome for it, if not that IFAs will have a much harder job if they still want to be qualified for distributing all products. This may, in our point of view, bring the IFA market to a standstill for the first months after RDR comes into play. Europe is a very fragmented market when it comes to distribution models. Spain and Italy are the strongholds of powerful banks whereas the UK is dominated by IFAs.

1.1

It should be noted that distribution is soon to be profoundly changed in Great Britain when the new Retail Distribution Review (RDR) regulation comes into play.

7 Source : Ignites Europe “Germany: A hot spot for managers”, 05/01/2011 8 Source : FSA, for further reference, please see http://www.fsa.gov.uk/Pages/About/What/rdr/index.shtml

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CONTEXT

1.1.2

Open and guided architecture

Open and guided architecture models allow retail investors to access a broader range of fi- nancial products.

Over the years, most distributors shifted from the integrated old model to the much-talked- about “open architecture” model, which allows clients to choose from a whole range of funds, manufactured by competing asset management groups. Private banks and fund supermarkets were the first to offer a whole range of products thanks to open architecture. In the early 2000’s, even retail banks, at first reluctant to adopt an open-architecture distribution model, started to add third-party funds to their in-house ranges. A McKinsey study published in 2006, showed that penetration of third-party products was as high as 79% for IFAs already back then, going down to 35% for private banks and 10% for retail banks. Gradually, however, private banks, retail banks and IFAs shifted toward the guided architecture model and put in place distribution agreements with a few selected asset management houses which they trust. According to a survey conducted in 2007 by PricewaterhouseCoopers on 270 private banks worldwide, nearly three quarters stated that third-party products make up over 40% of their product range 9 .

A certain number of key drivers are influencing third-party distribution and in turn affect the development of open and guided architecture models, as illustrated in the graph below.

Graph 2: Key drivers contributing to the development of the open architecture business model

Better access to information, which has enabled investors to improve their understanding and knowledge of fund products Investors increasingly looking for the best products available strong request for external funds

Regulatory developments (UCITS III, IV…) help to remove barriers

and favour cross-border distribution development

Investors

Regulators

Asset Managers

Asset managers have used UCITS III to increase the range of funds available to European investors, including funds of funds Development of new distribution strategies: third-party fund distribution/ selection, fund of funds sale, multi-managers fund sale, white-labelling

Distributors

Distributors are seeking opportunities for differentiation

Increased expertise in the selection of funds

Source: CACEIS, 2008

9 Source : PricewaterhouseCoopers, “Global Private Banking &Wealth Management Survey”, 2007

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CONTEXT

Today, there are uncertainties with regards to the future of open or guided architecture if the regulators further strengthen controls and disclosure requirements, in which case distributors may want to concentrate selling efforts only toward those products that they can be held re- sponsible for. Nevertheless, open and guided architecture’s future will be more and more linked to cross-border distribution of funds: Most European asset managers expect an increase in the penetration rate for both new models as they represent an easy way of penetrating new mar- kets, especially for those asset managers that enjoy a strong, reputable brand. Open and guided architecture models may result from a wave of merger & acquisition activ- ity in the asset management sector. Further to the financial crisis and the widespread lack of liquidity of the banking sector, many European banks hurriedly put their fund management units on the market. Given the insufficient capital available in the financial industry as a whole, not many deals actually took place, but those that did, according to a 2010 Ignites Europe survey, were priced very low, most probably, too low, and will in all likelihood be regretted by sellers 10 . When commenting on survey results, a Morgan Stanley analyst reported that “as parent banks grapple with the challenge of open architecture as investors seek best-of-breed capabilities, and in view of conflicting demand for group funding which has damaged mutual fund fran- chises in Southern Europe, we see pressures on captives likely driving additional scale deals – similar to Amundi – as banks look to rationalise costs for lower growth businesses” 10 . Furthermore, on the positive side, open architecture can potentially lead to an increase in fund performance, as fund managers can focus purely on their core business, i.e. managing assets, while being exposed to a potentially higher number of investors. However, on the negative side, distribution through a third-party sales force means, for a lot of fund manufacturers, loosing the ownership of client relation, potential revenues (distribution and trailer fees), direct contact with their clients and therefore possibly client loyalty as a whole. Recent experience shows that this can lead to rapid losses for those asset managers that cannot beat the markets and whose client-base, gained through an external sales network, is not particularly attached to them; This also applies to those that have been chosen for the presence in their teams of “star managers” and that see clients follow those “stars” when they move to another fund house or set up on their own. Furthermore, in case of non-integrated distribution models, the recent crisis has created a need for extra reporting efforts to distributors and investors. Notwithstanding these issues, both open and guided architecture represent a great opportunity for foreign asset managers to gain market share over local players in European and interna- tional markets. For this reason, while national open architecture development seems to remain steady , third-party distribution of funds is strengthening, as shown by the two following graphs.

1.1

Open and guided architecture’s future will be more and more linked to cross-border distribution of funds.

10 Source: Ignites Europe “Banks too quick to sell fund ops: survey” by David Ricketts, 08/11/2010

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CONTEXT

Graph 3: Total European mutual fund assets under management by distribution channel, 2008–September 2010

100%

28.6

30.5

33.3

80%

60%

40%

71.4

69.5

66.7

20%

Legend

Captive channel Third-party distribution channel

0%

2008

2009

Sept-2010

Source: Cerulli Associates, 2011

Graph 4: Total cross-border mutual fund assets under management by distribution channel, 2008–September 2010

100%

31.9

34.1

45.2

80%

60%

40%

68.1

65.9

54.8

20%

Legend

Captive channel Third-party distribution channel

0%

2008

2009

Sept-2010

Source: Cerulli Associates, 2011

In France, Spain, Switzerland and Italy, open architecture has developed so far mainly via mul- ti-management (funds of funds) through which banks or insurance companies manage fund wraps that include a broad range of in-house products as well as products from the competi- tion. This enables banks to better control the products they distribute (products’ risk/perform- ance ratios, brand) while providing their customers with a broader range of products and with optimised asset allocation. Industry players also consider that this model limits risks related to a totally open architecture model, namely the difficulty and cost of providing appropriate advice for a large range of products and the difficulty to determine responsibilities of asset managers and distributors toward the investor. A May 2011 Cerulli proprietary survey, however, found that some of these “bank-centred” countries may now be ready for opening to new channels in their historical patterns. Indeed, when asked to evaluate the foreseen most important distribution channel for future French as- set management industry growth, survey players reported that IFAs and fund platforms have

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CONTEXT

by far the highest momentum. And such momentum is not limited to France, IFAs scored well in Italy as well, being second only to discretionary accounts, which tend to remain Italy’s favourite so far. More conservative, Spanish players still bet on a further development of bank-driven distribution of funds, but surprisingly enough they also predict a substantial growth for direct sales 11 . In Germany the predominant model is guided architecture, through which banks distribute their own funds as well as selected external fund products from a limited number of partners; Guided architecture was initially the banks’ answer to the growing market share of IFAs. They first opened their doors, slightly, to third-party products through the use of German funds of funds, which allowed them to meet the growing demands for third parties’ products within their channels. Then, under the pressure of growing demand from customers for a more extensive choice of funds, many banks widened their distribution activities by using open architecture and opened up to third-party (non-German) products by establishing fund-platforms. The non- German funds also became more and more reluctant to accept fund orders directly from IFAs in light of the transfer agent requirements imposed on them (many thousand individual investors instead of just one bank). These developments led to the creation of fund platforms catering for the needs of IFAs and fund managers alike 12 . To conclude, graph 5 clearly summarises for all European cross-border distribution channels their importance in future industry developments, as rated by survey respondents and hence sends a clear message that the predominance of banks (and local banks) is not yet over.

1.1

Graph 5: Cross-border distribution channels’ growth potential as viewed by Cerulli Associ- ates survey respondents, January 2011

5

4

3

2

4.3

3.3

3.3

3.0

3.0

1

1.5

5 = Most important 1 = Least important

0

Retail banks

Fund of funds

Bancassurance

Private banks/ discretionary accounts

Independent financial advisors/platforms

Direct

Source: Cerulli Associates, 2011

11 Source : “European Distribution Dynamics 2011”, Cerulli Associates, May 2011 12 Source : Norton Rose, “Selling investment funds to German private investors - legal and regulatory issues”, July 2008

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CONTEXT

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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

1.2

Fund sales trends in Europe

When analysing fund sales, one has to take into consideration the different fund investors. By definition, investors are the parties whose money is invested in funds and who benefit from the performance of such investments. An investor can either be retail – an individual who purchases small amounts of fund shares/ units for him/herself – or institutional, i.e. an entity with large amounts to invest in funds, such as banks, mutual funds, insurance companies, pension funds, foundations and so forth. Institu- tional investors account for the majority of overall volume. Retail and institutional investors dif- fer of course by nature, but also in terms of the sales and marketing approach, reporting needs, and long term investment views. This guide focuses on the distribution of UCITS, which are the retail investment fund product by definition: Since their creation they have been representing the highest investor protection tool worldwide. Having said so, in the fund distribution context, onemust distinguish between public distribution and private placement. The first one is the sale of units/shares of funds to the retail investors, while the latter is the sale directly to an institutional investor of funds’ units/shares. Provided that the units/shares of funds are bought for investment purposes rather than resale, private placement does not require the registration of foreign funds with local authorities.

1.2

In the following chapters we will analyse the whole spectrum of fund sales by dealing sepa- rately with sales to the institutional sector and the private sector.

Fund sales to insurers, pension funds and other financial intermediaries

1.2.1

According to the European Fund and Asset Management Association (EFAMA) and the Euro- pean Central Bank (ECB), investment funds account for more than a quarter of total financial assets of insurers and pension funds in Europe, as displayed in graph 6.

40% 14.0 share in percent of total Graph 6: Main financial assets of insurers and pension funds 60% 80% 100% 22.4 23.4 24.0 22.3 25.9 19.5 14.1 14.6 8.7 7.9 14.3 44.7 43.1 42.8 47.2 46.6 46.2

Legend

Investment funds Debt securities Quoted shares Currency & deposits

20%

17.9

15.7

15.8

16.0

14.8

15.2

0%

2004

2005

2006

2007

2008

2009

Source: EFAMA fact book 2010, ECB, 2009

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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

Their penetration share increased by more than 5% over the 2004-2009 interval and this, despite the crisis. When analysing this trend, it seems clear that investment funds earned extra exposure thanks to a decrease of direct share holding in insurers’ portfolios. There seems, however, to be room for further modifications and hope from the asset mana- gement industry to gain extra exposure in insurance and pension fund portfolios, seen as tomorrow’s likely winners. In a continent that is quickly ageing and that should reach the worrisome barrier of 50% of population aged 55 and over by 2050, pensions and life insurance products have mar- ket share to gain in households savings. Moreover, most European countries have a pay- as-you-go state-based pension system, and the recent crisis of some Southern European countries created the fear that Member States may not be able to pay off state pensions, or will have to diminish drastically their real value. Hence, the expected rise of pillar 2 and 3 pensions in most European countries. In the Cerulli Associates survey mentioned above, respondents viewed “investing for retirement” as the main source of growth for the fund management industry in the next years. Besides, according to EFAMA, other financial intermediaries (OFIs) held EUR 6.8bn financial assets at the end of 2009, of which 9.9% was invested in funds, as shown by graph 7. The analysis of OFIs’ holdings of funds assets is of particular interest as they include funds of funds, whose distribution patterns are still quite vague.

In the 2005-2009 interval, OFIs, insurance and pension funds clearly contributed for the totality of the investment fund asset growth.

40% 10.9 share in percent of total Graph 7: Main financial assets of other financial intermediaries 60% 80% 100% 34.7 33.9 31.8 34.5 35.1 41.3 10.0 10.6 9.9 9.9 8.9 33.0 33.3 32.8 21.8 26.3 28.7

Legend

Debt securities

20%

33.7

28.7

Quoted shares Investment funds Currency & deposits

24.6

22.4

22.2

21.2

0%

2004

2005

2006

2007

2008

2009

Source: EFAMA fact book, 2010

In the 2005-2009 interval, OFIs, insurance and pension funds clearly contributed for the tota- lity of the investment fund asset growth, reporting respectively a positive net flow of € 235bn and € 489bn.

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A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

1.2.2 Fund sales to the retail sector

We reported previously that at the peak of the crisis, savings shifted away from funds, but the crisis simply destroyed a lot of wealth, including a lot of financial wealth of European households. As EFAMA reports in its 8 th Fact Book published in 2010, up to the end of 2006, that is to say before the crisis began, the average Euro zone holding of investment funds was stable around 11 to 12 % of the total financial wealth of households. At the end of 2009, that is to say when the industry slowly recovered from its worst days, investment fund penetration in financial wealth was still at 9%, downward from previous years, but not tragically down. Graph 8 shows details of the financial asset holdings by asset type for the Euro zone.

1.2

40% share in percent of total Graph 8: Main financial assets of households in the Euro area 60% 80% 100% 12.0 11.5 10.9 8.9 9.0 11.6 38.0 37.5 38.2 42.5 41.6 38.7 9.2 9.2 9.2 9.8 9.3 10.3 7.2 7.9 7.4 4.1 4.7 6.6

Legend

Currency & deposits Quoted shares Debt securities Investment funds Insurance & pension fund reserve

Understanding the local fund distribution channels is critical before marketing funds in a given country.

20%

32.8

33.6

33.9

34.3

34.7

35.4

0%

2004

2005

2006

2007

2008

2009

Source: EFAMA fact book, 2010

However, the situation must be put in context as it varies widely across Euro zone members, as shown in graph 9. Understanding the local fund distribution channels is critical before marketing funds in any given country.

Graph 9: Household direct investment fund ownership in Europe in 2009

11.9

12.0% 12%

11.6

10.9

10.0% 10

9.5 9.4

8.1

8.1

8.0 8.0

8

8.0%

6.9 6.8 6.7

6.2

5.9

6

5.8

6.0%

5.2 5.2 5.0

4.7

4.0% 4%

Share in total financial assets

2

1.8

2.0%

1.2

Share in total financial assets

0.0% 0%

Countries Country

ITALY

SPAIN

TURKEY

GREECE

EUROPE

FRANCE

POLAND

FINALND

SWEDEN

AUSTRIA

NORWAY

BELGIUM

HUNGARY

SLOVAKIA

SLOVENIA

GERMANY

BULGARIA

UNITEDKINGDOM DENMARK

PORTUGAL

CZECHREPUBLIC

Source: EFAMA fact book, 2010

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