Now well into the second half of 2013, Europe is still dealing with the worst financial crisis in recent memory, while Japan has finally joined the party in the printing room, bringing some fresh volatility along the way. The subtle talk of a US exit strategy has recently unsettled global markets, EM growth is fragmented and becoming more and more enigmatic, while southern Europe is in different phases of its fiscal resolution exercise.
Yet the money manager of the European periphery can sense a change in the air. Greece, in its fifth year of recession, has staged the most spectacular fiscal adjustment on OECD records, and is expected to balance both budget and current account deficits within the course of the year.
One small step for GDP
A small GDP growth is expected for next year, for a change. Cyprus is going through the adjustment process of its banking system and economic model after an earlier shock therapy, while Spain, Italy and Portugal seem to be managing the markets’ expectations in ways that keep funding flowing at acceptable costs. Last but not least, Ireland is already rehearsing for graduation day, which by most accounts is less than a year away.
That leaves the money manager of the European periphery with the guesswork of determining the type and characteristics of the next growth phase in our industry. Attention is gradually shifting from crisis management to business growth, but delivering tangible results in terms of asset and revenue growth depends at this stage on correctly deciphering the new age that’s unfolding before us.
First and foremost, the clientele based in the European periphery has gone through various traumatic experiences that have significantly altered its investment priorities. Safety and transparency have largely displaced the long-sought objectives of capital growth in some product categories even at the expense of transaction and management fee sensitivity.
The events that unfolded in Cyprus, where unsecured depositors at two institutions became part of the bail-in process and capital controls were imposed in a eurozone member-country – besides sparking an EU-wide debate on the safety of deposits – re-emphasised the importance of choice in structuring an investment portfolio, even in cases where only cash management is concerned.
Seeking order in chaos
While sufficient choice within a product platform and flexibility in cross border portfolio structuring remain well-sought provider attributes, clients now seem quite concerned about the complexity and ultimate soundness of classic solutions of the past. Simplicity, driven by the required underlying sophistication, seems to be the order of the next day.
Much can be said about the change in perceptions between peripheral and core money management destinations. While safety and discretion were traditionally the main drivers of outflows from the European periphery towards the core, we are already beginning to experience the dawn of a reversal of this trend towards a more balanced asset management mix.
Reasons behind this evolving trend can be found in the much stricter tax collection enforcement in the Southern Europe as a result of the fiscal tightening underway, as well as the pressure these jurisdictions are now applying on traditional core financial centres with regards to disclosing foreign nationals’ assets in their banking systems.
These effects seem to net out in favour of the peripheral European money management destinations, as asset owners gradually re-balance their wealth allocation closer to home.
The dawn of a new age in money management also involves the other critical link – service providers. Institutions in the European periphery have gone through various types of induced transformations, either by virtue of dramatic shakeups in the wider banking groups they belong to, or as a function of the deteriorating macroeconomic backdrop in their home markets.
Many financial institutions had to accept state aid bailouts that introduced significant operating restrictions, while most independent money managers had to confront a wildly shifting theatre of operations as their domestic markets became increasingly volatile.
On the other hand, a series of high-profile scandals in the wake of the global financial crisis, coupled with an international crackdown on true and perceived tax havens, have forced the traditional core players in continental asset management to re-think their offering, layout and client strategies, often to the benefit of smaller, nimbler market participants.
What seems to be emerging from this fusion is larger industry concentration at the core, while competition in peripheral markets is already picking up as besides the surviving locals, established forces are opening shop in new destinations across Europe, as they follow part of the money trail back to its home jurisdictions.
With a diverse and often disoriented client base and shifting industry dynamics, one can only wonder where this new era in money management in Europe is taking us. We think it has to do with diversification, specialisation and more transparency. All-in all, better days for the industry as a whole.
First and foremost, the purification process that existing and potential AuMs are undergoing will only help money managers as the investment process will once again come to the forefront, resulting in higher ROAs that will be derived by simpler, more straightforward product structures.
Uncertain decisions ahead
Elaborate portfolio ownership and control schemes are already taking a back seat to sound asset allocation, as private wealth is properly accounted for and taxed by local jurisdictions. Coupled with the natural tendency to stay local and think globally, asset growth will eventually spread out to more jurisdictions across the continent, with the periphery standing to reap significant benefits over the next decade.
In terms of its structural characteristics, the industry is also becoming a better citizen in the financial services ecosystem. Increased regulation, the crackdown on tax havens and the increased cross border cooperation of enforcement authorities is already ensuring a much more level playing field.
The providers that are willing to adapt or have survived the numerous local market scares to date are leaner, more focused, with updated corporate structures and a product offering that answers the questions clients ask in today’s volatile economic reality.
We expect that this process will only intensify in the months and years ahead, as the European economy will find its way towards economic growth in a much more integrated fashion.
Change in almost every human activity takes place in many forms. It usually boils down to a mix of foresight and inducement. While the financial industry as a whole is not renowned for its ability to recognise the need for change and force it on itself, money managers in the European periphery and ultimately its core have been faced with a do-or-die dilemma: change the way we do business, or cease to exist.
We feel the answer delivered so far shows significant promise for the future, in the form of a completely re-oriented industry that is blending today’s client needs with a product platform and an approach to asset allocation that attempt to address the challenges of the day after.
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