Galaxy of-stars-final

From big bang to a galaxy of stars
An assessment of Ucits after 30 years of evolution
30

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Foreword
DeniseVoss, Chairman ofALFI
T
hirty years ago, few would have foreseen the phenomenal success that
Europe’s Ucits has become. ‘Undertakings for Collective Investment in
Transferable Securities’ was an unlikely candidate to be a brand in its own
right, however today it is one of the EU’s most recognised financial exports, held
by investors resident in over 70 countries around the globe. As the premier global
investment fund, nearly two out of three Ucits distributed on a cross-border basis
are from Luxembourg, and assets under management in Luxembourg Ucits continue
to grow, recently reaching a new record of €3.6trn. We expect this trend to continue
given the sound regulatory framework and reputation of Ucits, and the depth of
global capability embedded in the structure.
All is not rosy, however. A new technological world faces the industry; savers who are
looking for engaging, easy to use, customisable and, crucially, mobile solutions. Fund
industry actors must now appeal to this demographic group. But, to make investing
‘on the go’ successful, they must also contribute to developing the sound financial
knowledge these savers need to make smart choices with or without financial
advice. This report highlights the opportunity but investor education is a critical
component. ALFI’s recent relaunch of www.understandinginvesting.org, reflects
our belief that investor education is essential both for the economic well-being of
individuals and the global economy.
Internationally, ALFI is as active as ever with an intense promotional agenda
to showcase the Grand Duchy’s investment fund ecosystem. In Latin America,
Luxembourg Ucits are now among the preferred investment solutions for local
pension funds and in Asia, we will continue to nurture the close relationships we
maintain with the many fund markets in the region.
For 30 years ALFI has been committed to advancing Luxembourg’s position as the
international fund centre of reference. We now look forward to another 30 years of
commitment to achieving the full potential of Luxembourg Ucits and other funds in
serving the financial health of investors and the economy.

Introduction
Diana Mackay
T
he Big Bang for asset managers occurred 30 years ago when the European
Parliament passed a directive giving Undertakings for Collective
Investments in Transferable Securities the passport to access all retail
investors in what was then known as the European Community. This strange beast,
now more commonly known as the Ucits Directive, triggered a period of explosive
growth, turning an industry that was nascent in some countries and non-existent in
others into a global brand boasting fund assets of nearly €10trn. The Big Bang caused
a collection of just 5,500 funds to explode into a universe of 32,000 stars, many with
sales appeal in markets beyond the gaze of the European rule makers.
Luxembourg was the first European country to seize the opportunity and the first
to implement the Directive in 1988. And in this year that saw the birth of Alfi, action
was taken that culminated in the smallest member of the European Community
becoming the largest domicile for European funds, and the beating heart of the
global fund market. European Ucits have become an accepted regulatory standard
for retail funds in markets all over the world. They are an important export story
with non-European markets accounting for 24% of Ucits’ assets. In terms of net
sales in 2017, their share was even higher at 31%.
The 30-year history of Ucits has sometimes seemed a crooked path but proof of its
resilience is clear from its ability to survive and thrive through market corrections
and serious financial storms. I am privileged to have been in a position to track this
regulatory success from its birth, and to have witnessed, and been able to measure,
the extent of its global reach. This report represents the accumulated wisdom and
data of the many stakeholders that have contributed to the past growth of Ucits. It
also sets the scene for those that will guide its health for investors in the next thirty
years.

5
Contents
Foreword 3
Introduction 4
Executive summary 6
Route to the top – a short history of Ucits 8
1 Three decades of exploration 11
2 European constellation 23
3 Into the wider universe 35
4 Distribution power 49
5 Future horizons 59
Appendices
1 Contributors & acknowledgements 67
2 Notes to sources 68

Executive summary
■ Ucits assets have the potential to grow at a compound rate of 5% in the
next three decades: This growth rate would quadruple their asset base to over
€42trn by the year 2048. This model suggests that average annual net sales flows
would rise from €201bn in 2017 to €860bn in thirty years.
■ Consolidation may lead to a contraction in the number of Ucits available
in the next 30 years. At the current rate of decline Ucits will number 17,500 in
2048 but their average size will be €2.4bn.
■ The Ucits Directive gave investment funds regulatory credibility:
Its launch made offshore funds acceptable vehicles for retail investors thereby
kick starting a period of explosive growth that took assets in long-term Ucits
from €300bn to nearly €10trn in their first three decades of life. AIFMD has
added a further €6trn of assets.
■ Luxembourg’s decision to be the first country to implement Ucits set the
Grand Duchy on the fast track in attracting groups looking for a suitable domicile
for their cross-border initiatives. Luxembourg now houses 36% of assets invested
in Ucits.
■ In its brief history Ucits has proved resilient to market crises: Ucits has
enjoyed periods of strong market growth and endured two significant crashes.
Each market crisis has ultimately resulted in new investors appreciating the
regulatory benefits of the structure.
■ Cross-border distribution is now no longer a dream but an integral feature
of the regime: Pure cross-border groups are now amongst Europe’s ten largest
asset management brands. Cross-border groups now account for 51% of all
European long-term fund assets.
■ Ucits has made Europe a honey pot for fund groups worldwide: Groups
from EU countries manage 56% of assets with US groups accounting for 30%.
6 B I G B A N G T O G A L A X Y O F S TA R S

■ Cross-border groups source 77% of their assets from Europe: Within this
European portion, five countries account for 70% of assets. Italy has been the
most successful market for these groups, followed by Switzerland and Germany.
■ Although designed for European investors Ucits has also proved to be a
successful export: Asian markets account for 13% of cross-border assets, with
Latin American markets contributing 3%. Hong Kong represents the largest
market for Ucits in Asia, followed by Taiwan and Singapore.
■ China is seen to be the big prize for foreign managers: Few groups, however,
have managed to compete with the local players for assets that remain focussed
on domestic strategies. Plans to lift capital controls and grow third pillar pension
provision could provide opportunity for the future.
■ Despite its success, it has been tough for pure-play cross-border groups to
gather net new money: The average group has generated just €1bn of annual
net sales from Europe and to achieve this each group has had to generate around
€12bn of gross sales.
■ Mifid 2 has been a game changer disrupting the traditional value chain:
The impact has been increased transparency and pricing pressure, leading to a
new focus on low-cost passives. The wealth management segment, particularly
those that were fee-based are least affected. They represent 43% of the European
asset pool that is accessible to third party providers.
■ The CMU and local initiatives to enhance long term savings to meet severe
demographic challenges will encourage future growth in Europe: Outside
Europe regulators are likely to wish to protect their own markets but the Ucits
brand means that the Ucits structure is most likely to be the adopted vehicle.
E X E C U T I V E S U M M A R Y 7

Route to the top
A short history of Ucits
€1.8trn
1988
1987
2001
Luxembourg
becomes ﬁrst
country to
implement
Ucits
Birth of
Ucits
Ucits 3
adopted
Dotcom crash
Error
404
1997-2000
2002
Ucits
AUM by
year
Deca
1997
Decade 1
1987
T
adop

T H R E E D E C A D E S O F G R O W T H 9
Decade 3
2007
2017
€6.1trn
€9.7trn
Global ﬁnancial crisis
2007-2008
2011
2004
new10
countries join
the EU
cade 2
Ucits 4 &
AIFMD
adopted
The
is
pted
EURO
2013
Taper
tantrum
Ucits 5
adopted
2016

“UcitsgavenewlifetoLuxembourgbutthe
relationshiphasbeensymbioticand...
LuxembourghasbreathednewlifeintoUcits.
Byprovidingafundcentrethatisdedicated
totheassetmanagementindustryithas
offeredahomethatis...attractivetothose
lookingtodevelopalong-termpresenceinthe
Europeansavings’market.Thisisattheroot
ofLuxembourg’ssuccessbutitisalsoacritical
factorintheevolutionofUcitsandthesingle
marketdream”
—SymbiosisintheEvolutionofUcits,Lipper,2008

1Three decades of exploration
The stated goal of the European policy machine in launching Ucits was
to create a passporting structure for fund sales within the European
Community. Thus a fund legally created in one European domicile, assuming
it met specified criteria, could be registered for sale in another. The limited
ambitions of the European Commission at the time was the creation of a
‘level playing field’ for funds across Europe, but it established Europe as the
global hub for fund investment and opened a door for retail savers to access
the services of expert portfolio managers regardless of their location.
P
rior to the Ucits Directive, the concept of cross-border business in the retail
world was more or less non-existent, at least in Continental Europe. There
was some interaction between Belgian investors buying coupon funds
based in Luxembourg but it was really only in the UK that cross-border business
thrived and this was in the form of so-called offshore activity. For much of the 1970s
and 1980s the offshore market was largely the province of British fund managers
offering offshore funds to domestic investors, expatriates and other high net worth
‘third country’ nationals through low-cost tax centres in the Channel Islands, the
Caribbean, Switzerland and Hong Kong. In many Continental European markets the
concept of ‘offshore’ was decidedly negative and, indeed, until the mid-1980’s French
investors were restricted from investing abroad. Investment in foreign funds was
regarded as dangerous.
Decade 1: pan-European expansion
The Ucits Directive changed all this by giving funds, regardless of their domicile,
regulatory credibility. In so doing it kick-started three decades of remarkable
expansion of long-term investment for retail savers. Its development in the first
decade was initially slow and in some ways unexpected. A single market of funds
11

that was agnostic to fund domicile and the residence of the end investor was a
laudable dream but initial practicalities and market preferences made complete
freedom of movement unrealistic. Luxembourg’s move to become the first country
to implement the Directive paved the way for this central, multi-lingual private
banking centre to become a host domicile to the early movers looking to take
advantage of the opportunities that Ucits presented.
Luxembourg takes the lead
Luxembourg’s early implementation of Ucits in March 1988 put it more than a year
ahead of Dublin, which formed its International Financial Services Centre and
implemented the Directive in 1989. Five years later, about 75% of the 992 funds
based in Luxembourg identified themselves as Ucits and were registered for sale
in at least one other EC jurisdiction. Early implementation of the Directive in
Luxembourg resulted in a wave of product launches there by the leading Continental
European banks, thereby converting the country from a quiet banking backwater
into a European fund centre with back office capabilities that enabled funds from
any neighbouring nation to match the local offerings.
The historical importance of Ucits to
Continental banks in this first phase of Ucits
development cannot be overestimated. Belgium
had historical ties with Luxembourg and the
new regime further strengthened the ties. For
other countries, the Grand Duchy offered the
convenience of a single location with all the
language and technical skills to establish funds
that not only carried the imprimatur of the
European Community, but also looked local.
French and German banks could now use their
extensive branch networks to market regulated
savings products to retail investors alongside
their locally-based funds. For the Swiss, market access was the critical factor.
Having voted against joining the European club, Luxembourg became a vital conduit
for Swiss groups to access their private clients across Europe. The early cross-
border pioneers also saw Luxembourg as a viable central hub from which they could
more easily explore the Continental European markets, but in this first decade they
were the minority.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Fig 1.1: Growth of AUM (€bn) and # funds in 1st
decade
Total net assets LuxAUM Number of funds
Source: Efama, Alfi, ICI

Round-tripping
The first decade of Ucits was pan-European rather than cross-border in its
orientation. It was an opportunity for the indigenous banks to move beyond their
role as deposit-takers and, for the first time, flex their muscles in the more lucrative
Fig 2: Early advantages of Luxembourg for development of Ucits
Drivers of growth in initial adoption phase
Belgium
Strong historical and cultural ties with Luxembourg, and no local fund
infrastructure meant that Luxembourg Ucits filled an immediate demand
gap. Luxembourg funds offered a coupon allowing Belgian nationals
to manage complex inheritance taxes so the implementation of laws
enabling the launch of local Ucits meant a slow start for the domestic fund
industry.
Germany
Processing advantages– a fund based in Luxembourg could be launched
faster than an equivalent German-based fund. German groups discovered
the convenience and flexibility of being able to offer Luxembourg funds to
their local clients and owning a Luxembourg fund became fashionable!
Switzerland
An international client base and a position outside the EU made an
alternative home in Luxembourg an essential recourse for Swiss banks.
France
Luxembourg was less important to French providers, which thrived
on a large domestic market. Luxembourg Ucits offered no immediate
attraction to French investors over their local funds but a small number
of institutions found the large umbrella structures attractive for the
switching opportunities they allowed. Umbrella structures were not
available in France.
UK
For UK groups the Ucits opportunity was one of access to Continental
European investors but finding suitable distributors in these bank-
dominated countries proved challenging.

By1993round-trip
fundsrepresented
58%ofall
LuxembourgUcits
provision of long-term savings products, which also introduced many to
foreign exchange and other investment banking activities. These banks
entered a pan-Europe phase of acquisition activity looking to develop
equivalent domestic franchises in other European countries. For these
organisations Luxembourg became a convenient domicile for funds
destined for consumption by their home-market investors and insofar as
they acquired or established entities in other countries, their aim was to
manage local (or Luxembourg) funds for local investors.
The phrase ‘round-tripping’ was coined to describe the local sales focus of these
early adopters of Ucits in Luxembourg. By the end of 1993 round-trip funds
represented 58% of all Luxembourg Ucits. And, by linguistic extension the term
‘reverse round-trip’ also became a feature linked to funds that were launched in
Luxembourg and notified for sale only in Luxembourg. These funds, predominately
managed by German banks enabled clients to buy either Luxembourg or German
funds through a single Luxembourg account. In this year more than half of all
Luxembourg Ucits were sold into just one market. A mere 8% of Luxembourg-based
Ucits were notified for sale in more than four markets and of all Ucits selling into
this number of countries, Luxembourg Ucits accounted for 92%.
Decade 2: from boom to bust, and boom again
After a sluggish start the fund industry under the Ucits Directive boomed. By the
end of its first decade the number of Ucits in Europe had exploded from 5,500 with
€307bn of assets under management to over 17,000 with assets of €1.8trn1
. The
drivers were complex but essentially distilled into two areas:
▪ Interest rates reductions encouraging a long-term move out of cash and money
market funds, into fixed income funds mainly investing in government bonds.
Banks were the principle beneficiaries of this shift, which also kick-started the
vibrant Italian fund industry.
▪ Rising appetite for equity funds, which culminated in the dot.com bubble of 1999
and, ultimately, in the crash that followed in 2000.
The dot.com bubble marked the end of the first decade for Ucits but also its first
crisis of confidence. 1999 was the pivotal year when European investors piled into
1 Efama

equity funds, specifically those investing in internet and technology stock. No pan-
European sales data exists for this heady period but extrapolation from such data as
was available at the time suggests that over €200bn of new money was invested in
equity funds in 1999, with a further €143bn in 2000, of which €129bn was invested
by Italians alone. The scale of this bubble can only really be appreciated by looking
at subsequent equity flows, which have never since reached the 1999 volumes. Their
best subsequent year was, in fact, 2017 when European funds registered €164bn of
new money but, in contrast with 1999, this latest peak saw 65% of net inflow going
into passively managed funds.
Shock waves from the dot.com crash
The crash came in the Spring of 2000 and with it collapsed the allfinanz ambitions of
many European banks to dominate both the manufacture and distribution of funds.
Their heavy involvement in encouraging savers into high-risk technology stocks,
managed internally, rocked the confidence of their clients, many of whom saw the
value of their holdings plummet by 50%-70%. On the plus side, they chose, or were
persuaded to avoid, crystallising losses and although the new money tap was turned
back to just a dribble, equity funds remained in positive territory until the financial
crisis weighed in.
Source: Broadridge, latest data date – June 2018
Author estimates for 1999 and 2001 based on BVI and Assogestioni data for Germany and Italy.
(150)
(100)
(50)
0
50
100
150
200
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Fig 1.2: Net sales of Equity funds from dot.com bubble to
current date

European expansion and new growth
Meanwhile, the newly-launched Eurozone
in 2000, and the subsequent widening of
the European Union to embrace many
Eastern European nations in 2004 led, to a
rapid expansion of interest in European and
Eurozone stock funds. This time, though, it was
the cross-border groups that were the main
beneficiaries. Mainstream retail investors, the
core constituents of the banks, remained on the
sidelines nursing their tech-stock losses, but
wealth managers and third party distributors in
search of performance sought the investment
skills on offer from the pure-play fund houses.
This was also a period of open- or guided-
architecture growth when banks saw advantage in using third party manufacturers
to offset earlier disappointment in their own equity skills. Many banks shifted their
strategies from allfinanz to distribution and fund selection strength.
Ucits 3 and inclusion of derivatives as eligible assets
At the start of this second decade of Ucits evolution, the European Commission
published its proposals for Ucits 3 (1998), having failed to get agreement for Ucits
2. Ucits 3 was adopted in 2001 and expanded the range of investments permitted by
Ucits funds to money market funds and funds of funds. Critically, the list of eligible
assets included, for the first time, certain derivatives and hedge fund strategies
aimed at sophisticated investors. ‘Newcits’ became the buzz word for these
strategies to distinguish them from traditional products, that were all subsumed
under the Ucits 3 umbrella. On the plus side, retail investors gained access to some
regulated hedge fund strategies and, of these, absolute return strategies have become
the most prolific.
These initiatives reinvigorated Ucits and fund industry fortunes leaving the dot.com
crash a memory that could quickly be forgotten. By 2005 net sales of long-term funds
had risen to a new high point of €371bn with bond funds enjoying their best year
on record. Rising interest rates put an end to the bond boom in 2006 but equities
continued to shine until the first rumblings of the financial crisis slammed the door
to the second decade of Ucits.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Fig 1.3: Growth of AUM (€bn) and # funds in 2nd
decade
Source: Efama, Alfi

Decade 3: promises delivered or dashed?
The third decade of Ucits had an inauspicious start. With the financial markets
seemingly spiralling out of control, investors sold out of every asset class with the
sole exception of safe-haven money market funds. This was a year of unparalleled
redemptions for long-term funds, which rose to €390bn by the year end. It was
undoubtedly a painful period for fund groups but withdrawals in 2008 – the depth of
the crisis – represented less than 10% of the €4.5trn then invested in funds. Crippled
market performance, though, had a much greater impact on industry fortunes,
wiping out more than a quarter of long-term fund assets.
Fears of the destruction of the Ucits brand and loss of trust amongst retail savers
were rife. Ironically, though, although mainstream savers retreated to cash, others
saw the benefits of the regulatory protection of Ucits and the period of pain was
surprisingly brief. By 2010 assets had recovered to their 2007 peak and fund groups
enjoyed two years of sales volumes that came close to €250bn a year. In a period of
extraordinary distress that had many in the industry questioning how investor trust
could be restored, some investors were benefiting from the unprecedented decline
in market values. The regulatory protection offered by Ucits proved to be a draw
for institutions and wealth managers who had previously viewed the vehicle as too
expensive, at least for exposure in plain vanilla securities.
Post-Financial Crisis drivers of growth
The rebound could be distilled down to the following drivers:
▪ Record low interest rates, resulting from central bank policies to steer global
economies from collapse.
“There is a high risk of investors losing confidence and the
industry as a whole should be aware that the trust needed
to build the culture of long-term savings, which is so
indispensable to the future economic health of the European
Community, may have been challenged.”
–JohnBaptistedeFranssu
BuildingLong-TermSavingsinEurope,2009

▪ Wealth managers, quick to spot the capacity of emerging markets to recover
earlier than the developed countries, and to take advantage of stock market rises
fuelled by the proprietary trading that followed government quantitative easing
strategies. Of €113bn that was redeemed from equities in 2008, €112bn returned
in 2009.
▪ The chase for yield against the backdrop of low interest rates had the wealthy
and some mainstream investors backing investment grade debt and other higher
yielding bond funds.
▪ A new-found appreciation of the regulated status of Ucits, which compounded
as Europe entered its debt crisis. Funds were seen to be safer than unregulated
hedge funds and the ability to access hedge strategies in Ucits form seemed
a better option for many. Meanwhile, interest rates were crumbling and cash
deposits were vulnerable to being snatched by creditors in advance of a state bail
out.
▪ Accommodative Central Bank policies in the form of quantitative easing created
enormous opportunities for more sophisticated investors to front run the well-
broadcast initiatives.
Expanding appetite and new opportunities
Amongst the wider retail franchise this was the
decade of risk aversion and restraint. Fearful
savers with the willing encouragement from
their cash-strapped banks retreated to cash.
Some banks sold off their asset management
arms either willingly or under orders from
European regulators – the price of rescue
during the Eurozone credit crunch – leaving
local and cross-border independents the space
to innovate and expand.
In this decade of turmoil and opportunity the
competitive landscape changed again, from one
that was dominated by the large Continental
captive banks to one where independent houses, both local and cross-border,
stepped into the spotlight. At the start of 2007 Europe’s ranking of largest managers
of long-term funds was led by UBS and included just two cross-border groups. A
decade later the number of pure-play cross-border groups had doubled, whilst those
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0
2,000
4,000
6,000
8,000
10,000
12,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Fig 1.4: Growth of AUM (€bn) and # funds in 3rd
decade
Source: Efama, Alfi

with a mixed franchise had expanded. Importantly, BlackRock, powered by its
ETF business, had leapfrogged bank and independent competitors alike to become
Europe’s largest asset management brand.
Incorporating alternatives into the passporting regime
During this period Ucits 4 and 5 were implemented, further facilitating cross-border
expansion with the introduction of the management group passport, the launch of
the simplified prospectus (which became the Key Investor Information Document
or Kiid), and provisions to encourage efficiencies through pooling of assets (via
master feeder funds) and fund mergers. Finally, within Ucits 5 were numerous
provisions to increase the security of the depositary provisions and implement a
remuneration regime for key staff that aligned their interests more closely with
investors. As well as enhancing existing Ucits provisions the European Parliament
also approved a further important expansion of the passport to include a number
of so-called alternative products in the form of the Alternative Investment Fund
Manager’s Directive (AIFMD) in 2011.
Fig 1.5: Market leaders – Dec 2006 (€bn)
Name Provenance AUM
1 UBSAG CH/X-Border 179
2 CréditAgricole FR 179
3 Unicredit IT 150
4 DWS DE/X-Border 130
5 Fidelity X-Border 114
6 AXA Group FR/X-Border 100
7 JPMorgan X-Border 95
8 Eurizon IT 89
9 Union DE 86
10 Allianz GI DE 83
TotalAUM–Top 10 1,202
TotalAUM–All groups 4,443
Market share of top 10 groups 27%
Fig 1.6: Market leaders – Dec 2016 (€bn)
Name Provenance AUM
1 BlackRock X-Border 519
2 UBSAG CH/X-Border 231
3 DWS DE/X-Border 226
4 Intesa SP IT 160
5 Amundi FR/X-Border 151
6 JPMorgan X-Border 144
7 Union DE 144
8 AXA FR/X-Border 142
9 Fidelity X-Border 139
10 Schroders X-Border 138
TotalAUM–Top 10 1,994
TotalAUM–All groups 7,559
Market share of top 10 groups 26%
Source: Broadridge.
Note: Data excludes money market funds and funds of funds.

The new category of Alternative Investment
Funds (AIFs) introduced a sizeable new
segment of investment activity embracing
closed-ended investment funds, private equity
and venture capital funds, real estate funds and
hedge funds. The European trade association,
Efama, show assets of funds now categorised as
AIFs to have had €1.9trn of assets in 2007. By
the end of 2017, this volume had expanded to
reach nearly €6trn of which the bulk (27%) was
invested in multi-asset products.
Although still a junior partner to Ucits, their
growth has once again proven the power of
regulation in facilitating market expansion.
Demand for alternative products is rising,
particularly in the current more volatile
market climate. However, there remains
some suspicion of the complex structures
involved in some products, particularly hedge
funds. Increasingly, asset managers find easier
acceptance if the strategy can be brought within
a Ucits wrapper. Some selectors specifically
include only Ucits into their selection criteria because their target market effectively
excludes AIFs under the Mifid 2 rules. This, of course, will act as a break on the
appeal of AIFs because although many AIF products are of interest to selectors, such
as private equity, they want these products within a Ucits wrapper.
Into the next decade
The decade that began in the depths of the global financial crisis ultimately
resulted in an accelerated expansion of Ucits and a wider regulatory framework for
alternatives. It also resulted in the realisation of the cross-border dream for those
early pioneers that made use of the facilities offered by Luxembourg and Dublin to
access the European markets with a single range of funds. By the beginning of the
fourth decade of Ucits, assets under management were on the cusp of breaching
the €10trn mark with AIFs adding a further €6trn to the universe. More than a
third of funds domiciled in Europe are sourcing assets from multiple European
and global markets and, of these, 64% are based in Luxembourg, and a further 25%
in Dublin. Ironically, the decision made by the US regulators three decades ago to
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Fig 1.7: AUM in Ucits v AIFs (€trn)
Ucits AIFs
Source: Efama Fact Book 2018, Alfi
‘I’mseeinganincreasedfocusonUcits-
compliantnon-directionalstrategies,
includinglong/shortequity’
Discretionary Portfolio Manager | Sweden
‘WeonlyacceptUcitsfunds,noAIFson
ourshortlist.’
Retail bank | Austria

forego reciprocal access for Ucits into the US and SEC-registered funds into Europe,
resulted in Europe becoming the central hub of cross-border fund traffic, and Ucits
becoming the commonly accepted regulatory standard for funds around the world.
This important footprint will bode well for Ucits in the coming decade as
populations in many of the newer markets are encouraged by their governments to
take on the mantle of pension provision. Regulators in most non-European countries
will wish to build a local fund franchise but the regulatory structures they use are
most likely to be based on Ucits, which will ultimately facilitate access for European
Ucits when doors begin to open.
In Europe the next decade will see the launch of the Capital Markets Union, an EU
initiative that could be as important to the future growth of Ucits as the original
Directive. At the core of this action plan is a desire to increase investment and the
choices available to retail and institutional investors. Ultimately, the EU is seeking to
deepen the capital markets by migrating some of the vast pool of deposit savings into
managed investments. This is a multi-tentacled initiative but over the next decade
we can expect Ucits to be a key beneficiary.
Europe
2018: 74%
2013: 77%
North America
2018: 4%
2013: 5% Asia
2018: 12%
2013: 11%
LaƟn America
2018: 3%
2013: 3%
Fig 1.8: Global appeal of cross-border funds, by region
Bubble size repre-
sents fund market
AUM
ProporƟon of cross-border
AUM by region, 2018 vs
2013, %.
MEA
2018: 1%
2013: 1%
Source: Broadridge

“Whenwechooseaprovider,welookat
minimumfundsizesofatleast€100masa
ruleofthumbtosafeguardconsistency.
WealsoneedUCITS-compliantfunds.”
—Insurancefundselector|Germany

E U R O P E A N C O N S T E L L A T I O N 23
2European constellation
The Ucits Directive created the regulatory energy that sparked a spectacular
growth of long-term savings through funds in Europe. From a near-standing
start of €307bn, the European industry has exploded into a constellation of
over 32,000 Ucits with assets of nearly €10trn in long-term funds1
. Although
in its initial development phase it was the local European industries that
were powered up, as the new century dawned the dream of the cross-border
passport became a visible reality. Cross-border funds2
now account for
nearly a third of all long-term Ucits, and 51% of assets3
. The bulk of this
business is sourced from European investors but an unintended consequence
of this regulatory initiative was its early acceptance by investors in wider
global markets.
T
he intention of the original architects of Ucits was to create a harmonised
landscape for marketing funds across Europe. Discussions of some wider
reciprocal agreements between the US and Europe rumbled along in the
background during the early phase of Ucits’ inception but the idea of opening up the
US market to funds domiciled in Europe, and visa versa, proved to be an industry
fantasy that arose out of the optimistic naivety of business strategists looking at
market opportunity with little understanding of local cultures, savings preferences
and competitive forces. To American eyes at that time Europe was seen to be a huge
opportunity. It was a single market with 360 million or so consumers – a third larger
than the US – with savings predominately committed to cash deposits. This status
quo has changed very little in the first 30 years of Ucits; 40% of European household
savings remains in cash and deposits, according to Central Bank statistics, with just
11.4% committed to investment funds4
.
1 Efama
2 Defined by Broadridge as funds that source less than 80% of their assets from one single
country.
3 Broadridge, long-term funds, excluding funds of funds, June 2018
4 Efama Factbook, 2018
23

With no reciprocal trade agreement forthcoming between Europe and the USA,
any group wanting a stake in the Ucits opportunity was forced to establish funds
in the European Union and although some US groups were already present, the
launch of Ucits resulted in multiple waves of newcomers from the US and elsewhere,
establishing funds in either Luxembourg and Dublin to take advantage of this unique
passport. Today, asset managers from some 48 non-EU countries take advantage
of the Ucits Directive by basing funds in the EU and, of these, groups with a US
provenance have the largest presence with fund assets of nearly €3trn, or 30% of the
entire European Ucits total5
. Similar proportions can
be seen in Europe’s largest host domicile, Luxembourg.
However, the presence of US groups in Europe’s second
host centre, Dublin, is all-powerful. Here they account
for 72% of Irish-domiciled assets.
Territorial expansion
Although the Ucits Directive promised the so-called
single market for funds, the ability of a single family of
funds to sell into multiple markets was slow to emerge.
Indeed, the early cross-border pioneers found it hard
to track down distributors that were willing to sell
their funds. They were unknown entities and treated
with suspicion; banks were a closed door and their all-
embracing presence left little room for newcomers. In
these early days (1994) just 269 funds were registered
for sale in five countries or more6
. Today, there are
12,607 cross-border funds, each one registered to sell in
an average of just over eight countries7
.
By the end of 2016 cross-border activity had reached
a pivotal point in its gestation, with assets finally
overtaking those of Europe’s domestic players. This
trend continued in 2017 when the assets of cross-border
groups accounted for 51% of long-term funds (Fig
2.2). The power of the Ucits franchise is even more
obvious when looking at the average volume of assets
in cross-border funds, compared with their domestic
5 Broadridge, data at 30 June 2018. Data excludes funds of funds to avoid double counting.
6 Lipper Analytical Strategy Report – Cross-Border Marketing 1995
7 Global Fund Distribution 2018, Alfi, data sourced from Lipper and PWC
Australasia
1%
Carribean
0%
EU
56%
LatAm
0%
MEA
1%
N America
30%
Wider Europe
12%
Fig 2.1: Share of assets by group provenance
Source: Broadridge
0
1,000
2,000
3,000
4,000
5,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Fig 2.2: Growth of Cross-Border Fund AUM
(€bn)
Domestic Cross-border
Source: Broadridge

counterparts. This analysis (Fig 2.3) shows cross-
border funds to have overtaken domestic funds in the
aftermath of the dot.com bubble, highlighting one of
many factors encouraging the growth of cross-border
strategies over the last two decades.
Drivers of cross-border opportunities
The Ucits framework provided the structure for cross-
border development, but it was external market drivers
that created the opportunities. The most important of
these were:
▪ Increased consumer scepticism in the allfinanz banking model following the
bursting of the dot.com bubble. The consumer shock that came from overselling
practices at that time led to greater retail appetite for product choice that went
beyond the in-house range.
▪ Introduction of D2C supermarket platforms and discount brokerages in the
late 1990s, that encouraged greater consumer awareness of the wider choices
of products that were available. Fund performance data was embedded in these
sites and enabled cross-border providers to profile the superior performance of
relevant funds in a period of equity bull markets. Although none of these D2C
providers became significant distributors, they nonetheless played an important
educational role.
▪ The global financial crisis, which served to highlight the security of regulated
products making them increasingly attractive to wealth advisers who previously
regarded funds as an expensive option for exposure to securities that they could
easily access directly. At a time when developed markets were sinking into
oblivion, the search for uncorrelated options such as emerging markets and
absolute return strategies, further enhanced the use of funds because they were
cheaper to access in this form, and they were regulated.
▪ An institutional drift towards funds for the regulatory comfort they offered,
supported by asset managers, which launched, in particular, tracker products for
their clients. The most recent iteration of this development is the growth of fund
activity from fiduciaries and institutional gatekeepers like Mercers who are now
enabling institutions to access their advisory/asset allocation strategies via Ucits
funds.
0
50
100
150
200
250
300
350
400
450
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Fig 2.3: Growth of ave fund AUM (€bn)
Source: Broadridge

▪ Communication and particularly the dissemination of information via the
internet, which created greater visibility of funds from other markets that might
not otherwise have been spotted. In this way sight of successful local funds from
boutiques now creates external demand and encourages the managers of such
funds to expand their franchise. The huge success of Carmignac’s Patrimoine
fund in 2009-2010 is an example of this dynamic at play.
Sales expansion
Net sales totals over the same period show even more energy, in part from the steady
influx of new players, but also from new investors – sophisticated and institutional
– that increased their commitment to funds. Rising interest in ETFs, a switch away
from plain vanilla funds towards more complex solutions, and the delivery of greater
choice, has helped the cross-border segment to accelerate. The slower pace of
development from domestic groups was really linked to the bank franchise, which
suffered more acutely from the financial crisis and,
mirroring the risk aversion of their retail clients, took
much longer to recover.
The game has changed in the last few years and banks
are now looking to increase profitability rather than
boost cash buffers. Their captive clients, weary of
impoverished interest rates are ready to consider
more lucrative savings options even with some risk
attached. These local players have therefore begun to
recover some market share. It is worth noting here the
growing importance of local boutiques as contributors
to the domestic sales totals in some markets. Their role
remains small but they are increasingly in the sights of
fund selectors in their countries of operation.
Global passport success
The Ucits success story and its rapidly expanding reach into multiple global markets
can be mapped through the registrations that Ucits funds have achieved over the
years. However, the real test of their accomplishment is in the assets derived from
these countries. These assets are invested in European Ucits but are sourced from
investors both within and beyond Europe. According to Broadridge SalesWatch1
data, based on data declared by 67 of Europe’s leading cross-border groups, just
(300)
(200)
(100)
0
100
200
300
400
500
600
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Fig 2.4: Net sales of Cross-Border v domestic
funds (€bn)
Source: Broadridge

under a quarter of assets invested in their European
Ucits are sourced from outside Europe, principally Asian
and Latin American markets (see Chapter 3 for further
details on these markets). The split of assets has changed
very little over time although the overall volume of assets
represented by the contributing groups have more than
doubled since 2010. These groups registered assets of
€2.6trn at the end of 2017.
Focus on Europe
Within Europe the asset split is weighted heavily towards
five key markets, which represent 70% of the €1.9trn of
assets booked by investors in Europe. The data set reveals
assets sourced from nearly 40 countries in the wider
European region, including Russia and Turkey. However,
the majority of these markets are very small and only 14
contribute long-term assets of more than €10bn. Fig 2.6
illustrates the split and highlights those markets in which
foreign or cross-border Ucits have enjoyed most traction.
These are also the markets that have generated the largest
sales volumes in recent years (see Market Dashboard
below for a full profile of Europe’s top five markets).
With retail investor attention increasingly favouring
products offered by the cross-border investment
specialists, and more local players entering the cross-
border arena, how successful have these expansionist
strategies been in gathering new assets from European
retail investors? Fig 2.4 shows a strong growth dynamic
but this data also includes ETFs, Asian and other non-
European inflows, as well net sales from institutions. A
deep-dive into the sales activities of the Broadridge SalesWatch8
groups, which
better reflect the appetite of third party retail buyers, reveals a more nuanced
picture of a maturing industry where increasingly weighty gross sales volumes are
necessary to maintain positive net sales traction. This is particularly the case for the
largest and longest-standing cross-border groups that have built up sizeable pools
of legacy assets that inevitably become vulnerable to redemption as investors shift
8 See Appendix 1 for detailed definition of this data
Asia-Pacific
13%
Europe
77%
LatAm
3%
Other
7%
Fig 2.5: Regional split of European
Ucits by asset source
Source: Broadridge SalesWatch1
Data: Split based on assets of €2.6trn at 31 Dec 2017.
Data excludes ETFs, Funds of Funds, SIFs and money
market funds.
Italy
23%
Switzerland
17%
Germany
12%
UK
11%
Spain
7%
Rest
30%
Fig 2.6: Source of AUM from European
investors in cross-border funds
Source: Broadridge SalesWatch1
Data: Split based on assets of €1.9trn at 31 Dec 2017.
Data excludes ETFs, Funds of Funds, SIFs and money
market funds.

their allocations in response to the changing waves
of product demand. ETFs will be also a factor in the
widening gap that has developed, almost uninterrupted,
between gross and net sales totals since 2012. During
this period, the steady take-up of ETFs, which
predominately wear a Ucits hat, have eaten into the
assets of certain core sectors, particularly in the equity
arena.
The fact remains, though, that aspiring managers
looking to penetrate the European markets, need to
be aware that despite the large sales numbers that
are thrown around in the public domain, the average
pure-play cross-border group has historically generated
just under €1bn of annual net sales receipts from the European markets9
. And, to
achieve this volume, it was necessary for each group to achieve around €12bn of
gross sales. The average obviously masks much bigger numbers from the largest
contributing brands, but it highlights the amount of sales activity required to support
the rising asset trend. Nonetheless, at the asset level, growth over the last decade of
turmoil more or less matches that of the wider European universe where assets have
risen by a factor of 1:8 with market performance and net sales contributing in more
or less equal proportions.
There is much still to do to fully realise the single market dream in Europe but, after
three decades of evolution, the playing field for cross-border and domestic groups
is now more or less level. Cross-border funds have proved their ability to capture
new business from all the European markets, and in some, they have built a sizeable
market share.
9 Broadridge SalesWatch – calculated over the 10-year period to Dec 2017
(4,000)
(2,000)
0
2 ,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018annualised
Fig 2.7: Gross and net sales over time -
per group average(€m)
Gross sales Net sales Linear (Gross sales) Linear (Net sales)
Source: Broadridge SalesWatch

29M A R K E T D A S H B O A R D
ITALY
Key metrics – long-term funds (€bn) 2017
AUM CAGR (10 yr) Net sales
Domestic 475 2% 34
Cross-border 456 21% 68
TOTAL 931 8% 102
Foreign market share 49% 67%
Product focus (€bn) 2017
Domestic Net sales
1. MixedAsset -Target Mat 6.3
2. Bond Global Currency 6.1
3.AssetAllocation 5.9
4. MixedAsset Conservative 5.6
5. Bond Emerging Markets 5.1
Cross-border Net sales*
1. MixedAsset Income --
2. Bond Global Currency --
3.AssetAllocation --
4. Bond Emerging Markets --
5. Bond Flexible --
% of passives in client portfolios: 19%
Bond
45%
Equity
27%
Mixed
26%
Other
2%
Cross-border AUM by investment type
(80,000)
(60,000)
(40,000)
(20,000)
0
2 0,000
40,000
60,000
2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017
Net sales history – 3-yr moving average(€m)
Broadridge.
Data at 31 Dec 2017 with CAGR calculated from 2007. Data excludes ETFs, Money Market funds (incl
Enhanced). Funds of Funds also excluded except in sector table.
Cross-border data sourced from confidential data contributions from 67 groups to Broadridge
SalesWatch service.
The Italian market has been the most
successful target for cross-border groups,
which have built up a market share of
nearly 50%. Bond funds are a strong
favourite but mixed asset funds are now
enjoying stronger growth. There is very little
difference in appetite between domestic
and cross-border sectors, although local
players dominate the Target Maturity space.
* Net sales data unavailable for reasons of
confidentiality..

30 M A R K E T D A S H B O A R D
SWITZERLAND
Domestic 413 10% 13
TOTAL 739 13% 37
Domestic Net sales
1. Bond Global Currency 3.8
2. Bond Global Corporate 2.5
4. FofF Real Estate 1.3
5. Equity NorthAmerica 1.2
Cross-border Net sales
2. Bond US Corp Invest Grade --
4. Bond Flexible --
5. Bank Loan/Floating Rate --
confidentiality..
Bond
44%
Equity
39%
Mixed
11%
Other
6%
Simple assumptions on the Swiss market
can be misleading. Many Swiss groups are
also key cross-border players selling funds
from Lux/Dublin back to Swiss investors,
but also to investors in multiple global
markets. Switzerland is a truly international
buyer market and a high percentage of
assets booked there are bought on behalf of
investors all over the world.
(10,000)
(5,000)
0
5,000
10,000
15,000
2 0,000
2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017
Broadridge.
SalesWatch service.

GERMANY
Domestic 590 3% 28
TOTAL 830 4% 43
Domestic Net sales
1. MixedAsset Conservative 6.1
2.AssetAllocationAlternative 4.8
3. Bank Loan/Floating Rate 3.4
4. Equity Global Income 2.3
5. FofFAssetAllocation 2.2
2.AssetAllocationAlternative --
5. Bond Flexible --
confidentiality..
Bond
36%
Equity
40% Mixed
19%
Other
5%
Cross-border AUM by investment type One of the first markets to become truly
accessible to cross-border Ucits, Germany
remains a key target for cross-border Ucits
although the pace of sales was curtailed
by the financial crisis and has only recently
recovered to its earlier form. Mixed asset
funds have been the product of choice but
competition from local providers is stiff.
(15,000)
(10,000)
(5,000)
0
5,000
10,000
15,000
2 0,000
2 5,000
2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017
Broadridge.
SalesWatch service.

32 M A R K E T D A S H B O A R D
UK
Domestic 1,182 7% 63
TOTAL 1,401 8% 73
Domestic Net sales
1. Equity Global 27.4
2. FofF Balanced 5.6
3. BondTarget Maturity 4.7
4. Equity Europe ex UK 4.4
5. FofF Dynamic 3.6
2. Bond Global Corporates --
4. Equities Europe ex UK --
5. Bonds Emerging Markets --
confidentiality..
Bond
52%
Equity
37%
Mixed
10%
Other
1%
The UK market is Europe’s most open in
terms of distribution structures, but also
one of the least accessible. Headline data
suggests huge potential but most of the
cross-border groups that are winning
assets are groups with a strong domestic
presence. The Brexit factor is affecting
appetite, shifting investor focus from UK
equities to global stock funds.
(10,000)
0
10,000
2 0,000
30,000
40,000
2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017
Broadridge.
SalesWatch service.

SPAIN
Domestic 181 -2% 10
TOTAL 324 3% 37
Domestic Net sales
1. FofF Bond Europe Currency 5.2
3. FofF Balanced 3.3
4. FofFAssetAllocation 3.2
5. Bond EUR ShortTerm 2.6
1. Bond EUR ShortTerm --
2. Bond Flexible --
confidentiality..
Bond
46%
Equity
38%
Mixed
15%
Other
1%
The recent success of cross-border groups
in Spain is linked to the Spanish banks’
strategy of using funds of funds for
their client investments. These are open
architecture products that feed heavily on
cross-border Ucits. The exclusion of funds
of funds from the headline data therefore
contributes to the stalled asset growth from
the local fund groups.
(30,000)
(20,000)
(10,000)
0
10,000
2 0,000
2 002 2 003 2 004 2 005 2 006 2 007 2 008 2 009 2 010 2 011 2 012 2 013 2 014 2 015 2 016 2 017
Broadridge.
SalesWatch service.

“Theindustryisprovingmoresuccessful
thanweoriginallythoughtatcapturingthe
assetsofHNWIs–manyoftheminemerging
markets”
—PWCAssetManagement2020:TakingStock,June2017

I N T O T H E W I D E R U N I V E R S E 35
3Into the wider universe
Durability and brand recognition continue to underpin the sales success
of Ucits outside Europe. However, alongside emergent sales opportunities
headwinds are forming, raising questions about the long-term growth
outlook for one of the region’s most successful exports. Whether developing
a Ucits footprint in Asia, Latin America or the Middle East, competition is
stiff and local regulations are complex so cross-border fund groups must
adapt their business models and hone their product offering to compete with
increasingly sophisticated domestic providers.
W
ith 30 years under its belt the Ucits framework has withstood financial
crises and adapted to new regulations and shifting investor demands.
Its acceptance as a regulatory standard outside Europe was unexpected
in its early days, but subsequently extolled as an important European success
story. Its path has not been smooth; the inclusion of derivatives under the Ucits 3
Directive caused consternation amongst non-European regulators who feared the
entry of complex products that had the potential to undermine the Ucits brand, and
investor confidence. It survived and non-European investors now account for 23%
of assets invested in European Ucits. Nonetheless, while many markets continue to
open their doors to Ucits, protectionist moves in some of the fastest growing wealth
management centres have the potential to challenge the distribution muscle and
resilience of all but the largest and most visible product providers.
Asia Pacific region
Growing wealth in the Asian Pacific region (Apac) is a huge draw card for
international asset managers. According to the latest Cap Gemini Global Wealth
Report1
, Apac and North America powered the growth in numbers of the world’s
1 Published June 2018
35

wealthiest investors, accounting for 75% of
the increase in the global high net worth
population in 2017 and 69% of the rise in HNWI
wealth2
. The report also notes that Asia Pacific
region maintained its growth momentum and
expanded its lead over North America, reaching
a record 6.2 million HNWIs with $21.6tn in
financial wealth. As a relatively sophisticated
client base this wealth community clearly
represents a growing opportunity for
international product providers as they look to
diversify and gain access to niche asset classes.
The importance of the mass affluent and mass
retail investors should also be considered since
over 70% of total Apac wealth is held by these
segments. While financial literacy remains
low, opportunities are likely to increase as
lower interest rates and the downward trend
in investment returns means more initiatives
will have to be introduced to promote pensions
savings. While money market funds account
for the majority of new flows in Apac, the current impetus to mobilise savings and
invest in riskier assets is only going to get more intense, even in ultra-conservative
countries such as Japan.
Hong Kong, Singapore and Taiwan
Notwithstanding the significant opportunity that these developments represent, the
constituent Apac markets are at varying stages of sophistication and addressability.
Fig 3.3 shows the countries that are most open to third-party foreign asset managers
and cross-border Ucits funds are Hong Kong, Singapore and Taiwan3
where cross-
border market share represented 46%, 66% and 54% of their respective investment
fund industries in June 2018. Offshore funds or sub-advised funds form a significant
proportion of assets under management in these markets.
2 A total of 1.2 million new HNWIs accounting for $4.6trn in new wealth
3 Broadridge SalesWatch data – see Appendix 1
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2013 2018
Fig 3.1: Apac AUM by Domicile(€m)
Cross Border Domestic
Source: Broadridge3
(100,000)
0
100,000
200,000
300,000
400,000
500,000
600,000
2010 2011 2012 2013 2014 2015 2016 2017 H1 2018
Fig 3.2: Apac net sales by domicile (€m)
Source: Broadridge3

Taiwan is something of an anomaly and merits
a special mention. Curbs on offshore fund
launches resulted in significant outflows from
Ucits products in 2015 and 2016, but sales
have dramatically recovered as more asset
managers have taken advantage of an incentive
scheme that rewards offshore providers for
boosting their local presence. The Taiwanese
authorities are clearly keen to expand the
domestic market, but the carrot and stick
approach adopted has, paradoxically, lifted
offshore fund business in the country.
South Korea, Japan and Thailand
In other markets such as South Korea, Japan and Thailand, international managers
must work with local partners to access the domestic wealth pools. In Korea, for
example, it is currently more costly to invest directly in an offshore fund than it is
to invest locally due to tax and regulatory issues. The same holds true for Australia.
Unsurprisingly, observers says that regulators are more likely to look favourably on
foreign managers who show a demonstrable commitment to establishing a sustained
local presence. It is notable that in January 2017, the South Korean FSC announced
that it will revise asset management regulations to further open the sector. Under
the proposed new rules, foreign asset managers will be allowed to sell to a wider
group of professionals. However, product partnerships and distribution tie-ups
will be increasingly the norm as foreign managers look for a cost efficient means of
expansion. It is worth pointing out that Japan’s offshore assets as a percentage of
onshore assets can be deceptive as sub-advised assets are significant in this country
and not always visible.
India
India is one of the most challenging markets to penetrate as is evidenced by
the number of managers that have exited the country in recent years. Offshore
funds have yet to gain traction in the country and the majority of onshore funds
invest locally. However, India’s asset management space is growing as a result of
government support and an increasingly professional wealth management industry.
Broadridge forecasts double digit growth in mutual funds and ETFs from 2016-2021.
0
50
100
150
200
250
2013 2018 2013 2018 2013 2018
Hong Kong Singapore Taiwan
Fig 3.3: Apac AUM growth by market (€m)
Source: Broadridge3

China
China is seen by most foreign managers as the main prize and foreign funds can
be distributed via a foreign bank or local wealth manager using their overseas
investment quota (QDII). However, it is domestic focused strategies that are in
demand and currently few international fund houses have made inroads here. That
said, managers should keep an eye on developments in China, as plans to lift capital
controls on outbound investments and grow the country’s third pillar pension
segment will likely create opportunities to launch retail pension funds via fund of
funds structures.
Apac investor appetite
The bulk of mutual fund assets sourced from Apac investors lie in fixed income and
equities. Two notable exceptions are China and South Korea where money market
funds dominate. Weaning investors off money market funds in these countries will
be a challenge, though Chinese investors are starting to diversify and multi-asset
funds along with fixed income funds will likely gain market share over the next three
years.
Equities Apac, thematic equities and mixed asset funds have
enjoyed the strongest sales flows across the region over the
past three quarters, though every market has its own nuances.
In Taiwan, for example, fixed income funds dominate but more
money is starting to be diverted into mixed funds, which will
benefit foreign asset management firms more than local players.
The multi-asset segment has grown in popularity in several Apac
countries as it provides a means to access diversified investment
strategies and suits the more conservative mind-set of many Asian
investors. Those that come with income components remain popular across the
region, particularly in South East Asia where demand has been relatively untapped.
Managers need to keep mixed asset funds simple in order for investors to understand
and feel comfortable with these products.
Social responsibility and ESG
There has been a lot of talk about the need for managers to adapt their product
offerings to include an ESG component. While support for ethically invested
multi-assetalongwith
fixedincomefundsare
expectedtogrow
marketshareoverthe
nextthreeyears

funds has gained significant traction in Europe and North America, they are only
now making an impact in Apac. A number of global managers are registering and
promoting their ESG strategies by leveraging on the success they have built in other
regions. Whilst just four of the largest 20 international ESG funds are passively
managed, seven passive funds made the top 20 list by net new flows at the end
of 2017. Examples of global managers importing these strategies include HSBC,
launching two funds with a lower carbon investment strategy targeted at Hong Kong
retail investors in April 2018 and Natixis Asset Management rolling out a green bond
fund and a sustainable equity fund through its boutique asset management unit
(Mirova). Both funds are for sale in Hong Kong and Singapore.
Passives and ETFs
ETFs have been steadily making inroads in
Apac and it is likely that ETF Connect – the
planned trading link between Hong Kong
and mainland China’s two stock exchanges
– will give the sector a much needed boost.
Currently, Apac institutions are increasing
and broadening ETF usage, but the bulk of
flows have been directed to US and European
exchanges. Retail penetration, on the other
hand, remains low and requires a more
favourable regulatory framework to improve
uptake. While Japan will remain the largest
ETF market in Apac, we expect China (and
Hong Kong due to ETF connect) to be the two fastest growing markets in the region.
Nearly 70% of the projected growth is expected to come from new flows and ETF
assets in the region are expected to reach $1.9trn by 20254
.
Passport threat
Observers have suggested that the most significant threat to Ucits in Asia comes
from recent passporting initiatives looking to emulate and, arguably, to replace
Ucits. These include:
▪ The China mainland/Hong Kong Mutual Recognition of funds (MRF) scheme,
4 Broadridge forecasts
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2013 2018
Fig 3.4: Growth of AUM in mutual fund vs ETF
(€bn)
ETFs
Mutual Funds
Source: Broadridge3

▪ The Asean Collective Investment scheme (CIS) between Singapore, Malaysia,
Thailand,
▪ The Asia Region Fund Passport (ARPF) between Australia, New Zealand,
Singapore, Thailand, Korea and Japan.
Like Ucits these schemes allow approved funds that are domiciled in one country
to be distributed in another participating country and vice versa. While Hong Kong
investors have shown a moderate interest in buying China mutual funds and the CIS
has attracted a modest number of participating funds, asset volumes remain low.
Many observers believes ARPF could be equally disappointing. The main drawback
is the problems posed by the different tax rules in each jurisdiction, which will be
very difficult to align. Further measures will need to be taken in order to provide real
impetus to these regional schemes.
Forward view on Asia
With so much wealth being generated throughout Apac, and as the needs of
investors continue to evolve, Ucits will continue to play an important role because
they facilitate economies of scale, allow the central management of product
strategies and are firmly embedded in the investment culture of the region.
International managers can succeed if they focus on a limited range of products
and choose their markets wisely – a scatter gun approach can never work in Apac.
Beyond the most addressable markets, a local presence is required and attention to
detail is key. Managers have learnt to their cost that applying the same marketing
and distribution strategies across disparate markets rarely works and parachuting
sales staff in from Europe without the requisite language skills and cultural training
can prove to be a costly and unproductive strategy.
Latin America
International managers have traditionally approached Latin America through the
region’s pension schemes (AFPs and Afores) because of their size, transparency,
growth outlook and addressability. According to Broadridge data5
, total
professionally managed pension scheme assets reached $850bn at the end of 2017, of
which $309bn was managed by third party asset managers.
5 Broadridge Money in Motion

Appetite for cross border Ucits products remained robust throughout 2017
as pension scheme administrators sought expertise in emerging market debt,
European, Asian and North American equities. And while the global share of LatAm
Ucits remains tiny at just 2%, regulatory changes to the region’s pensions systems
and shifting dynamics in the region’s wealth management sector are enticing new
entrants to its shores. However, this view needs to be treated with caution because
the perceived opportunities presented by the pension systems can be deceptive.
As Fig 4 shows, addressable pension assets are fairly evenly split within the private
(DB DC) and the public Cap AFP Afores systems. Cap is the largest component
with 44% or $150bn of the total addressable pool, followed by defined benefit with
$100bn or 35% of the addressable assets.
Andean markets
With their similar regulations and ease of access, the Andean markets (Chile,
Colombia and Peru) present the greatest opportunity for international managers.
While Chile is the most established market for both local and international
managers, other Cap systems modelled on Chile represent a growing opportunity
due to their favourable demographics and appetite for mutual funds rather than
mandates.
Fig 4: LatAm addressable institutional assets, €bn
Total
institutional AUM
Addressable
AUM
Addressable
%
DB
Private 170 101 59%
Public 64 1 2%
DC Private 98 59 61%
CAP
Chile 208 82 39%
Mexico 161 22 14%
Columbia 86 20 23%
Peru 48 10 21%
Costa Rica 10 1 8%
846 296 35%
Source: Broadridge.
Brazil accounts for 90% of this
segment, which, due to regulatory
restrictions, can only be accessed
by means of local players.
Mexico CAP system, Afores, is only
accessible through ETFs listed on
the local stockmarket or via pension
mandates. From Jan investment in
Ucits is possible
The Andean market (Chile, Colombia,
Peru) presents the greatest
opportunity for foreign managers,
thanks to similar regulations and single
point of contact from abroad or through
third-party representatives.
1
1
2
2
3
3

Total institutional asset management in Chile
reached $208bn at the end of 2017 with the
addressable component representing $82bn.
This compares to $86bn of AUM in Colombia’s
Cap public DC scheme of which $20bn is
addressable, and $48bn in Peru’s public
pension scheme of which $10bn is addressable.
It is worth noting that some of Chile’s largest
AFPs, such as Provida, typically have between
40%-45% of their assets in foreign vehicles.
Mexico
While Mexico is one of the largest pension
markets in the region with assets of $161bn
and an addressable asset pool of $22bn, until
recently the Cap system was only accessible
through ETFs listed on a local stock exchange
or through mandates given by one of the
pension managers. However, Consar, the local
pension regulator, introduced new guidelines
in January allowing pension funds to invest in
mutual funds with 20% allocation to overseas
Ucits. These guidelines require further
clarification, but international managers are
confident that they are well placed to win
assets as pension scheme administrators are
eager to access international securities via
foreign mutual fund structures because they
are less expensive and more accessible than
mandates – this is especially true for smaller
schemes.
Brazil
On the face of it Brazil appears a compelling opportunity, accounting for 90%
of private and public DB and private DC assets6
. However, until recently it was
impractical to target the Brazilian pension schemes. While pension funds could, in
6 Broadridge, Money in Motion
0
200
400
600
800
1,000
2013 2018
Fig 3.5: LatAm AUM by Domicile(€bn)
Source: Broadridge
(10 ,0 00 )
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2010 2011 2012 2013 2014 2015 2016 2017 H1 2018
Fig 3.6: LatAm net sales by domicile (€m)
Source: Broadridge
0
20
40
60
80
100
2013 2018 2013 2018 2013 2018
Chile Colombia Peru
Fig 3.7: LatAm AUM growthby market (€m)
Source: Broadridge3

theory, invest 10% of assets overseas, few rarely took advantage of this option. The
process was cumbersome and domestic fixed income offered better risk-adjusted
returns due to the relatively high interest rates in the country. With the recent fall in
interest rates, however, pension administrators are looking overseas for yield. That
said the home bias for local and high local rates still exists. Managers need to have a
truly differentiated story or a huge brand to lean on as local fund pickers prefer to go
with what they know.
LatAm investor appetite
Equities dominated Latin American pension fund flows in 2017 and as investors
re-risked they pulled money out of passive and into active strategies. Around $6bn
was redeemed from developed market equity index funds, with a significant portion
ending up in emerging market equities and debt. Multi-sector funds also registered
strong flows, particularly from Brazilian institutional investors. On the index side,
emerging market equity was the only index bucket that gathered meaningful flows.
Tax amnesties shake-up retail distribution
While the AFPs and Afores will likely remain the main draw for international
managers, a growing and now visible wealth management industry has also piqued
interest. Large firms such as MFS have been active in this space for some time, but
new entrants, such as Scandinavia’s Evli asset management and Edinburgh head-
quartered Kames Capital, have recently entered the market, offering niche products
– some with an alternatives focus – to both pension funds and HNWIs.
The introduction of tax amnesties, which allow citizens to report undeclared assets
outside of the home country, has shaken up the wealth management industry in the
region, unlocking an estimated $300bn of wealth. Traditionally, wealthy LatAm
investors parked money in Switzerland or the US offshore hub of Miami. When the
tax amnesties were introduced, it was thought that a significant proportion of this
money would be repatriated. Spotting a lucrative asset gathering opportunity, many
international managers turned their attention to the onshore market, hoping to win
a share of the repatriated pie.

Strategies for accessing LatAm market share
Few have been successful because favourable tax treatments for onshore products
has led to a rush of locally-based launches that have taken momentum away from
Ucits. However, the money has been slow to come. Larger clients still prefer to
keep their savings abroad as most remember decades of political unrest, currency
devaluations and economic instability. Despite this local consultant, Frederick
Bates7
, believes local product is the future for an emerging segment of savers
but warns, ‘If you do go local beware of competing against your potential asset
management clients. A safer play is to join the locals and provide your Ucits to one
of their funds of funds aimed at the mass affluent segment. The high net worth will
buy a local product but they generally do so for more sophisticated strategies such as
private equity and debt due to tax advantages’.
Recommended strategies according to Bates include:
1. Consider the retail segment
Although the pension segment is more transparent and easier to cover, the retail
market is more profitable and the money much stickier. A focus on pension assets is
often unrewarding; either the money is not forthcoming, fees are pushed too low or
the scheme redeems 100% of the money invested after a short period of time. In the
retail channel independent advisers typically go for the higher fee share classes and
are therefore a more profitable option.
The tax amnesties arguably make the retail segment more attractive. Individual
bonds – a traditionally preferred option for investors – are a case in point. They are
now less tax-efficient because they pay dividends creating a potential tax liability
on the income. Ucits bond funds, however, offer accumulation share classes with
no dividend payments that therefore reduce the tax burden on income. That said
the client could incur a future capital gain when they sell the fund, resulting in a
tax consequence. Many advisers view this structure as more tax efficient because
tax can often be deferred when the investor redeems the position. The situation is
similar to the tax deferral available in the US IRA structure. Another advantage with
a Ucits bond fund is the high price point for investors wishing to buy higher yielding
individual bonds – $200,000 being a typical minimum. This has made diversification
difficult for individual investors unless they have considerable assets. Ucits provides
the ultimate diversification and active management tool helping to avoid costly
mishaps such as unexpected defaults.
7 Managing Director of Becon Investment Management, an independent third-party distributor
focused on the US offshore and Latin American markets

2. Build the right connections
A meaningful network of connections is vital and time spent with the fund selection
teams and heads of all the private banks is an important investment. Identifying
the big hitters is tricky because people are constantly swapping life with the big
institutions for taking independent status but establishing these contacts is the
best way of gaining traction. Just getting on a recommended list is less than half
the battle. Advisers hold the keys to the execution of the trades and many don’t even
follow those recommended lists.
3. Go local
The cost of establishing a local presence can be off-putting, with one third-party
marketer suggesting a ball park figure of $2bn. Flying in from Europe or Miami
and flying out again after concluding business – is now frowned upon by wholesale
intermediaries. Chile is often the first choice for putting boots on the ground, but the
largest markets do not always present the best opportunities. The big numbers may
highlight Chile but don’t ignore the interesting opportunities from countries like
Uruguay, Argentina, Columbia and Panama.
4. Consider strategic partnerships
A strategic partnership can make all the difference to a manager’s chance of success.
PGIM, for example, has set its sights on Chile, entering into a partnership with
Chilean asset manager Banchile Administradora General de Fondas SA which
will distribute PGIM’s Ucits funds to local investors. BlackRock, meanwhile, has
doubled its business in Mexico to $62bn following the acquisition of the asset
management arm of Citibanamex, a subsidiary of Citigroup.
5. Focus on one market
Better to go small and deep – high quality relationships are vital and will not survive
the rooky errors of not speaking Spanish or Portuguese, or omitting to have fund
documentation translated into either language. Given the tough competition it helps
to have a niche offering that can open doors but they are generally not appealing to
advisers because the tax amnesties mean that every time a portfolio is rebalanced, it
potentially triggers capital gains tax consequences. Also, the typical range of share
classes might not be enough to satisfy the needs of retail advisers. Whilst the trend
in institutional is towards lower fees it is not necessarily the case elsewhere.

Middle East
The Middle East currently represents just 1% of global Ucits sales, yet cross-
border managers view the region as an increasingly important part of their global
distribution strategy as cross-border assets continue to expand. Local distributors
understand Ucits, a structure that has been
used in many instances by the region’s
regulators as a model for domestic fund
structures. While sales have been impacted by
the fall in oil prices in recent years, the overall
growth outlook for Ucits is encouraging thanks
in part to a vibrant and expanding wholesale
channel.
The investment market in the Middle East is
forecast to double between 2012 and 2020 with
assets rising to $1.5 trillion by 20208
, according
to PwC. Sovereign Wealth Funds continue
to be the primary driver along with a growing
Ultra HNW population, though it is notable
that the biggest SWF in the region (Adia)
appears to have reduced its reliance on external
managers in recent years, with externally
managed assets dropping to 55% in 2016 from
65% at the end of 2014. While lower oil prices
are primarily responsible for redemptions,
fees are also under the spotlight. A sustained
recovery in the oil price and more competitive
fee structures could well reverse the flows.
The United Arab Emirates is the centre of the
asset management industry in the Middle East
and most managers access the region via one
of three designated free zones. The DIFC is
the most popular with around 210 wealth and
asset management firms including Amundi,
which opened up an office in May 2017 to
better service its institutional clients. Other
managers that are building a presence in the
8 Asset Management 2020: Taking Stock, June 2017
0
50
100
150
200
250
300
2013 2018
Fig 3.8: MEA AUM by Domicile(€bn)
Source: Broadridge
(10,000)
(5,000)
0
5,000
10,000
15,000
20,000
25,000
2010 2011 2012 2013 2014 2015 2016 2017 H1 2018
Fig 3.9: MEA net sales by domicile (€m)
Cross-border Domestic
Source: Broadridge
0
10
20
30
2013 2018 2013 2018 2013 2018
Bahrain Saudi Arabia UAE
Fig 3.10: MEA AUM growth by market (€m)
Source: Broadridge3

DIFC include Italy’s Azimut, which last year acquired 80% of New Horizon Capital
Management (a boutique asset manager based in the DIFC). Abu Dhabi Global
Market (ADGM) has also attracted big names, most notably Standard Life Aberdeen,
which set up an onshore sales office back in 2015.
As the chart opposite reveals, most of the funds registered for sale in the financial
free zones are European Ucits for the onshore UAE market. The regulatory
framework applicable to foreign funds is constantly evolving, but generally not to the
detriment of Ucits. In the UAE, for example, it is relatively straightforward to market
foreign funds provided they are registered with the Securities and Commodities
Authority (SCA), though a ruling issued in 2016 meant that all foreign funds must
be distributed through a local licensed agent. It is probably safe to assume that the
financial centres will be keen to encourage managers to domicile funds in their
respective jurisdictions, but given its first mover advantage and wide acceptance by
asset owners and distributors Ucits is likely to remain the vehicle of choice.
Future
There is always a risk that domestic regulators develop stricter criteria for Ucits
fund distribution as they seek to build-up their onshore fund industries. At the
same time regional passporting schemes could well mature to become a viable
alternative to Ucits vehicles in certain parts of the world. But it is
questionable whether local fund firms can develop the necessary
scale and investment skills to compete with established cross-
border players and their decades of global investment expertise.
It is also hard to imagine a scenario whereby Asian regulators put
aside their national differences to develop an efficient and cost
effective regional fund passport that bypasses currency, taxation
and legislative barriers.
There remains many areas of untapped potential, from the groaning pension market
of Australia to emerging wealth management opportunities in Uruguay, Argentina
and the established free zones of the Middle East. For as long as clients require
access to local and international investment exposure, there should be sufficient
opportunities for those domestic and cross-border fund providers that are prepared
to adapt their product offerings and business strategies as the global distribution
landscape evolves. And, for now, Ucits remains the vehicle of choice for regulators
and investors alike.
Fornow,Ucitsremains
thevehicleofchoicefor
regulatorsandinvestors
alike

“IthinkthatMifid2willbeoneofthemost
importantfactorsinfluencingchangeinthe
fundindustryoverthenextfewyears.Inmy
opinion,itsimpactwillbegenerallypositive,
becauseitwillleadtogreatertransparency
andtotheuseofanopen-architecturemodel
onthepartofanincreasingnumberof
distributors”
—AdvisoryPortfolioManager,Spain

D I S T R I B U T I O N P O W E R 49
4Distribution power
The progress of Ucits is intricately tied to the distribution structures that
exist in Europe and their evolution, which is now undergoing a seismic
change in response to Europe’s latest directive, Mifid 2. This game-changing
regulatory initiative was implemented on 1 January 2018 and its full
impact has yet to be felt. However, many of the responses now evident from
distributors in Europe were already underway, encouraged by some early-
bird regulatory initiatives from the UK and the Netherlands, and general
market forces. Whether the new directive will discourage or expand the Ucits
franchise remains in question but its importance is undeniable.
T
he distribution landscape in Europe is, with the exception of the UK,
commonly thought to be dominated by the indigenous banks. Their
influence remains important and they retain ultimate control over the
direction of most retail investor savings. Distribution structures have evolved
during the three decades of Ucits with the doors to third party products opening to
varying degrees in each country.
Evolving distribution structures
First promise of open architecture emerged in the late 1990s and the launch of
discount brokerages that then doubled up as fund supermarkets. Many of these
platforms still remain and, in reality, these D2C options are Europe’s primary
gesture to open architecture. They also remain small, accounting for little more
than 1% of industry assets1
. Other platforms evolved into B2B operations, acting
as administrative hubs to facilitate order aggregation and efficiencies between
underlying distributors and their fund providers. The primary distributors of
funds to retail investors are either closed, distributing their own funds to captive
1 Broadridge, Fund Radar estimates
49

clients, or they sell a limited number of third party funds through preferred partner
agreements. Guided architecture is the norm for third party funds, operating
through the primary channels shown in Fig 4.1 above.
Enter Mifid 2
Mifid 2 is now changing the distribution world in ways that have yet to reveal
themselves. The Directive delved deep into practices across the financial spectrum.
For the asset management industry the relevant clauses were brief but profound.
They related to product transparency and the correct identification of ‘target
market’ for every fund sold in an effort to ensure best practice in the delivery of
suitable products to end-investors. Of greater significance, though,
was the commission ban. It was far from all-embracing; it banned the
taking of retrocessions by distributors claiming to be independent and,
for those non-independents that continued to claim commissions,
proof of service to justify the commissions was required. Moreover,
distributors would, for the first time be required to notify their clients
in their annual statements of the amounts they were taking from their
clients’ investments for the service.
Fortheasset
managementindustry
therelevantclausesof
Mifid2werebriefbut
profound.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
AUT B/LUX FRA DEU ITA NLD ESP SWE CHE GBR
Fig 4.1: Split of accessible AUM by channel
Bank IFA Discretionary Advisory Insurance Funds offunds
Source: Broadridge, Distribution 360
Data based on calculations of accessible third party assets derived from fund selector interviews.
Discretionary and Advisory channels are both from private bank/wealth management segment.
See Appendix 1 for further details of methodology.

The switch to an unbundled fee was first initiated in the UK under the Retail
Distribution Review (RDR) rules that were implemented in 2013. In 2014 the Dutch
authorities implemented similar provisions that were more widespread in effect
because they covered all financial services and involved positive encouragement for
distributors to ensure that their clients were given access to the lowest-cost product
options. These earlier initiatives heralded a new public focus on fund charges and
the launch of countless new share classes that were automatically visible to fund
selectors, regardless of their domicile. As a result, demand for low-cost or ‘clean’
share classes developed considerable traction well before the full rigour of Mifid 2
provisions came into force.
Changing value chain
The value chain that had governed the industry since its inception was in
jeopardy well before EU regulators stepped in, but it was truly broken by Mifid
2. Whereas previously fund providers had controlled the payment structure, the
commission ban meant that distributors now decided how the fee cake was to be
sliced. Assuming a desire to ensure that the client pays no more than would have
previously been paid through the old management fee structure, distributors now
had the power to contain the manager’s fee and/or bulk up the portfolio with low-
cost passives in order to retain their own margins. Many in the wealth management
segment already had client fee arrangements in place so, in theory, they were the
least likely to suffer a detrimental impact. However, increased bureaucracy from
Manufacturer Intermediary
End
customer
Power shifting
Fig 4.2: Disruption to the value chain
Pricing pressure
• Passives
• Reduced buy-lists
• Own-brand funds
Value for money
• Alpha innovation
• Brand service
• D2C response
Source: Broadridge

the requirement to deliver additional statement
information, and report on client suitability and
target market issues, is having an impact on cost
across all distributor segments. European fund
selectors now cite regulation as the biggest driver
of industry change for them. And ranking beneath
regulation are a variety of issues that reflect the
responses to these industry-changing rules that
distributors are either experiencing or anticipating.
Response #1 – Pricing pressure focus on passives
The greater inclusion of ETFs and low-cost trackers in client portfolios is the
obvious and most immediately felt impact of the retrocession ban. The trends
favouring passives have been rising since the financial crisis, but Mifid 2 has
undoubtedly added fuel to the fire. Nonetheless, at the headline level, exposure
to passives in Europe remains very low at 15.8% of long-term assets2
– less than
half the exposure of these products in the US, currently set at 38%. However,
the headline figure masks a much higher weighting of passives amongst the third
party distributors on whom cross-border Ucits rely. In this segment passively
managed funds now account for 22% of assets in client portfolios and in countries
where the commission ban has been most rigorously applied, like the Netherlands,
the weighting is over 40%. Elsewhere the average is much lower but growing
consistently across the board. Selectors in Italy, Spain and France continue to
favour actively managed funds but their exposure to passives can be expected to
increase steadily in the coming years.
The widespread acceptance of low-cost passive
funds, coupled with the regulatory overview
on charging structures has inevitably led to
pricing pressures across the board. Fund
selectors will now look at the value proposition
on offer and argue for access to the lowest-cost
available share class. In some countries, Spain
for example, the regulators require distributors
to put their clients into the lowest-priced share
class and increasingly high prices are being
cited by fund selectors as a reason for removing
a fund from the buy list.
2 Broadridge
Fig 4.3: Top five drivers of industry change
1. Regulation
2. Pricing/cost
3. Architecture of fund industry
4. Active v passive investment
5. Distribution
Source: Broadridge Fund Buyer Focus
Ranking based on 937 fund selector interviews
conducted in 2017
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Overall AUT B/LUX FRA DEU ITA NLD ESP SWE CHE GBR
Fig 4.4: Share of passives in third party distributor
client portfolios 2017
Based on 937 fund selector interviews in 2017

The fear of ETFs and low-cost trackers becoming the
default option for retail clients is real but still some
way from realisation. Certainly, many fund selectors
are reporting larger allocations to passive funds.
Moreover, the launch of numerous robo-advice
platform operating asset allocation models based
entirely on passive funds has occupied financial
press headlines in recent years. Equally, though,
there is a robust constituency of distributors who
wish to differentiate their services by using actively
managed funds. Price is now a more important
factor in the fund selection equation, but it is seldom judged in simple isolation.
Response # 2 – Contracting buy lists
The regulatory pressures, particularly those
on the reporting side, are expected to force
many selection units to reduce the number of
groups they work with and focus on the bulge-
bracket groups able to provide broad product
menus and end-to-end service levels. There is
some evidence that buy lists or, the number of
supplier relationships that distributors have,
are shrinking.
This is not a recent phenomenon. Across
all markets the average number of supplier
agreements per distributor has dropped from 42
in 2014 to 38 in 2017. Such averages mask clear
differences in dynamics particularly at the channel
level where marginal buy-list declines are evident
amongst discretionary and advisory portfolio
managers. On the other hand the 2017 interview data
showed funds of funds, IFAs and insurance selectors
to have increased the numbers of preferred partners
they work with.
Most important in terms of placing power are the
retail banks where buy lists are the shortest and
“Activefundsreallymustoffer
returnsthatjustifytheproduct
price,otherwisewewillseekto
replacethemwithlower-priced,
passiveequivalents.”
—IFA,Netherlands
“Inthecomingmonthsalotof
ourpassivesproviderswill
seeareductioninbusiness
volumeswithus,becauseof
generalreorientationofour
portfoliostowardsmore-active
investmentsolutions.”
—DiscretionaryPM,Italy
-
20
40
60
80
100
Overall
AdvisoryPMDiscretionaryPM
FofF
IFA
Insurance
Bank
Superm
arket
Fig 4.5: Ave # of suppliers by channel 2017
Based on 937 fund selector interviews in 2017

most likely to experience the further contraction in the
coming years. Asset management represents an important
stream of profitability for the large indigenous banks that
control the wealth of Continental European savers. The
due diligence requirements of Mifid 2 involve considerable
administrative resource and expense that can be eased
by transferring more assets into their own captive funds
(via sub-advisory arrangements or transfer to internal
management). Equally, profitability can be enhanced or
retained by negotiating access to lower-cost funds with a
smaller number of elite manufacturers.
This channel, above all others, is arguably
becoming less accessible and more likely to
focus on relationships with the largest brand
manufacturers. It is currently estimated
to represent just 15% of assets invested in
third party Ucits, but this market share is a
simplification of the power of the banks, which
usually embrace multiple underlying channels
and selection units that may act independently,
but are nonetheless under the influence of head
offices that may see cost benefits in simplifying
selection processes.
Response #3: New distribution models
As distributors become more proficient in managing fee-based business models,
some will see an advantage in taking greater ownership of the chargeable elements
they have previously outsourced. The coming years are likely to see a land grab from
a variety of asset management stake holders looking to secure revenue streams for
the future. Chief amongst these are:
▪ Distributors launching own-brand funds
The temptation for larger entities to enter the manufacturing space has already
become evident in the UK with some IFA distributors launching their own low-
cost actively managed funds in addition to selling third-party products3
. This
was big news in the UK where the line between distribution and manufacture
3 ‘Hargreaves Lansdown to launch equity fund’, The Financial Times, 16 November 2016
“wewillseeareductionin
variety...asdistributionarms
willstopofferingcertainfund
rangesduetothedirectiveson
targetmarkets.”
—Bank,Germany
Bank
15%
Wealth -
Discretionary
18%
Wealth - Advisory
25%
Insurance
24%
IFA
7%
Funds of Funds
11%
Fig 4.6: Market share of accessible assets by
channel
Source: Broadridge, Distribution 360

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