Subadvisory Is One of the Fastest-Growing Opportunities for Asset Managers in Europe
Subadvisory is already attracting approximately 5.4% of today’s total European mutual fund and exchange-traded fund net inflows
May 2018, London. In researching its latest report, European Distribution Dynamics 2018: Addressing a Shifting Landscape, Cerulli Associates found that the European subadvisory market is growing at an impressive pace; Cerulli data shows that it currently amounts to approximately €480 billion (US$458 billion). Italy and the U.K. are the most dynamic markets in the region in terms of asset growth and number of new funds.
The global research and consulting company finds that subadvisory is growing at different rates throughout Europe, from various starting points. The U.K. is leading the way, with 37% marketshare, and the country hosts the region’s largest sponsor, St. James’s Place. Italy has the second-largest share of the European market, 15% (excluding sponsors headquartered in the U.S.), and it is also the fastest-growing subadvisory market in the region. Subadvisory is less popular in markets such as Spain and Germany, where funds of funds are preferred.
Cerulli has identified 1,290 funds subadvised by third parties. More than 100 sponsors—banks, financial advisor networks, consultants, and various institutions—delegate the management of their funds to subadvisors. The market has grown at an impressive rate in recent years: 15% in 2016 and 16% in 2017. Cerulli estimates that yearly net new flows could be between €30 billion and €60 billion over the next few years, with subadvisory already attracting approximately 5.4% of today’s total European mutual fund and exchange-traded fund net inflows.
“Fund providers and distributors need to work together more closely and share a greater volume of information to align solutions with the current needs of predefined targeted client segments,” says Angelos Gousios, director of European retail research at Cerulli and lead author of the report. “At the same time, distributors and investors have to focus ever more on costs. However, this must not be at the expense of product quality; indeed, quality is becoming increasingly important.”
Closer co-operation between the two parties to an agreement is a prerequisite of subadvisory. The part of the management fee that sponsors share with subadvisors is consistently lower than in the typical relationship. Distributors can offer products with top-notch management, while protecting their profitability and reducing the cost to the customer.
To target the subadvisory market, managers need persistence and patience. Agreeing a subadvisory deal is a long and onerous process. Lawyers, compliance teams, and other back-office functions need to be involved and it can take more than six months to reach an agreement. Managers need a solid operational team and must be willing to wait; they should not give up after just a couple of months.
“Managers appreciate the fact that subadvisory relationships tend to last longer—more than 10 years in many cases,” adds Gousios. “As long as the subadvisor offers decent performance, it will tend to stay in the game. Although the fees are lower, the assets are stickier.”
This and several other new findings make up Cerulli Associates’ European Distribution Dynamics 2018 report.
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