Europe still attracts US managers

 By: Caroline Allen, 23 Jul 2012 

A plethora of reasons - and none of them to do with the current crisis - are encouraging US asset managers to position for expanding their businesses across Europe.US asset management firms are expressing new interest in Europe, despite sagging markets and the looming shadow of the eurozone debt crisis.We have been looking for some time to leverage our strengths in Europe and Asia, and Europe does after all account for 35% of mutual fund assets in the world

The creation of the eurozone ten years ago offered a prospect of a more integrated, if not homogenous, Europe. Penetration of the market has never been easy, given the multiplicity of languages and dialects, regulatory regimes, distribution channels and strongly defended local cultures.Many US banks or their international asset management divisions have been well established across the region for years, although at the height of the boom market ten years ago, others believed that a hop across the ‘Pond’, with a brief stop in London, would land them right in the middle of a growing and newly confident market.Within months, in some cases, it became apparent that barriers to entry in Europe were higher than many aspiring firms had calculated, and the expansionary ventures proved an expensive foray from which they had to retreat empty handed.Even for those who survived the initial test, sliding markets following one crisis after another have prompted them to return to the relative safety of home markets.

But there is value, and there is once-in-a-generation opportunity, which many managers believe Europe presents right now. Not for a generation has it been so cheap to buy, and for ambitious asset managers wanting a global presence, increasing regulatory pressures are likely to lead to a break up of larger firms spinning off non-core businesses.Among those announcing initiatives into Europe in recent weeks have been Wells Fargo Asset Management, Eaton Vance and Calamos. The global active manager MFS International is also spending, as is Janus Capital International.

Looking at expansion

However, none cite M&A opportunities, or even cheap assets, as the reason for their interest. Wells Fargo Asset Management, a part of the San Francisco-based bank Wells Fargo, is set for a major strategic push into Europe and Asia as part of a drive to diversify away from the maturing US market.

“We started looking at this expansion well before 2008,” said Karla Rabusch. A vice-president of Wells Fargo & Company, she is also president of Wells Fargo Advantage Funds, part of the corporate’s Asset Management division, and head of Wells Fargo Funds Management LLC, the unit spearheading the European campaign, from a London base.

The US is no longer growing as quickly as other areas of the world,” she adds. “We have been looking for some time to leverage our strengths in Europe and Asia, and Europe does after all account for 35% of mutual fund assets in the world.”

In the US the firm is the 11th-largest among asset managers. The group has 80 business lines, with 30 offices in 130 countries focused on providing US clients with services abroad. Globally, the asset management business has some $450bn in assets under management.Rabusch, who joined Wells Fargo in 1997 as chief financial officer for the mutual fund business, has already driven expansion from the established investment platforms in the US, through wholly-owned subsidiaries such as First International Advisors in the US, and London-based European Credit Management (ECM), as well as entities in Bermuda and Singapore.We have been looking for some time to leverage our strengths in Europe and Asia, and Europe does after all account for 35% of mutual fund assets in the world

The firm put down roots in Luxembourg in 2008, building a fund range and track record to underpin further expansion from $150m in assets under management to some $1bn in ‘long-term’ flows, or $2bn including money market funds. It maintains relationships with 3,700 financial firms worldwide, proving an ability to make connections with intermediaries.

“Our acquisition of Wachovia at the height of the financial turmoil also helped us build out teams and to grow our international presence,” notes Rabusch. 

Wells Fargo & Co fought off Citigroup Inc to complete the $12.7bn deal at the start of 2009, after an embattled Wachovia Corp had to write down billions of real estate loans. The merger propelled Wells Fargo up the US rankings in terms of reach and assets.

US firms are competing in Europe not just with locals, but other contenders, notably from Asia, keen to grow market share. US newcomers are likely to meet many of their home rivals – Fidelity, Vanguard, Bank of New York Mellon, Pimco, Franklin Templeton, Morgan Stanley and Merrill Lynch among them.

‘logical next step’

But Andrew Owen, executive vice-president, Wells Fargo Asset Management, says expansion into the European marketplace, with a market size of some $2.9trn and a faster growth rate than North America, “is the logical next step for our growing international fund line-up”.Owen says the corporate brand was known in Europe, which allowed his team to “open conversations” with the intermediary market. “It gets us in the door, but we are now explaining our fund management capabilities,” he adds. Target markets are Germany, France and Italy, with offices to be established in all three by the end of the year.Wells Fargo funds are already on 13 platforms in Europe, with another 20 platforms to come, covering most of the 38 believed to be operating in the region. The strategy is focused on financial advisers, platforms, private banks and other gatekeepers. “Our business resonates best with these intermediaries,” explains Owen.

Lina Medeiros, president of MFS International, also sees increasing opportunities in Europe. “We hear firms talking of Asia, but at the end of the day Europe is very well established as a funds market, and there is tremendous opportunity because of its size.”She points out that MFS, established in the region for some years, is still learning about the local markets. “Your understanding just increases over time.”
The firm targets the UK, Germany and Switzerland, but Medeiros says the other markets are also promising.We have been looking for some time to leverage our strengths in Europe and Asia, and Europe does after all account for 35% of mutual fund assets in the world “It is a question of  focus. We don’t look at a market in terms of product, or what is hot. We focus on core capabilities, so if we see a long-term opportunity we will develop internal capability to bring that to the market.”

However, she adds that operating across the region “has not got easier”. “It is difficult, but you have to take the decision to go for it.” Medeiros says. “The business environment is if anything getting more complicated, and so have regulatory demands. Companies have to get their hands and heads around that, but if there is no certainty, it makes it even more challenging.”

MFS CIO Jim Swanson points out that, although European markets are under pressure, the region will eventually come out of recession. “It has not been so bad,” Swanson says. “The European Central Bank can still cut rates, German exports are still rising. We have just come off a record quarter, although expectations are probably still too high, both in Europe and the US.”

Labour cost concerns

The real long-term problem for Europe, he adds, is that unit labour costs are trending higher, so Europe’s share of global exports is falling. “How much of a profit recovery can you really have if labour accounts for 70% of your cost structure? Ultimately, growth comes from population growth, and selling goods and services. That is the worry.”

But the business proposition remains. In its home market, Boston-headquartered Eaton Vance Investment Managers has more than 85 years of history backing the brand, known for its fundamental and structured strategies, as well as being a sub-adviser on a number of other funds.Its international arm has been in London since 2001, but Pepijn Heins, head of Business Development Europe, says his focus now is the UK, Benelux – particularly the Netherlands – and the Nordics. France and Germany, he adds, will not be ignored but demand more consideration due to local rules such as those for KAG structures in Germany.

Heins says the manager was intent on bringing not only more product to European investors, but also more people over from its US headquarters in Boston. This will improve links to European investors, but also to enable its own managers to get closer to the assets they invest in.Eaton Vance has a history of launching new strategies, and more recently of acquiring expertise, such as through the 49% stake in Montreal, Canada-based Hexavest, which brought with it discretionary management of equity and tactical asset allocation strategies for institutional clients in Canada, the US, Europe and Asia-Pacific.

The firm’s plan to raise its profile in Europe is likely to be slanted towards pension funds and those responsible for selection of assets and/or underlying funds. The manager sees a good opportunity for low volatility or alternative beta strategies in a market affected by record low interest rates and growing liabilities. At the same time, should inflation risk arise, there is its expertise in floating rate fixed income.

We have been looking for some time to leverage our strengths in Europe and Asia, and Europe does after all account for 35% of mutual fund assets in the world Heins notes the debate in the Dutch pension market over what interest rate the government may set for all schemes going forward – that rate is mandated for use in calculating future liabilities against current assets.

The decision may affect the attractiveness of some types of investments such as infrastructure. In Sweden, the pending inquiry into the future of the AP buffer funds, which make up part of the three-tiered pension system, could also lead to fund selectors taking a different view of assets and funds, if any of them were to be merged.

New funds

Heins is keen to distinguish Eaton Vance from the global integrated banks, headquartered in the US, which are also trying to push into European markets. He said colleagues in Boston were good at accepting input and information about events specific to Europe, including discussion around EU regulatory developments.New funds being offered in Europe include two based on the investment process of the firm’s Seattle-based structured investments subsidiary, Parametric Portfolio Associates, which managed $46.1bn in client assets as of the end of April 2012.

The Eaton Vance International (Ireland) Parametric Emerging Markets Core Fund will primarily invest in a diversified equity portfolio of companies that are domiciled in or derive most of their revenues from emerging market countries.

The Eaton Vance International (Ireland) Parametric Global Equity Fund will invest in a diversified portfolio of companies present globally, in both developed and emerging markets. Both funds are sub-funds of Eaton Vance International (Ireland) Funds plc, an Irish Ucits fund. The funds offer two classes of shares for purchase: Class A2$ and Class I2$.

Another smaller new player is Chicago-based Calamos Investments, which has some $36bn under management in about 20 strategies, with 340 employees. Founded in 1977 by Greek-born chief executive and co-chief investment officer John P. Calamos, the company launched its London operations in 2009.

It is planning a second office in 2013 as part of a strategy to develop its business in Europe. The location has not yet been decided, but target markets are Italy, Switzerland, Germany and Scandinavia.

Geoffrey Davis, Calamos head of intermediary distribution for Europe, Middle East and Africa, confirms expansion plans involving private banks and wealth managers. Calamos offers five Ucits funds. The latest, the Global High Income Fund, launched on July 2.We have been looking for some time to leverage our strengths in Europe and Asia, and Europe does after all account for 35% of mutual fund assets in the world

Of the five, Davis said the global equity fund has the greatest appeal, followed by the emerging markets fund and the US fund. “We consider ourselves growth managers,” he says. “Now macroeconomics is driving investment decisions, we base them on proprietary research produced by our US team.

We analyse companies with a buyer’s eye. We look at the global franchise, where revenues are generated, balance sheet, productivity and corporate governance.”

Many European fund buyers are increasingly well-disposed towards US managers, who tend to offer high levels of risk management, transparency and service. They are used to operating across significant geographical areas and different time zones, and bring an energy and commitment that is not always evident in European markets.

Recovering US market

The recovering US market, however fragile, has itself been a recent point of interest which has brought US managers to investors’ attention. US firms say fund buyers in Europe are much the same as those at home, apart from business style and a new emphasis on risk management.Denver, Colorado-based Janus Capital International, with $164bn assets under management worldwide, has just opened its latest European office in Paris, the sixth in Europe after London, Frankfurt, Milan, The Hague and Zurich. President Augie Cheh says the move “marks an important step in our international growth”.

The office in The Hague, under Sander Van Der Ent, is responsible for developing business among pension funds, insurance companies, banks and private banks. Sylvain Agar, Janus’ head of French-speaking Europe says the Paris opening followed six years of developing the local customer case, with some strong growth despite market volatility.

Assets under management are now some €1bn. Another advantage enjoyed by US asset managers is the stringent demands of their domestic regulators. Most firms are used to a far higher degree of scrutiny than they experience in Europe. The present market uncertainty, not just around eurozone macroeconomic fundamentals, but with regulatory changes, simply creates opportunity.

“It is breaking up old ways of doing business and allows us to propose a new way,” says Wells Fargo’s Owen. Rabusch’s aim is for Wells Fargo to be the 20th-largest asset manager in the region within five years. With a long-term commitment to the region goes a long-term view of the product range.

“Some of the funds will appeal now, but some of them may take two to four years to gain traction, but we don’t mind. We are sowing seeds for the future,” she adds. 

Courtesy: http://www.investmenteurope.net/investment-europe/feature/2192299/europe-still-attracts-us-managers