Introduction to the Spanish Fund Industry
In their 2020 annual report, Inverco, the Association of Collective Investment Institutions in Spain estimated that Spanish domestic mutual funds posted net inflows of around € 742m in 2019, taking total assets under management (AUM) to approximately € 275.69bn and representing more than a 7% increase on the previous year.
Because of this, Spain is becoming an increasingly attractive market for both Spanish and non-Spanish investors alike and is a growing area of interest for all aspects of the fund ecosystem, from fund managers, to distributors, to intermediaries and to the end investor.
We spoke to Juan de Casadevall, Sales Manager of FE fundinfo in Madrid, to find out more about the current situation and challenges of the Spanish fund market.
Juan, what are the main challenges currently facing the Spanish Fund Management industry?
Because of the widespread growth in investment products, the Spanish fund regulator, the National Securities Market Commission (CNMV) is demanding greater transparency across the funds industry as a whole. This is creating a greater need for accurate fund data and reporting solutions for clients from both buy side and sell side of the market.
Meanwhile, for domestic players, there is increasing competition from international fund houses and passive investments (index funds, ETFs), which are eating into the margins of active fund managers. Insurers too are a growing force in this space as are emerging ‘wealthtech’ firms, although this trend has been slower to develop.
What are the main opportunities for the Spanish Fund Management industry?
The industry as a whole has enjoyed steady growth in recent years, despite regulatory and economic challenges. This has largely been driven by zero to low interest rates, which have encouraged investors to move their money out of bank deposits into funds. However, Spanish investors are broadly conservative and still keep significant proportions of their assets within bank deposits and savings accounts (around EUR 1 trn), so there is still a lot of potential for further growth within Spanish funds. Additionally, demographic trends are favourable to the investment industry as the ‘baby boomer’ generation are still largely in the saving phase of their lives. This makes the Spanish fund industry very attractive. On the other hand, independent (of banks) asset managers and distributors have only been able to grow at a similar or slightly higher pace.
How is regulation affecting the Spanish fund industry?
Regulatory workload for fund groups is increasing while the need for delivering efficiencies and reducing costs are becoming more apparent. Eventually outsourcing to specialist service providers should gain greater traction as well as the embracing of technology. Specialisation within fund groups and focusing on competitive advantages should shape the industry further moving forward. Finally, mergers and acquisitions among smaller providers should increase as they seek greater economies of scale.
The challenges for Fund Managers in Spain are therefore multi-layered?
Like other areas of the investment industry, passive investments are becoming increasingly popular among Spanish investors. Active asset and fund managers are not only having to face losing market share to passive investments but are also having to reduce costs for their clients in order to remain competitive. The Spanish fund industry is relatively concentrated, with a large number of providers chasing a small number of investors, so not only are ‘active’ asset managers competing against passives, but also against one another. Smaller players too have to compete for this same pool with limited resources.
For international providers, some big distributors are considering moving to mandates, which could damage margins in the funds space. Caixabank – Spain’s largest domestic bank – for instance moved EUR 3/4 bn from mutual funds to mandates.
The move to mandates is taking place for a couple of reasons. Firstly, mandates are managed at a far lower price than investing in institutional share classes within funds. This allows fund groups to reduce their costs, which they can pass on to the end investor and also increases their profit margin. Additionally, it also allows funds to better define, control and monitor their underlying investments. The portfolio of direct investments advised by each asset manager is built to the exact specifications of the mandate and it is subsequently easier to manage and monitor.
Finally, a further consideration is that Spanish regulatory requirements insist on a range of third parties being appointed which can sometimes be confusing to foreign managers.
Where do you think the challenges for Fund Distributors in Spain lie?
The MiFID II regulations and CNMV are requesting more transparency from fund providers on costs and information on the value added by fund distributors. CNMV are keen to ban retrocessions at some point in the not too distant future, which have been criticised due to potential conflicts of interest arising and a lack of transparency, something on which most country-wide regulators are keen to improve. This could foster an environment ripe for new and low-cost players in the technology space.
Penetration of robo-advisors, neobanks and low cost funds market places is still very low in both absolute and relative terms compared to the US and other European countries, but this could change and speed up as providers mature and the retail investor community becomes younger and more knowledgeable – and more trusting of them.
What impact to you see Covid-19 has had on the financial service industry in Spain?
Traditionally, the Spanish financial services industry has had a largely paper-based system. However, the Covid-19 crisis has made many of these traditional ways of working at best unhelpful and at worst completely obsolete. Among regulators there is an acknowledgment that some of the more traditional ways in which the funds industry operates are no longer fit for purpose. Remote working and the closures of offices has sped up the trend of digitalisation and this is only likely to increase in the coming years.
With the fallout from Covid impacting on margins, the need to find greater cost efficiencies is becoming sharper, so although it is unclear, it is possible that smaller firms may increasingly merge with others or be acquired by larger groups, in order to survive.
Can you say something about the market structure and main players of the fund industry in Spain?
Spain has a large and fairly open fund distribution market. Nonetheless, the industry lacks domestic fund managers and groups with scale and international presence. Banks still hold a very large market share and market concentration among them is very high. Santander, BBVA, Caixabank and Bankia (the four largest banks) make up for around 40% of the fund distribution business and the domestic asset management industry. IFAs and other independent players (brokerage houses, wealth managers) still have a very low market share and this is unlikely to change in the short to medium term.
Given all the challenges, how can FE fundinfo support the fund industry in Spain?
FE fundinfo is a global fund data and technology leader. We maximise efficiencies for fund managers and fund distributors through our unique fundinfo.cloud market place, one of the world’s largest information marketplaces for local and international investment funds and support market participants at every stage of the investment lifecycle.
We work with fund groups and fund distributors throughout Spain to help improve efficiencies, reduce risk and costs surrounding operations and regulatory requirements. Through our leading FE Analytics platform, we also supply the latest fund information, along with digital and reporting tools to improve the relationship between asset managers and fund distributors. Our Global Funds Registration (GFR) team also works with non-Spanish domiciled funds to set up their funds within Spain and overcome the administrative burden associated with setting up foreign funds in the country.