Following a temporary dip in 2020, European fund flows across both UCITS and AIF funds have picked up pace in 2021, with equity and multi-assets funds in particular seeing robust net inflows[1] . But with consolidation and fragmentation across the value chain, fund buyers and distributors face an unprecedented level of choice and complexity. In this Q& A, Giuseppe Malinverni and Paul Daly review recent trends in fund distribution and how BNP Paribas is working with Allfunds to offer efficient solutions.
Q: It is increasinglysaid that the global fund distribution landscape is becoming more complex. What are the drivers behind this?
GM: In recent years we have seen rapid consolidation of investment platforms in Europe. Three major players have emerged: Allfunds, Euroclear MFEX and Clearstream Fund Services. This consolidation has been driven by the need for more efficiency and economies of scale on both sides of the distribution process. Fund buyers are looking for scale in order to access a greater variety of traditional and alternative assets in a cost-effective way. Distributors are looking for more efficient and innovative methods to sell their funds across different markets.
In the past, the sector relied heavily on distributing banks and financial advisor networks. This is still the case in many markets, notably in Asia Pacific. However, now in Europe, we estimate that fund sales via platforms are around 15%[2] of the total. Platforms are the fastest growing distribution channel as fund houses look to benefit from the increasing reach, digital connectivity and tailor-made experiences that they can offer.
Another key influence is the regulatory framework. The evolution of MiFID and the the Sustainable Finance Disclosure Regulation (SFDR) implementation are increasing data requirements for fund managers and fund buyers. As intermediaries, platforms can play a valuable role in facilitating this data exchange, especially if they have access to increasing data sources through scale and consolidation.
Q: Recent decades have seen huge growth in cross-border fund distribution, especially in leading domiciles such as Luxembourg and Ireland. Is this likely to continue and what will facilitate more efficient distribution?
GM: In the coming years, the regulatory changes proposed by the Capital Markets Union (CMU) are intended to reduce barriers to cross-border distribution of investment funds, and aims to create a more harmonised cross-border set of rules. Cross-border registrations have been increasing steadily in the last 10 years but this growth has largely plateaued in comparison to asset growth. Fund launches are still heavily concentrated in certain key domiciles such as Luxembourg and Ireland[3]. We believe that in future, thanks to the EU directive to facilitate cross-border distribution, the different fund domiciles will compete more fairly, by levelling the playing field. The effect we are seeing is a simplification of the procedures for the distribution of funds as well as a reduction of induced costs, which will progressively increase the fund cross-border distribution.
In addition, the growth of investment platforms as a key distribution channel may act as a catalyst to greater cross-border distribution. Platforms can offer a streamlined, more harmonised process across different markets with different demographics, and are well-positioned to take advantage of a more uniform set of rules when the CMU is implemented.
Q: With all these factors in mind, what are the obstacles that firms currently face when buying and distributing funds?
GM: A diversified fund investment book requires fund buyers and distributors to manage the complexities of placing and settling orders in different markets and fund types; the back-office costs can really stack up. For example, functions such as settlement, reconciliation, rebate fee management, corporate actions and data management all need to be managed separately, which can represent a significant challenge from a cost and profitability perspective.
PD: Indeed. It’s not just about cost – firms need significant operational resources and expertise to manage and connect to different Transfer Agents, and follow different market practices in all of the countries in which their funds are domiciled. Data management can prove particularly challenging. Firms need to access and aggregate data from a range of sources across markets and distribution channels, in order to analyse fund performance and flows at market, portfolio and fund level. When you add in the increasing demands from investors for reporting on ESG-related factors, as well as the growth of non-traditional assets and increasing reporting requirements, this can create a huge operational burden for distributors.
Q: So what is BNP Paribas doing to reduce this complexity in the fund distribution process?
PD: In 2020 we embarked on a strategic partnership with Allfunds, in order to offer our clients the benefits of scale that this platform can provide. Our ‘Fund@ccess’ solution gives our fund-buyer clients easy access to more than 2,300 fund houses and 100,000 funds available on Allfunds’ leading fund distribution network. Importantly, this combined approach means that fund buyers have a streamlined, automated process to buy and sell fund shares, as well as manage the back-office functions such as dealing, cash movements, reconciliation and reporting. As Securities Services Partner, we provide a single point of contact for our clients to place their investment orders, across all asset classes and not just funds – offering also the peace of mind that these are held in custody by a top five global custodian.
When considering the increasing regulatory requirements and the fragmentation of processes and practices across markets, as discussed earlier, our hope is that this solution will enhance operational efficiency for fund buyers and enable them to take advantage of the scale of the Allfunds network while alleviating the operational and resource burden.
Finally, this strategic partnership can provide firms with more quality data, enabling clients to analyse their fund flows across asset classes and markets in a more sophisticated way. By connecting to the ‘Allfunds Connect’ service, firms can compare and track over 180,000 funds and deep dive into their portfolios at market, fund and entity level. Through this improved intelligence on fund flows, modelling of future scenarios, and ease of reporting, our hope is that this will encourage firms to pursue their product development and market growth plans.
To find out more about our Fund@ccess solution in partnership with Allfunds, BNP Paribas clients should contact their Relationship Manager for further information.
[1] Further slowdown in the net sales of long-term UCITS | EFAMA
[2] Internal estimation from EFAMA statistics (above)
[3] Benchmark your Global Fund Distribution (pwc.lu)
Suggested reading
BNP Paribas and Allfunds announce completion of strategic agreement
BNP Paribas, a leading financial institution, and Allfunds, a world-class independent leader in wealth technology, today announce the completion of their strategic agreement to build next-generation fund distribution services.
