Fund Management 2010 www.TheCiTyUK.com The UK is one of the largest markets in the world for fund management along with the US and Japan It has a strong international orientation and attracts significant overseas funds London is the leading international centre for fund management OCTOber 2010 Chart Global fund management industry assets under management assets under management, 2009, $ trillion SUMMAry Global fund management conventional assets under management of the global fund management industry increased by 14% in 2009, to $71.3 trillion (charts and 2), slightly below record levels seen two years earlier Pension assets accounted for $28.0 trillion of the total, with $22.9 trillion invested in mutual funds and $20.4 trillion in insurance funds Together with alternative assets (sovereign wealth funds, hedge funds, private equity funds and exchange traded funds) and funds of wealthy individuals, assets of the global fund management industry totalled around $105 trillion at the end of 2009, up 15% on the previous year 28.0 Pension funds Mutual funds conventional investment management assets 22.9 Insurance funds 20.4 SWFs 3.8 Private equity non-conventional (alternative) investment management assets 2.5 Hedge funds 1.7 ETFs 1.0 Private wealth1 39.0 10 15 20 25 30 35 around one-third of private wealth is incorporated in conventional investment management Source: TheCityUK estimates 40 The increase in 2009 followed a 18% decline in the previous year and was largely a result of the recovery in equity markets during the year Part of the reason for the increase in dollar terms was the depreciation in the value of the US dollar against a number of currencies in 2009 Although some funds were exposed to instruments which suffered losses, on the whole, fund management was affected much less than the banking sector by the recent economic downturn The economic downturn may however have a longer-term effect on the fund management industry in prompting more cautious investment strategies in the coming years and more diversification across asset classes and geographical regions Chart Global fund management of conventional assets conventional assets under management, $ trillion 80 76.4 70 66.7 The US remained by far the biggest source of funds in 2009, accounting for around a half of conventional assets under management or some $36 trillion The UK was the second largest centre in the world and by far the largest in Europe with around 9% of the global total UK fund management UK assets under management increased 12% in 2009 to £4.1 trillion This was slightly below the record amount under management two years earlier These figures represent a conservative estimate as they not take into account significant funds managed in the UK for which there are no precise data such as funds managed on behalf of sovereign wealth funds as well as private client funds managed, for example, by family offices 62.7 58.9 60 71.3 53.6 50 46.9 39.8 40.1 37.7 40 30 20 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: TheCityUK estimates The UK fund management sector has a strong international orientation reflected in the: institutional presence of a broad mix of UK and foreign firms; investment of over a quarter of institutional clients' portfolios in overseas securities; and management on behalf of overseas clients of funds totalling over £1.4 trillion London is central to the UK’s strong international position Edinburgh and Glasgow are also important international centres for fund management Fund management accounted for 0.67% of UK GDP in 2009 and provided employment for over 50,000 people Net exports of UK fund management totalled £2.9bn in 2009 Fund management margins fell to 33% in 2009 from 34% in the previous year and 37% in 2007 TheCityUK Fund Management 2010 GLObAL FUND MANAGeMeNT According to ThecityUK estimates, assets of the global fund management industry totalled over $105 trillion, up 15% on the previous year (chart 1) There was also an additional $13 trillion held in money market funds Table Sources of conventional investment management assets1 $bn, end-2009 US UK Japan France Germany Netherlands Switzerland Other Total Assets of the global fund management industry consist of: - Conventional funds (pension funds, mutual funds and insurance companies) totalling $71.3 trillion at the end of 2009; Total conventional 35,880 6,081 4,489 4,213 2,336 1,608 1,102 15,062 71,262 % share 50 6 2 21 100 figures are for domestically sourced funds regardless where they are managed No reliable comparisons are available for total funds under management by country Source: TheCityUK estimates based on Watson Wyatt, OECD, Insurance Information Institute, Investment Company Institute, SwissRe, CEA data Alternative funds (hedge funds, private equity funds, exchange traded funds and sovereign wealth funds) generating some $9 trillion of funds; and - Private wealth funds which generated an additional $39.0 trillion in funds About a third of this was however incorporated in other forms of investment management The increase in assets under management in 2009 was largely a result of a recovery in equity markets following a sharp fall in the previous year Part of the reason for the increase in dollar terms was the depreciation in the value of the US dollar against a number of currencies in 2009 Although some funds were exposed to instruments which suffered losses, on the whole, fund management was affected much less than the banking sector by the recent economic downturn Conventional funds of the global asset management industry increased by 14% in 2009 to $71.3 trillion, following a sharp fall in the previous year (chart 2) Pension assets accounted for $28.0 trillion, with a further $22.9 trillion invested in mutual funds and $20.4 trillion in insurance funds (Table 1) The US was by far the largest source of conventional funds under management in 2009 with around a half of the world total It was followed by the UK with 9% and Japan and France with 6% each Rankings based on sources of assets understate the UK’s position due to the substantial value of funds managed there on behalf of overseas clients Taking these into account, funds managed in the UK are by far the largest in Europe The Asia-Pacific region has shown the strongest growth in recent years many fund management firms have shown an increased interest in countries such as china and India as they offer huge potential for growth of the largest countries, the UK has the highest ratio of funds as a per cent of GDP (278% in 2009), followed by the US (252%), Switzerland (223%) and Netherlands (202%) as shown in chart The global average was 123% Mutual funds 11,121 729 661 1,806 318 96 168 7,984 22,883 Insurance assets 6,671 2,808 2,785 2,188 1,844 484 387 2,724 20,383 - - Pension funds 18,088 2,544 1,043 219 174 1,028 547 4,353 27,996 Pension fund assets Global pension assets totalled $28.0 trillion at the end of 2009 according to ThecityUK estimates based on oEcD data The US remains the largest single market with $18.1 trillion in pension assets, nearly two-thirds of the world total The UK was the second Chart Funds as percent of GDP % of GDP, (by source of funds), 2009 300 Mutual funds Insurance assets Pension assets 278 252 250 223 202 200 157 150 123 100 50 France Switzerland Netherlands World US Source: TheCityUK estimates based on Watson Wyatt, OECD, Insurance, Inf Inst., IMF, Investment Company Institute, SwissRe, CEA data UK TheCityUK largest centre (with 9% of the world total) followed by the Netherlands (4%) The large volume of pension assets in the US is mainly a reflection of its substantial domestic market The UK pension system with assets equivalent to 116% of GDP in 2009, is more heavily funded than most other major European economies Fund Management 2010 Chart Worldwide Mutual Funds Assets assets under management, $ trillion 30 25 - - Insurance funds ThecityUK estimates that insurance companies held around $20.4 trillion of funds under management at the end of 2009 Approximately four-fifths of the total was from long-term insurance policies and the remainder from general policies, such as health and property and casualty insurance over the past decade, insurance funds grew faster in Europe than in the US Life companies’ funds also grew faster than non-life ones UK insurance companies’ funds under management totalled around $2.8 trillion, much higher than in any other European country Mutual funds’ assets increased by 21% in 2009 to $22.9 trillion following a 27% decline in the previous year The bulk of the increase came in the second and third quarters in the year (chart 4) most mutual funds are generated in only a few countries The US was by far the biggest source of funds with more than a half of the world total UK mutual funds increased by 44% in 2009 to $729bn However, this was still below the record $897bn held two years earlier other important centres for mutual funds include France, Luxembourg, Australia, Italy and Japan Institutional clients account for the majority of funds There are substantial variations, however, between countries in the institutional to retail ratio In France for example, the retail sector accounted for more than a half of funds on the other hand institutional investors were the biggest source of funds in the US, UK and Japan Alternative funds totalled around $9 trillion at the end of 2009 They consist of hedge funds, private equity funds, exchange traded funds and sovereign wealth funds (these topics are covered in more detail in other ThecityUK reports): - Hedge funds’ assets under management increased by 13% in 2009 to $1,700bn This followed a 30% decline in the previous year Redemptions continued for the second year running, albeit at a slower pace The 19% return in 2009, the best hedge funds’ performance in a decade, more than made up for the $85bn in net outflows The number of hedge funds totalled around 9,400 at the end of the year, a reduction of more than 1,000 from the peak seen two years earlier New hedge fund launches however exceeded the number of liquidations in the second half of 2009 Growth of hedge fund industry assets is likely to continue in the coming years barring further economic turbulence or major regulatory changes London is the second largest global centre for hedge funds managers after New York Its share of the global hedge fund industry more than doubled in the decade up to 2009 to 20% (chart 5) London is much the largest European centre for the management of hedge funds At the end of 2009, four-fifths of European hedge fund investments totalling $382bn were managed out of the UK, the vast majority from London 24.8 24.7 22.4 23.0 23.0 21.7 20 18.9 18.2 20.3 15 10 Q1 Q2 Q3 2008 Q4 Q1 Q2 Q3 2009 Q4 Q1 2010 Source: Investment Company Institute Chart Global hedge funds $bn assets (bars) Number (line) 2,200 12,000 2,000 1,800 10,000 1,600 1,400 1,200 8,000 1,000 800 600 6,000 400 200 2000 2002 2004 2006 2008 2001 2003 2005 2007 2009 Source: TheCityUK estimates 4,000 Chart Share of global hedge fund industry, London vs New York % share of global hedge fund assets by location of manager New York London 55 50 45 40 35 30 25 20 15 10 2000 2002 2004 2006 2008 2001 2003 2005 2007 2009 Source: TheCityUK estimates TheCityUK - - - Private equity According to ThecityUK estimates, $91bn of private equity was invested globally in 2009, a significant fall from the $181bn invested in the previous year The 2009 total was more than 70% down on record levels seen in 2007 Funds raised fell by two thirds during the year to $150bn, the lowest annual amount raised since 2004 Total private equity funds under management were unchanged from the previous year at a record $2.5 trillion (chart 7) most of this total resulted from strong fund raising activity in the period between 2005 and 2008 and unrealised portfolio investments, as firms were reluctant to exit their stakes in market conditions of falling valuations Funds available for investments totalled 40% of assets under management or some $1 trillion These funds can be used to inject capital into troubled portfolio companies or to fund new investments Sovereign Wealth Funds (SWFs) ThecityUK estimates that assets under management of SwFs fell by 3% in 2009 to around $3.8 trillion (chart 8) The underlying value of SwFs’ portfolios probably increased by 15% in 2009 if negative positions on equity market investments at the end of the previous year are taken into account SwFs funded by commodities exports, primarily oil exports, accounted for nearly twothirds of assets The remainder was funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses, pension reserves and privatisation revenue There was also an additional $6.5 trillion held in other sovereign investment vehicles, such as pension reserve funds and development funds ThecityUK projections are that SwFs are likely to double from their current level to around $5.5 trillion in 2012 London is an important centre in the management of sovereign wealth funds assets, although it is difficult to estimate the size of funds managed there due to lack of precise data Exchange Traded Funds (ETFs) Assets invested in ETFs increased by 45% in 2009 to a record $1,032bn as the markets recovered during the year (chart and Table 2) The global ETF industry had 1,939 ETFs on 40 exchanges around the world at the end of 2009 The number of ETFs listed in Europe reached 821 during the year, surpassing the 772 in the US Institutional investors have been behind most of the increase in ETF industry assets since the first fund was launched in 1993 in the US and in 2000 in Europe, but retail investors are expected to become more active in coming years The US is the leading global centre for ETFs and accounted for 68% of global assets under management in 2009 Europe generated around 22% of the total with Germany and France accounting for more than a half of the exchange Traded Funds are passively managed open-ended funds that are listed and traded on exchanges ETFs provide easy access to a broad exposure of stock market, fixed income and commodity indices most ETFs consist of a basket of securities that trade at approximately the same price as the net asset value of its underlying assets They predominantly track an index, such as the S&P 500 and can be traded continuously during trading hours more recently, ETF products are venturing into emerging markets, real estate, infrastructure, private equity and hedge funds Because ETFs can be economically acquired, held, and disposed of, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to implement short-term investment strategies Fund Management 2010 Chart Private equity worldwide assets under management $bn Unrealised portfolio value 2,500 Funds available for investment 2,000 60% 46% 40% 40% 2007 2008 2009 54% 1,500 57% 1,000 53% 59% 56% 500 47% 44% 41% 2003 2004 2005 43% 2006 Source: Preqin; TheCityUK estimates Chart Sovereign wealth funds assets under management $bn 4,000 66% Commodity 3,500 Non-commodity 3,000 2,500 2,000 1,500 1,000 87% 500 13% 1999 2001 2003 2005 2007 34% 2009 Source: TheCityUK estimates Chart Exchange-Traded Funds Number of funds Assets, $bn 1100 Other Europe US 1000 900 2000 1500 800 700 600 1000 500 400 300 500 200 100 2000 2002 2004 2006 2008 2001 2003 2005 2007 2009 Source: Blackrock 60% TheCityUK Difference between eTFs and mutual funds while ETFs share some basic characteristics with mutual funds, there remain key operational and structural differences between the two types of investment products ETFs are similar to mutual funds because both instruments bundle together securities in order to offer investors diversified portfolios ETFs trade throughout the trading day, like a stock, while mutual funds trade only at the end of the day at the net asset value price most ETFs track a particular index and therefore have lower operating expenses than actively invested mutual funds Investors purchase and sell ETF shares on a stock exchange through a brokerdealer, like they would any other type of stock In contrast, mutual fund shares are not listed on stock exchanges but are bought and sold through a variety of distribution channels In addition, ETFs have greater tax efficiency due to a structure that allows them to substantially decrease or avoid exposure to capital gains tax European total The 142 ETFs listed in London accounted for around 5% of global assets ETFs investing in the stock markets of Brazil, china, South Korea and Taiwan have shown the fastest growth in 2009 Equity exposure accounted for 81% of global ETF assets at the end of 2009, followed by fixed income 16%, with most of the remainder invested in commodities The NYSE and Nasdaq were dominant in the trading of ETFs with 83% of the volume of trade (chart 10) in 2009 They were followed by Deutsche Borse and the London Stock Exchange Private wealth funds The annual World Wealth Report 2010 published by merrill Lynch capgemini estimated that in 2009 the value of funds managed on behalf of 10 million high NwIs with over $1m of investable worldwide assets increased 19% to $39 trillion (chart 11) Following a 24% fall in the previous year, the value of ultra-HNwIs’ assets under management rose by 22% in 2009 The US, Japan and Germany accounted for close to 54% of the world’s HNwI population at the end of 2009, down slightly from the previous year The trends in 2009 show that the HNwI population allocated more to fixed-income instruments and markets outside their home regions than in previous years, in search of more consistant returns and geographic diversification At the end of 2009, equities accounted for 29% of total global HNwI financial assets (up from 25% in 2008), fixed-income 31% (29%), cash 17% (21%), with the remainder in real estate and alternative investments BcG, in its annual report Global Wealth 2010, estimated that the total value of assets managed on behalf of all investors increased by 21% in 2009 to $111.5 trillion, following a 12% fall in the previous year Managers of funds The latest available data shows that assets under management of the world’s largest 500 fund managers declined 23% in 2008 to $53.4 trillion (chart 12) Funds under management of the top 500 are likely to have staged a recovery in 2009 in parallel with the increase in global assets under management of the fund management industry US and UK owned firms held the bulk of the total in 2008 with 42% and 11% respectively Swiss, Japanese, German and French firms held between 5% and 8% each The proportion of assets managed by managers in developing countries totalled around 4% more recent data for managers of top 300 pension funds show that, assets increased 8.2% during 2009 to Fund Management 2010 Chart 10 Trading of ETFs % share, 2009 NYSE Euronext (Europe), 2% London Stock 10% Exchange, 2% Deutsche Borse 3% Nasdaq OMX Others NYSE Euronext (US) 17% 66% Total: $6,584bn Source: World Federation of Exchanges Table ETFs by country 2007 assets $bn 581 US 50 Germany 40 France 23 UK 34 Japan 18 Canada 13 Hong Kong Switzerland 30 Others 797 Total 2008 assets $bn 497 63 39 25 27 13 14 11 22 711 2009 -assets Number % share $bn assets listed 665 68 753 96 331 54 224 47 142 25 68 29 109 21 22 18 42 77 248 1,032 100 1,939 Source: Barclays Global Investors Chart 11 Private wealth value of assets, $ trillion 120 100 All investors (BCG) 80 60 40 20 High Net Worth Individuals (MLCG) 1999 2001 2003 2005 2007 2009 2000 2002 2004 2006 2008 Sources: Boston Consulting Group (BCG), Merrill Lynch Capgemini (MLCG) TheCityUK Fund Management 2010 $11.3 trillion This follows at 12.6% fall in the previous year Table Largest global investment managers Independent managers accounted for around a half of total assets of the largest 500 fund managers in 2008, with the remainder split equally between insurance companies and banks The concentration of the industry has grown over the past decade The largest 20 fund managers‘ share of top 500 assets increased to 38% in 2008 from 30% a decade earlier assets under management, end-2008, $bn There has been a rise in m&A activity in the fund management industry over the past two years Asset management firms have reduced the number of mutual funds and products they offer in a bid to reduce costs and many funds have been merged or liquidated A major trend has been one of bank divestment of asset management subsidiaries This is partly due to regulation changes which affect banks by setting limits on speculative trading with shareholders’ funds as well as restrictions on owning or investing in hedge funds and private equity funds Asset management arms of some banks have also been sold in order to raise capital In the coming years the industry may see more traditional asset managers being bought by alternative players such as hedge funds or sovereign wealth funds 10 11 12 13 14 15 Barclays Global Investors1 Allianz Group State Street Global Fidelity Investments AXA Group BlackRock Deutsche Bank Vanguard Group J.P Morgan Chase Capital Group Bank of New York Mellon UBS BNP Paribas Goldman Sachs Group ING Group UK Germany US US France US Germany US US US US Switzerland France US Netherlands 1,516 1,462 1,444 1,389 1,383 1,307 1,150 1,145 1,136 975 928 821 810 798 777 acquired by BlackRock in 2009 Source: Pension & Investments / Tower Watson World 500 Chart 12 Assets of 500 global managers % share, 2008 In June 2009 Barclays Global Investors accepted BlackRock’s $13.5bn offer, making this the second largest asset management deal ever and creating the world’s largest fund manager other mergers included the purchase of Fortis Investments by BNP Paribas, Societe Generale Asset management by credit Agricole, Sal oppenheim Jr & cie S.c.A by Deutsche Bank AG, New Star Asset management by Henderson and Societe Generale Asset management UK by GLG Partners Asset allocation varies considerably around the world In the UK, US and Australia (chart 13), the proportion of funds invested in equities has generally been higher than in other countries although exposure to equities has been declining for a number of years in favour of more diversification more risk appetite in 2009 however encouraged investors to invest more in equity markets, overseas markets and alternative investments reversing the previous year’s trend UK investors held on average of 46% of their portfolios in equities in 2009 (Table 6), up from 41% in the previous year Fixed income allocation on the other hand fell to 36% from 39% over the year Others US 20% Switzerland 42% 5% 6% Japan 8% Germany 8% 11% France UK Total: $53.4 trillion Source: P&I/Tower Watson World 500 Chart 13 Asset allocation in major pension markets % share, 2009 Institutional investors are likely to remain more cautious in the next couple of years, allocating less to equity markets than in previous years while continuing to increase the diversification of their portfolios both in terms of assets and geographical regions There has been a shift over the past year from actively managed funds to passive investing due to high manager fees and poor performance This is likely to continue as investors search for better returns in relation to costs The use of low-cost passively managed products such as ETFs is likely to continue growing 100 80 7% 17% 10% 26% 39% 35% 36% 47% 60 34% 40 58% 20 54% 36% US Japan Equities UK Bonds Source: UBS Asset Management 19% 40% 42% Canada Australia Other TheCityUK Fund Management 2010 UK FUND MANAGeMeNT Table Funds under management in the UK UK fund management overview The UK fund management industry was responsible for £4.1 trillion of funds at the end of 2009 (Table 4, charts 14 and 15), up 12% during the year and just slightly below the record amount under management two years earlier The increase during the year was primarily a result of the equity markets recovery and an increase in retail inflows The recovery in 2009 follows a 12% decline in the previous year £bn Managed by IMA1 member firms2 Institutional clients - insurance companies - corporate pension funds - other (local authorities, charities, etc.) Retail clients Other funds3 - Hedge funds - Property funds - Private equity funds Private client funds Total funds under management in the UK The international orientation of the UK’s fund management industry is reflected in the presence of a broad range of UK and foreign-owned firms, in the significant investment in overseas securities, and in the management of overseas clients’ assets over 30% of funds under management in the UK, or some £1.4 trillion, are from overseas (charts 16 and 17) London is central to the UK’s strong international position Edinburgh and Glasgow are also important centres for fund management There are also significant funds managed by UK fund managers outside the UK as some firms choose to delegate to overseas offices the management of UK funds The ImA estimates that a further £17.3 trillion is managed globally by asset management firms operating in the UK The UK has been a beneficiary of the globalisation of the fund management industry It has however lost market share as a domicile for funds over the past decade According to the ImA, the total assets of funds domiciled in Luxembourg and Dublin were just under twice those domiciled in the UK ten years ago In 2009 they were four times as much over £700bn in overseas domiciled funds were managed in the UK in 2009 Around 80% of this was for funds domiciled in Luxembourg and Dublin, and most of the remainder in the channel Islands and cayman Islands The proposed Alternative Investment Fund managers Directive (AIFmD) and reforms of banking regulation are likely to influence the fund management sector both in the UK and internationally in the coming years International concern has been expressed on the marketing provisions of the AIFmD which could effectively prevent non-EU funds and managers from accessing the EU market and thus prevent EU investors from investing outside the EU The figure of £4.1bn for assets under management in the UK represents a conservative estimate It does not take into account significant funds managed in the UK for which there are no available estimates such as funds managed on behalf of sovereign wealth funds as well as private client funds managed, for example, by family offices Client type Institutional clients account for the bulk of funds under management in the UK The UK’s strong international position as a fund management location means that significant institutional funds from overseas are managed there Retail and private clients generate the remaining funds Institutional clients in the UK accounted for around two-thirds of funds under management in 2009 Institutional clients include insurance funds, pension funds, local authority and charity funds: 2008 2009 2,982 3,360 2,395 2,643 766 761 959 898 865 736 717 587 345 345 190 130 130 135 80 80 402 335 3,662 4,110 Investment Management Association; Excluding private clients; Figures have been adjusted to take account of double-counting Source: IMA, ComPeer, Eurohedge, BVCA, IPD, TheCityUK estimates Chart 14 Growth of funds under management in the UK £ bn 4,500 4,000 3,500 Institut funds Retail funds Private clients Alter funds 3,000 2,500 2,000 1,500 1,000 500 2002 2003 2004 2005 2006 2007 2008 2009 Source: TheCityUK estimates based on IMA, ONS, ComPeer, Eurohedge, BVCA and IPD data Chart 15 Annual net investment by UK institutional groups1 £bn 50 40 30 Insurance funds Unit and investment trusts 20 10 -10 -20 -30 Self-administered pension funds 2000 2002 2004 2006 2008 2001 2003 2005 2007 2009 Pension funds and insurance companies assets include investments in unit trusts Source: ONS - Insurance funds UK insurance funds totalled £766bn in 2009, slightly up on the previous year This represented close to a fifth of funds TheCityUK Funds under management in Scotland According to the Scottish Financial Enterprise, funds managed by the Scottish investment management industry totalled £685bn in 2008 A third of the funds invested by Scottish managers are long term life assurance funds with a further third in pension assets mutual funds and private and charitable funds make up most of the remainder Scotland has a traditional strength in pensions and the management of long-term savings, including open and closed-end mutual funds Fund Management 2010 Chart 16 Assets managed in the UK by domicile % share of UK funds, end-2009 Overseas private clients and alternative funds Overseas institutional and retail clients 28% under management in the UK Around 90% of insurance investment funds are from long-term insurance policies in which premiums paid over many years are invested by insurance institutions in order to meet the liability at maturity The remainder are from general insurance policies which have a shorter timescale Around 80% of insurance clients’ assets are managed by in-house asset management subsidiaries, although third-party insurance asset management is on the increase - - Pension funds’ assets increased by 7% in 2009 to £959bn The UK pension fund industry has been affected in recent years by various factors such as changes in regulation and accounting standards and the continuing shift from defined benefit to defined contribution schemes Increasing costs have resulted in the closure of many private sector DB schemes: membership of such open DB schemes has therefore halved to 2.6m since the early 1990s contributions to Dc schemes that have replaced them, at 9% of salary, are only about half that to DB schemes ‘Other institutional’ category includes a wide range of clients such as corporations, asset gatherers, local authority, sovereign wealth funds, charity, etc The considerable growth of this category to a record £865bn in 2009 is a reflection of an increase in international business from governments, corporate non-pension business, and central banks 6% 66% UK clients Total: £4,110bn Source: TheCityUK estimates based on IMA, Compeer, Eurohedge, ONS, BVCA and IPD data Chart 17 Assets under management in the UK by region of group headquarters % share 100 90 80 70 1% 11% 29% 2% 9% Other Europe 42% North America 47% UK 60 50 40 30 59% 20 10 Retail clients held some £717bn in investment funds managed in the UK in 2009, up nearly a quarter on the previous year largely due to an increase in retail investment in corporate bond funds and absolute return funds The overall figure for investment funds managed in the UK is around £1 trillion as some products are sold to a range of institutional clients UK based investment funds consist of: - UK domiciled funds including unit trusts and open ended investment companies (oEIcs), investment trusts and other retail products Funds under management of UK authorised retail funds increased by a third in 2009 to £481bn, more than making up the 23% decline in the previous year (chart 18) market movements were responsible for Advantages of the UK as a centre for fund management - Highly sophisticated and innovative management styles, techniques and strategies; - Skilled labour force and high quality professional and support services; - wide ranging client base: private and institutional, UK and overseas; - Highly liquid securities market with the opportunity to trade in large blocks of shares; - History of openness with relatively easy access to markets; - Liberalised operating environment combined with protection against abuses; - competitive infrastructure in telecommunications services and airline links; - A proportionate regulatory regime that is effective, fair and focused on the future, principled and risk based 2008 2009 Source: Investment Management Association Chart 18 UK domiciled retail funds under management £bn, funds under management (bars) £bn, net retail sales (line) 500 25 400 20 300 15 200 10 100 0 2000 2002 2004 2006 2008 2001 2003 2005 2007 2009 Source: Investment Management Association TheCityUK three-quarters of the increase in funds, with new money accounting for the remainder Funds under management increased further in the first months of 2010 to £509bn (chart 19) - UK managed funds domiciled outside the UK totalled around £500bn at the end of 2009, including funds such as UcITS and ETFs marketed to retail investors A number of firms have significant retail operations where the assets are largely managed in the UK but with domicile in Luxembourg, Dublin and other overseas locations Private clients are a significant niche in the UK market, with assets of around £402bn at the end of 2009, up a fifth on the previous year This figure includes assets managed by private client firms such as stockbrokers and private client departments of banks and fund managers Latest available data shows that individual ownership of UK shares accounted for around 10% of total share ownership in 2009, down from 16% in 2000 and 21% in 1990 Although the proportion of equity held by individuals is lower than in some other countries, the greater UK market capitalisation implies a more significant penetration of individual share ownership Alternative funds include hedge funds, property funds and private equity funds Both institutional clients and private clients invest in such funds Adjusting for double-counting, alternative funds were the source of an additional £400bn in 2009 or 10% of UK funds under management The UK accounts for around a third of the European property funds market London is also Europe’s leading centre for managers of hedge funds In 2009, over three-quarters of European-based hedge funds’ assets were managed out of London Including US hedge funds with an office in Europe, London probably accounted for 90% of European hedge fund assets The UK is Europe’s leading centre for managers of private equity funds with more than a half of European assets managed in London Overseas clients and firms In recent years, the UK has consolidated its position as one of the most important centres for the management of funds on behalf of foreign clients Funds in the UK managed on behalf of overseas clients totalled around £1.4 trillion in 2009 or a third of the UK total (chart 16) This was twice the total a decade earlier due to growth in the client base and consolidation which has been reflected in some large acquisitions Institutional and retail clients were the source of around 80% of overseas clients’ funds, while the remainder came from private clients and alternative funds A significant number of overseas firms are operating in the UK They accounted for over a half of UK funds under management in 2009 most of these funds are managed by firms with North American headquarters (around three-quarters of the overseas total), with Europe accounting for the bulk of the remainder (chart 17) The large increase in overseas companies’ share of UK funds under management in 2009 was largely are result of a number of divestments by UK retail banks and the BlackRock Barclays Global Investors deal Manager type UK fund management organisations can be classified by manager type into (chart 20): - Fund managers include independent investment managers that are not linked to any UK-based banking, securities or insurance groups They managed a third of UK funds, mainly pensions, at end-2009; Fund Management 2010 Chart 19 UK investment funds assets under management £ bn, assets managed by UK domiciled investment funds 550 500 450 400 350 300 2008 2009 2010 First months of 2010 Source: Investment Management Association Chart 20 Assets managed in the UK by manager type % share of UK funds, end-2009 Other Pension fund managers, 3% 14% Retail banks 4% Investment banks Fund Managers 35% 14% 30% Insurance companies Total: £4,110bn Source: IMA, TheCityUK estimates Table Largest firms by UK funds under management UK assets under management, end-2009, £bn 10 BlackRock Investment Management Legal & General Investment Management State Street Global Advisors M&G Investments Scottish Widows Investment Partnership JPMorgan Asset management Aviva Investors Standard Life Investments Schroder Investment Management Insight Investment Management £bn 462 306 183 166 142 138 132 108 97 88 Source: Investment Management Association TheCityUK - - - Fund Management 2010 Insurance companies Insurance companies managed around 30% of total funds in the UK at the end of 2009 Two-thirds of funds originated from their clients and most of the remainder from pension funds Around four-fifths of insurance companies’ funds are either managed by their internal investment department or by a separate subsidiary which might manage funds of external clients as well as those of its parent company The remaining funds are outsourced to third-party asset management firms; Chart 21 Market share of largest asset management firms Retail and investment banks represent banking and securities groups some of which combine securities and fund management operations Retail and investment banks accounted for 4% and 14% respectively of UK funds at the end of 2009 Investment banks’ funds predominantly came from pension assets while retail banks’ funds originated from both insurance and pension assets equally; 30 Self-managed pension funds represent separate legal entities set up to manage a company’s pension fund assets Their share has fallen in recent years as companies’ pension funds are increasingly managed by third-party fund managers In 2009, UK self-managed pension funds held around 3% of assets under management Largest UK fund management organisations The UK market is relatively concentrated at the top end with the largest five fund managers accounting for 37% of total funds under management in 2009 (up from 31% in 2008), and the top ten managers for 54% (up from 48%) (chart 21) BlackRock Investment management was the largest firm with £462bn of funds under management in the UK at the end of 2009 It was followed by Legal & General and State Street Global Advisors (Table 5) Asset allocation Fund managers have an array of investment choices available to them at home and overseas including equities, bonds, property, and cash Some 42% of UK institutional funds were invested in equities at the end of 2009 (Table 6, chart 22), up from 37% in the previous year The last ten years have however seen a reduction in portfolio allocation to equities As some pension funds are facing a deficit there is a heightened awareness of risk Allocation to UK Government bonds accounted for 39% of assets in 2009, down from 42% in 2008 The shares of cash and property investments were practically unchanged in 2009 at 11% and 5% respectively The use of derivatives as a means of facilitating the transfer of risk and implementing tactical asset allocation decisions has become a common feature of many fund managers % share Top 60 Top 10 50 40 20 10 2002 2008 2009 Source: IMA Chart 22 Asset allocation of UK pension funds % share 60 UK equities 50 40 Overseas securities 30 20 Government bonds 10 Property 1980 Cash 1985 1990 1995 2000 2009 Source: UBS Asset Management Chart 23 Active versus passive management % share, end-2009 close to 80% of UK institutional assets were managed actively at the end of 2009 Third-party insurance and in-house insurance had the largest proportion of active management (around 90%), while corporate pension funds (around 65%) had Table Asset allocation in the UK by institutional the smallest proportion client type (chart 23) CONTribUTiON TO The UK eCONOMy Value added while there is no official figure for the contribution of fund management to UK GDP, 10 % share of total assets under management, 2009 Corporate Insurance Insurance (In (Third Pension -House) -party) Fund 32.0 Equities 45.1 40.8 51.1 Bonds 36.7 41.7 8.6 Cash 7.0 4.0 6.5 Property 4.5 3.1 1.8 Other 6.8 10.4 Source: IMA Charity Total 66.8 10.9 18.2 2.1 2.0 45.8 35.5 9.5 4.5 4.7 Active Pasive Corporate pension fund Local Authority Charity Sovereign Wealth Funds Third-Party Insurance In-House Insurance Other Institutional Total Institutional Source: IMA 20 40 60 80 100 TheCityUK ThecityUK has made an estimate by applying cost margin indicators to total funds under management in the UK (charts 24 and 25) According to this measure, fund management generated around 0.67% of GDP or £8.7bn in 2009 It was therefore an important component of the financial sector’s overall contribution of around 10% in that year Fund management’s wider contribution to the economy stems from its promotion of the UK’s capital market and from the links fund managers have with other financial services providers, such as banks, securities dealers and information providers Fund Management 2010 Chart 24 Fund management industry profitability % of funds under management (FUM) Revenue/FUM Costs/FUM Profit/FUM 30 25 20 revenue combining ImA’s estimates on revenue margins with data on revenue for private clients separately estimated by comPeer, ThecityUK estimates that the total revenue of fund management activities totalled around £12.8bn in 2009 15 Profits and costs Fund management margins (profit/revenue) decreased to 33% in 2009 from 34% in the previous year and 37% in 2007 This was the second consecutive annual fall and follows six years of growth The decline was largely due to revenue falling more quickly than costs despite the recovery in equity markets (chart 25) Profitability is likely to remain at lower levels in the coming years with wide variations across institutions depending on which asset classes they offer Equity specialists may see a fall in business whereas fixed income specialists should continue to benefit from an increase in fixed income investments seen in recent years 10 2002 2003 2004 2005 2006 2007 2008 2009 Source: IBM, IMA, TheCityUK estimates Chart 25 Fund management margins margin as % of revenue 40 Fund managers have been reducing costs since the start of 2008 Some firms have consolidated fragmented back-office operations into centralised infrastructures while others have outsourced back-office processes such as investment operations and fund administration Fund managers are also looking at other approaches to reduce cost bases such as trimming sales and client services and reducing the product range on offer offshoring services such as transactions processing, IT services and call centres to offshore locations has been a trend for a number of years now offshoring has been more common amongst firms based in the US, UK and Asia, while firms in France, Italy and Germany have been more reluctant, partly due to the language barrier 35 30 25 20 15 1999 2001 2003 2005 2007 2009 Source: IMA, TheCityUK estimates employment cost cutting measures have also included some staff reductions, more to middle to lower management and back office staff than front office employees The ImA estimated that fund management firms in the UK directly employed around 24,000 at the end of 2009, down 3% from the previous year of this, around a quarter were employed in asset management, a fifth in marketing and client services, and most of the remainder in fund accounting and administration, corporate finance and administration, compliance, legal and audit and transaction processing These figures largely exclude private client investment managers and stockbrokers who are thought to employ an additional 25,000 people It should be noted that due to outsourcing of many operations by fund management firms within the UK, these figures significantly understate total employment generated by the fund management industry Net exports of fund managers totalled £2.9bn in 2009, down over 40% on the previous two years’ record levels (chart 26) The balance of payments inflow from portfolio investment by financial institutions, which will have owed much to the activities of UK fund managers, totalled £54.5bn in 2009, more than double the level a decade earlier Chart 26 Net exports of UK fund managers1 £m 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 1999 2001 2003 2005 2007 2009 Data since 2003 is not entirely comparable with prior years due to wider sample selection Source: ONS 11 TheCityUK Fund Management 2010 links to other sources of information: boston Consulting Group: Global wealth Report, Global Asset management www.bcg.com investment Property Databank: IPD Pan-European property index www.ipdindex.co.uk ComPeer Limited: In Depth Review of wealth managers www.compeer.co.uk Merrill Lynch Capgemini: world wealth Report www.ml.com european insurance Committee (CeA) www.cea.eu OeCD www.oecd.org insurance information institute www.iii.org Office for National Statistics: Insur companies’, Pension Funds’ and Trusts’ Investment, Q4 www.statistics.gov.uk institutional investor/Watson Wyatt: world’s top 500 fund managers www.institutionalinvestor.com www.watsonwyatt.com investment Company institute www.ici.org investment Management Association: Fund management Survey www.investmentuk.org Datafiles Datafiles in Excel format for all charts and tables published in this report can be downloaded from the Reports section of ThecityUK’s website www.TheCityUK.com Sign up for new reports If you would like to receive immediate notification by email of new ThecityUK reports on the day of release please send your email address to signup@TheCityUK.com Pensions and investments www.pionline.com Swissre www.swissre.com UbS Asset Management: Pension Fund Indicators, International Pension Fund Indicators www.ubs.com TheCityUK research Centre: Report author: Marko Maslakovic, Senior Manager, economic research, marko.maslakovic@ThecityUK.com, +44 (0)20 7776 8977 For further information about our work, or to comment on the programme/reports, please contact: Leslie Sopp, head of research leslie.sopp@ThecityUK.com, +44 (0)20 7776 8979 ThecityUK, 65a Basinghall Street, Ec2V 5DZ www.TheCityUK.com © copyright october 2010, ThecityUK TheCityUK is a new independent membership body, promoting the UK financial and related professional services industry The cityUK’s key areas of activity include: - Promoting the UK-based industry as a world leader offering unrivalled service and expertise to partners around the world - creating a partnership for a sustainable industry: demonstrating the industry’s role in enabling growth and prosperity in the wider UK economy - Using research, insight, data and analysis to meet the needs of its members and to provide the evidence to support our promotional objectives This report is based upon material in ThecityUK’s possession or supplied to us, which we believe to be reliable whilst every effort has been made to ensure its accuracy, we cannot offer any guarantee that factual errors may not have occurred Neither ThecityUK nor any officer or employee thereof accepts any liability or responsibility for any direct or indirect damage, consequential or other loss suffered by reason of inaccuracy or incorrectness This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or as the provision of financial advice copyright protection exists in this publication and it may not be reproduced or published in another format by any person, for any purpose Please cite source when quoting All rights are reserved  ... UBS Asset Management 19% 40% 42% Canada Australia Other TheCityUK Fund Management 2010 UK FUND MANAGeMeNT Table Funds under management in the UK UK fund management overview The UK fund management. .. corporate pension funds - other (local authorities, charities, etc.) Retail clients Other funds3 - Hedge funds - Property funds - Private equity funds Private client funds Total funds under management. .. end-2009; Fund Management 2010 Chart 19 UK investment funds assets under management £ bn, assets managed by UK domiciled investment funds 550 500 450 400 350 300 2008 2009 2010 First months of 2010