Despite rising pressures to build up prefunded pension assets in Europe, debate rages over how much of an opportunity this could mean for outside money managers.
A 1994 study by InterSec Research Corp. uncovered what the firm considered to be a surprising amount of interest by European institutions in outside, including specialty, managers. Historically, many pension arrangements evolved around insurance contracts; companies used arms of their local banks to provide pension asset management.
But although pressure is now mounting in Europe to create more funded pension plans to ease the burden of social security programs - and more companies want to cut their pension costs by boosting returns - a host of local country rules still impede the free flow of assets. Many governments still want the assets kept at home, where it can aid the local economies.
The result: A number of money managers see less glorious business opportunities in Europe than the InterSec data suggest.
For its study, InterSec initially contacted 600 institutions, mostly pension funds and insurers, in 10 European countries. Of that group, 66% of pension fund sponsors questioned and 20% of insurance companies had appointed or intended to appoint outside managers. Detailed interviews with 200 of those using outside managers revealed that 56%, or 112, expected to hire at least one new manager by July 1995. Almost 40% of the new hires would be foreign based, compared with 21% when the survey was conducted in December. In turn, foreign equities would claim more than 40% of new assignments vs. 25% existing at the time the survey was conducted.
Not surprisingly, interest in outside managers varied among countries. Generally, InterSec found greater appeal where sizable numbers of prefunded plans exist, including in the United Kingdom, the Netherlands and to some extent, Switzerland. Indeed, 90% of respondents from Denmark expected to tap more outside managers vs. 30% - the lowest country level - in Ireland.
Underscoring the move toward hiring more foreign specialist managers, InterSec found that only 35% of upcoming hires will be for domestic managers; in comparison, 78% of the 951 managers already on board hail from the home country. Another 44% of respondents were undecided about the nationality of the managers they will hire. Institutions that knew where their new manager would come from most preferred, in order, the United States, the United Kingdom and Japan.
From the global perspective, such findings are important because of the large proportion of world pension assets that European funds hold. For instance, according to InterSec, of the total world pension assets of $6.86 trillion at the end of 1993, Europe had the second largest share - $1.6 trillion - after North America's $3.9 trillion.
Europe's two biggest economies - Germany and France - have relatively few funded pension schemes. If more plans start in those and other European countries, as seems likely over time, money management opportunities will certainly grow. And even a rise in defined contribution plans - which often invest conservatively - could be useful. Money managers could benefit, some believe, if they help companies and employees set up such plans.
Thus, to Bradford E. Klinck, senior actuary with Actuarial Sciences Associates Inc., Somerset, N.J., "Europe is one of the best opportunities," especially for Western money managers. Despite the many investment rules that still exist, Europe offers both a business opportunity and a perceived "cultural familiarity" for, say, American managers.
But at least some money managers remain skeptical. Or, they haven't yet begun to pursue continental European opportunities because of the region's traditionally sleepy investment management practices.
"We've been focused on continental Europe for a long time, and it's been tough going. Outside of the Anglo market, such as the U.S., the U.K. and Canada, pension funds are decades behind. Europe is a different world - a very unsophisticated area in terms of investments and has a lot of unfunded pension programs," said a representative of a London-based money management firm. He asked not to be quoted.
Alan Kemp, deputy chief executive of Dunedin Fund Managers, Edinburgh, Scotland, said the firm intentionally has done "nothing" in continental Europe because it perceives that opportunities "to win money are far better in other places, such as America. Europe is in the very early stages of moving to external managers. And pension arrangements in many of these countries aren't even funded."
As for the United Kingdom, "we frankly can't compete for balanced management business with the big four managers - Mercury, UBS, Gartmore and Schroders - because they've got that sewn up," he said. "We hope (in the U.K. to land) more specialized management assignments. But as far as I am concerned, the best opportunity is in the U.S. I've put seven years into developing that, and it's starting to pay off."
Sandy Bowes, marketing director of Lombard Odier International Portfolio Management Ltd., in London, picks the United Kingdom and the United States as best sites for gaining new business. In continental Europe, he sees a growing willingness to consider overseas investing but not "an identifiable flow of funds yet." He foresees more activity once pension consultancy and performance measurement gain popularity.
For its non-U.S. business, Boston-based Acadian Asset Management is targeting Australia. While "some people have said that probably the U.K. and Europe would find our value and quantitative approach appealing, we just haven't gotten there yet," said Churchill Franklin, senior vice president. While the firm has always had a "rifle-shot approach" to addressing the non-U.S. market, it's had more success with Australia lately - perhaps because a number of consultants active in that market also have offices in the United States and are familiar with Acadian, Mr. Franklin said.
As Mr. Franklin observed: "U.S.-based consultants are pushing the same kinds of investment ideas that worked in the U.S. to more virgin territory where they have offices."