With the rising popularity of fund supermarkets has come the reality of disintermediation, only it is not IFAs that are being pushed out of the chain but fund houses themselves.
Gross Isa sales through fund supermarkets are now three times higher than those via intermediaries, as shown by the Investment Management Association’s fifth annual asset management survey which covers 2006 sales.
The trend in gross Isas sales has been a steady upward path for fund supermarkets, with sales rising each tax year for the past five years. At the same time, the trend in sales has been downwards for IFAs, with the figures showing a fall in sales in each tax year, bar one, over the five-year period.
In 2002-03, gross IFA sales of Isas fell by more than £973m compared with the previous year while the supermarkets gained £604m in the same year. Supermarket sales evened out after that and while gains were still recorded in 2003/04 and in 2004/05, it was in 2005/06 that another massive jump occurred in sales, up by £841m, while that was the only year in five that IFAs increased sales, up by £66m.
The past year saw the trend continue. IFA sales fell by £145m while fund supermarkets gained a massive £1.1bn over the previous tax year. According to the IMA, supermarkets are now the dominant distribution channel for gross Isa sales.
But these figures are not that clear cut as they do not disseminate what portion of supermarket sales are actually coming from IFAs.
Still, the threat of disintermediation that was a common cry when supermarkets were first launched has become an identifiable trend, according to the IMA report – just not for IFAs.
Despite the doomsayers’ predictions to the contrary, it would seem that open architecture and the rise of platforms has not substantially redefined the relationships between distributors and retail investors in the UK. Instead of supermarkets enabling better relationships between the fund groups and direct clients, it is the use of platforms by IFAs that means the end client has become even more remote to the asset managers.
Jonathan Lipkin, author of the IMA report, says where the relationships are felt to be different is between the retail investor and the fund manager, as clients become more remote. According to one firm interviewed in the report: “We are being disintermediated, so we do not own the customer.”
Another said: “Now, between us and the client, you have a platform provider and an IFA. You are two stages removed from the client. As a fund manager, you are a bit like Heinz selling beans to a supermarket.”
Another common thread identified by the IMA study is the “institutionalisation” of the retail world in a number of different ways. Distribution trends blurring the line between what used to be distinctly institutional and retail is not the only growing similarity between the once two distinct camps.
One firm interviewed in the IMA study said: “An institutionalisation of retail investment is taking place. Everything is merging together. The biggest part of our business is done through very big wholesalers.”
Asset managers are now using similar techniques for both markets, eroding established distinctions between traditional long-only management and hedge funds. This is seen in the emergence of 130/30 funds which were initially created for the institutional world but in the UK at least seem to be making inroads in retail just as fast.
One of the main reasons for increasing similarity between institutional and retail clients has been the growing divide and demand for alpha and beta – active fund management and passive strategies. Both continue to be in demand but the separation of the two is more evident these days.
Pickin notes there is agreement in the industry that clients on both sides seem willing to pay higher prices for extra alpha although that same money is apt to move fast if performance disappoints.
Other points highlighted in the report include:
- Twenty-seven per cent of total assets managed in the UK – £800bn – are run on behalf of overseas clients.
- The market share of the top 10 biggest firms remains similar to last year at 48 per cent. the top five firms accounted for 30 per cent of assets managed in the UK by IMA members.
- The top five groups based on assets managed in the UK are L&G, Barclays, State Street, M&G and Morley.
- There continue to be indications of a general move away from equities and into bonds.
- Despite unusually strong growth in property funds, these only represent some 3 per cent of total funds under management. They made up 1 per cent of total net retail sales in 2003 but increased nearly eightfold between 2004 and 2006.
- There has been increased interest in alternatives, notably hedge funds, private equity, commodity and infrastructure funds.
- Retail assets identified in the survey account for 21 per cent of total assets – some £650bn. The IMA estimates that £230bn is domiciled in Luxemburg or another overseas location.
- Over 2006, the best selling sectors in terms of net retail sales were the specialist sector at £4.4bn and UK equity income at £2.3bn. The worst selling sector was UK smaller companies with net outflows of £360m.