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Taking on the US: the giant hurdle for European fund managers

Fund management

Taking on the US: the giant hurdle for European fund managers

Success proves elusive for the titans of London, Paris and Frankfurt. Is that about to change?

Rewards for cracking the US can be significant but few European companies have more than a toehold (Alex Wheeler/FT)

Cracking the US has long been a target for companies seeking to boost their international profile — but many of Europe’s largest asset management companies find Stateside success elusive.

Only a handful of European fund houses have a meaningful presence in the US. Amundi, Europe’s largest fund manager, has $62bn in US assets — a fraction of the $39tn managed on behalf of American investors.

By contrast, US fund managers plunder the European market. BlackRock and Vanguard dominate the continent’s fund industry, often taking the lion’s share of local fund flows.

European managers in the US face high hurdles. The market is extremely mature and competitive with trillion-dollar established players in entrenched positions. Active fund flows are hard to come by because of the relentless surge of money into passive products. According to Morningstar, assets in passive equity funds have reached market-share parity with their active counterparts.

Yet the rewards from cracking the US are significant. As the largest fund management market, accounting for 40 per cent of investor assets worldwide, success in America is essential if a company is to be seen as truly global.

Last month, Nick Train, the high-profile investor who holds an 8 per cent stake in Schroders, called on the UK fund manager to expand its US business. “How are they going to get to $1tn or even $3tn? It probably has something to do with the US,” he said.

Schroders wants to rise to the challenge and hopes to double its US asset pool — which stands at $75bn — within five years. Marc Brookman, who moved to Schroders from Morgan Stanley to drive its expansion, says it is “incredibly challenging” but the “challenges of the US are also its opportunities”.

In comparison with other European companies, Schroders has a longstanding presence in the US, having been in New York since 1999. Other established participants include Scotland’s Baillie Gifford, which has been in the market since 1983 and manages $96bn on behalf of local investors. France’s Amundi and Natixis expanded via acquisition, as did Germany’s Allianz which bought US bond giant Pimco. Few managers have grown organically.

Jonathan Doolan, head of Europe, Middle East and Africa at Casey Quirk, the Deloitte-owned consultancy, says some foreign fund houses mistakenly “dip their toes” in the US rather than make a meaningful investment. These groups enter the market, retreat after limited success and then return under new leadership. Mr Doolan says this approach displays a lack of understanding of what is needed to build a brand and establish a record in the US.

Standard Life Aberdeen has had limited US success and has just $50bn in US assets. Quantitative investment specialist Axa Rosenberg has seen lacklustre growth in US business, according to a person familiar with the company; parent group Axa Investment Managers declined to give figure but said: “US clientele span several investment capabilities.”

Legal & General Investment Management, which has $100bn in local assets, took a decade to establish its Chicago-based business. Aaron Meder, US chief executive at LGIM, says the manager set aside three to four years to allow its funds to build up a record and five years to forge relationships with clients.

The most challenging aspect for entrants is creating a product range that appeals to US investors.

Onur Erzan, senior partner at McKinsey, says managers with European investment expertise start at a disadvantage due to local investors’ home bias. Financial advisers allocate about a third of their portfolio to US equities, with just 10 per cent going into global stocks, according to Cerulli Associates.

A complication is the fact that US-based managers increasingly offer international equity exposure via passive funds. As local pension plans shift assets from active to passive, this “eliminates the need to add a European active strategy in a portfolio”, says Mr Erzan.

Dominique Carrel-Billiard, who heads Amundi’s US business, says: “The US is a challenging market because the mutual fund format is challenged by the exchange-traded fund and passive business. It’s a market where, effectively, investment excellence is what pays.”

This fierce competition is accentuated by wealth managers’ dwindling product choice, with distributors including Morgan Stanley, Ameriprise and Merrill Lynch culling funds. According to Mr Erzan, the average wealth manager has cut the number of asset-manager partners by up to half in a decade.

Jim McCaughan, former chief executive of Principal Global Investors, the $413bn US fund manager, says that in the 1990s European managers could rely on their international expertise giving them an edge but now need to stand out more. “A successful entrant to the US needs to bring something really different,” he says.

Schroders’ US strategy centres on its reputation as an international specialist. Mr Brookman says this will help open the door to prospective clients, allowing it to gradually offer other asset classes. As part of this, the group is looking to make acquisitions in areas such as private assets and alternatives.

LGIM is carving out a niche by offering liability-driven investment (LDI) strategies and income solutions. Mr Meder says LGIM noticed local investors’ problems — accessing benefits in legacy-defined benefit pension schemes and demand for retirement income — and responded to them. “The combination of LDI and insurance expertise … takes the competitive universe from 50 to three. That’s important as a newcomer,” says Mr Meder.

He adds that LGIM also stands out because of its sales approach. It employs a team of actuaries who engage with investors to understand their liabilities. “The US does not have a lot of people taking that solutions-orientated, consultative approach, so you can differentiate yourself pretty easily,” he says.

Distributing funds is resource-heavy in the US due to the sheer size of the market, says Mr Erzan. “There are more than 300,000 financial advisers that distribute some kind of wealth and asset management solutions,” he says.

Local asset managers typically employ hundreds of on-the-ground salespeople who hold “thousands of meetings every year with advisers”. Mr Erzan adds: “Incumbent asset managers that have sizeable capabilities in terms of covering financial advisers … are at an advantage vis-à-vis new entrants.”

Schroders’ approach to the distribution challenge was to partner Hartford Funds, a local manager. Schroders provides investment management services and Hartford distributes the funds. “We would never have been able to create scale without the deal. Before it, we had 12 sales people. [Via Hartford] we have 80,” says Mr Brookman. “You need to have people and boots on the ground to build a truly diversified business. [Not doing that] is one of the mistakes non-US firms make.”

While groups such as Schroders and LGIM are determined to increase their US presence, some recognise they will only make gains on the edges. Mr Brookman acknowledges that Schroders will not be the first choice of manager because of US clients’ home bias but it hopes to be the “third or fourth” choice when investors are ready to diversify.

He adds that for Schroders, “just getting to 1 per cent of market share is a very significant asset and revenue opportunity”.

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