UK Collective Investments 2008

UK Collective Investments 2008

Introduction

The mutual funds sector faces its own challenges since the market upheaval of summer 2007. Taking account of new regulation and the threat of product substitutes such as ETFs, this report examines market developments and competitor and investor dynamics over the last year, and presents the prospects for 2008-12.

Scope

*Sizes the market for unit trusts, OEICs and investment trusts in the UK and provides forecasts to 2012;

*Examines investor characteristics and purchase behaviour;

*Identifies the leading players in the UK collective investments market.

Highlights

Exchange-traded funds (ETFs) are gradually assuming a more prominent place in the UK's collective investments landscape. Though still a fraction of the mutual funds market, growth in UK ETF assets outstripped growth in mutual funds in 2007.

Since 2005, retail investors in the UK have allocated a growing percentage of their investments to unit trusts, OEICs and investment trusts. By 2007, these mutual funds accounted for just over one quarter of their portfolios, up from 20% in 2003.

Younger adults aged 18-29 tend to use a variety of channels for investing. While they are most likely to invest at their bank or building society (34%), nearly one-quarter of these clients has also approached an IFA, 22% invests directly through an investment company and 19% has also invested through an insurer.

Reasons to Purchase

*Assess the size and industry dynamics of the UK collective investments sector;

*Profile your target customer groups in order to develop more effective marketing and distribution strategies;

*Access independent forecasts of UK unit trusts/OEICS and investment trusts to identify product sectors for future investment.

Overview 1
Catalyst 1
Summary 1
Methodology 1
Executive Summary 2
Despite regulatory and financial market challenges, there is broad scope to increase penetration in the UK collective investments market 2
Key issue: Mutual funds vs ETFs - In the short term, mutual funds will hold their own against ETFs, but the competitive threat is increasing 2
Adverse market conditions and regulatory interventions are likely to deter mutual fund investors 2
UK penetration remains below 5%, with higher earners and the elderly more likely to hold collective investments 3
IFAs remain a popular source for advice and service on collective investments 3
Despite contraction in the number of providers, retail investors have access to an expanded range of funds 3
Table of Contents 4
Table of figures 5
Table of tables 6
Special Feature: Mutual Funds vs ETFs - The Battle for Retail Investors 7
In the short term, mutual funds will hold their own against ETFs, but the competitive threat is increasing 7
ETFs present a minor, but growing threat to conventional mutual funds 7
Demand for ETFs is growing because they offer advantages of cost, trading flexibility and market access 8
UK and EU legislation is also facilitating growth in the ETF market 8
Faced with inevitable growth in the ETF market, conventional fund managers can play offence or defence to shore up their revenue and profit 8
Offering ETFs is not the only option 9
ETFs do not offer cost advantages to all investors 9
For mass market investors, the ability to trade throughout the day may prove less alluring 10
Fund managers should communicate their commitment to the investment objective and strategy that investors have bought into 10
Building and emphasizing corporate investment expertise minimizes the threat of manager defection 10
Improving transparency through more regular, comprehensive reporting will help investors and advisors to formulate their own judgements about a fund manager's integrity 11
The best defensive position will be completely transparent 11
Market Context 12
Adverse market conditions and regulatory interventions are likely to deter mutual fund investors 12
Mutual funds account for a growing percentage of retail investment assets 12
Retail investors in the UK are holding £421 million worth of collective investments 13
Poor performance has lowered year-on-year growth 13
By 2012, investors will have seen growth of just 10% in their mutual fund portfolios 14
Regulatory developments affecting fund management and distribution will threaten mutual fund managers' revenues and profit 16
The FSA wants improved due diligence on mutual funds 16
Proposed changes to existing retail distribution models will also increase operating costs and open the market to greater competition from substitutes 17
Other government interventions may help to boost the UK asset management industry 18
Customers 19
UK penetration remains below 5%, with higher earners and the elderly more likely to hold collective investments 19
Retail investors are using mutual funds to access the equity markets 19
The majority of unit trusts and OEICs are held outside of ISAs and PEPs 19
Approximately 3% of adults in the UK have unit trusts, with the highest penetration among those over age 60 21
Distribution Channels 24
IFAs remain a popular source for advice and service on collective investments 24
Investors buy mutual funds primarily through IFAs 24
Tied agents or sales forces account for close to one-third of ISA unit trusts and OEIC sales 24
Clients prefer face-to-face service and advice on their investments 25
Mass affluent investors are most likely to go directly to investment companies or buy directly through fund supermarkets 27
Sales efforts should focus most on advisor training and support, since investors prefer to speak to someone about their investment options 28
Wealthier investors are also open to using the financial press to gather information on investments 29
Men are more likely to do-it-themselves than women 30
Competitors 32
Despite contraction in the number of providers, retail investors have access to an expanded range of funds 32
Industry consolidation continued into 2007 32
The top 10 investment trust managers account for 45% of the market, in terms of assets under management 33
45% of OEIC, PEP and ISA assets are attributed to the top 10 fund managers 34
APPENDIX 35
Data 35
Definitions 50
Independent Financial Advisors (IFAs) 50
Gross Retail Sales 50
Net Sales 50
Share repurchases 50
Deposits 50
Investment trusts 50
ISA 51
OEICs 51
Unit trusts 51
Personal Equity Plan 52
Methodology 52
Datamonitor's UK Savings and Investments Database 52
Flows Methodology 52
Market Share Methodology 52
Ipsos MORI data 53
Sample design 53
Bibliography 53
Further reading 54
Ask the analyst 54
Datamonitor consulting 54
Disclaimer 54
List of Tables
Table 1: Number of unit trust and OEIC funds and providers in the UK, %, 2003-07 32
Table 2: Overview of the retail savings and investments market, GBPm, 2003-07 35
Table 3: Retail mutual funds under management segmented by type of fund structure, GBPm, 2003-07 36
Table 4: Retail mutual funds under management segmented by type of fund structure, GBPm, 2008-12 37
Table 5: Overview of the retail savings and investments market, GBPm, 2008-12 37
Table 6: Retail mutual funds under management segmented by type of fund, GBPm, 2005-07 38
Table 7: Unit trust and OEIC funds under management by type, GBP bn, 2003-07 38
Table 8: UK households by type of saving and region: Unit Trusts, %, 2002-3 - 2006-7 39
Table 9: UK adults by sex, type of saving and age: Unit trusts, %, 2002-3 - 2006-7 40
Table 10: UK households by type of saving and total weekly household income: Unit trusts, %, 2002-2006 41
Table 11: Gross retail sales of unit trusts and OEICs in the UK by distribution channel, %, 2003-07 41
Table 12: Gross retail sales of ISA unit trusts and OEICs in the UK by distribution channel, %, 2003-07 42
Table 13: Responses to question: "When you bought your most recent investment who arranged it for you?", UK adults, segmented by age, 2007 42
Table 14: Responses to question: "When you bought your most recent investment who arranged it for you?", UK adults, segmented by income, 2007 43
Table 15: Responses to question: "When you bought your most recent investment who arranged it for you?", UK adults, segmented by gender, 2007 44
Table 16: Responses to question: "When taking out your investment, which of these methods if any would you use to find information about the product?", UK adults segmented by age, 2007 45
Table 17: Responses to question: "When taking out your investment, which of these methods if any would you use to find information about the product?", UK adults segmented by age income, 2007 46
Table 18: Responses to question: "When taking out your investment, which of these methods if any would you use to find information about the product?", UK adults segmented by gender, 2007, 47
Table 19: Top 30 investment trust managers by total assets under management, GBPm, 2007 48
Table 20: Ranking of competitors by total funds under management including OEICs, PEPs and ISAs, GBPm, 2007 49
List of Figures
Figure 1: Growth in retail mutual funds outstrips other asset classes 12
Figure 2: Unit trusts & OEICs continue to dominate the retail mutual funds market 13
Figure 3: Mutual fund growth will decelerate between 2008 and 2012 15
Figure 4: Growth in investment trust balances will continue to outstrip unit trusts and OEICs 16
Figure 5: Retail investors continue to favor equity mutual funds, but these now account for a smaller percentage of their portfolios 19
Figure 6: 12% of unit trust and OEIC investors' funds is held within ISA wrappers 20
Figure 7: 4% of UK households invest in unit trusts 21
Figure 8: Adult males are more likely to hold unit trusts 22
Figure 9: Income is positively related to investment in unit trusts 23
Figure 10: IFAs continue to dominate sales of unit trusts and OEICs 24
Figure 11: Intermediaries' share of the ISA unit trusts and OEICs market continues to decline 25
Figure 12: Overall, IFAs are the preferred channel, but younger investors are more likely to use a variety of sources 26
Figure 13: Fund supermarkets are most used by mass affluent investors 27
Figure 14: Men are also far more likely to invest directly through an asset management firm than women 28
Figure 15: Investors of all ages value face-to-face advice; but younger clients also make use of provider and aggregator websites 29
Figure 16: Clients of all income levels prefer to speak to someone face-to-face for advice 30
Figure 17: Women are more reluctant to rely on newspapers or Internet searches 31
Figure 18: The UK market for investment trusts remains highly fragmented 33
Figure 19: Invesco Perpetual enjoys a narrow lead in the market for OIECs, PEPs and ISAs 34