The initial goal of the ban was, in anticipation of the Mifid II Directive, to increase cost transparency and to prevent banks from selecting funds based on the commission fees they offer. In the run-up to the commission ban, there was widespread fear that banks would respond by cutting their fund ranges to focus more on in-house products. Interestingly, one private bank fund selector said that, contrary to these expectations, he has started to invest more in external funds as they have become cheaper following the introduction of rebate-free share classes.
But the commission ban has indeed triggered a response by the banks, albeit a less radical one. AA Advisors, the fund selection arm of ABN Amro, introduced its own single manager funds, a hybrid between an in-house fund and an external fund. These funds basically delegate the portfolio management to an external manager, within a mandate set by AA Advisors. These funds charge lower fees than most third-party funds.
Emerging market equities
Double Dutch enthusiasm
Fund selectors in The Netherlands are unequivocal in their enthusiasm for emerging market equities. Four out of ten are looking to increase their weighting over the next 12 months: the only reason that number isn’t higher is because they are already almost universally overweight the asset class.
Emerging market equity sentiment in the country had reached its highest level in almost three years in June, and has held up well since (see chart 1). The only worry seems to be about China, where the real estate market shows signs of imminent collapse.
Frontier market equities
All-in or nothing at all
As far as frontier market go, there is substantial divide of opinion (see chart 2). While two thirds of interviewees are not invested at all in the area, those who do all have strong overweights to the asset class. One of the frontier market bulls even said that almost 3% of total assets under management of his company, a private wealth manager, is invested in frontier market equities at the moment.
It’s either Europe or US
A striking feature of the Dutch fund selector community at the moment is the polarisation around developed equities, quite similar to the sentiment surrounding two rival football clubs. Fans of European stocks dislike US equities, most often because of their high valuations, while fund selectors who like US stocks see no value in Europe, usually due to the meagre growth prospects on the continent. Whereas one interviewee stressed European equities have more potential than their American equivalents considering the European recovery has only just started, leaving room for margin expansion, another fund selector said she prefers US equities, arguing the imminent deflationary threat in the Eurozone casts a shadow over equities in the region.
Appetite for alternative products is considerable, with the majority of interviewees wanting to increase their exposure to long-short and flexible strategies. Only 35% of them are really planning to buy more alternatives though (see chart 5), as most insurance companies and pension schemes are not allowed to invest in hedge funds. Several fund selectors told us they want to buy alternatives, but can’t use them because of internal guidelines or regulatory constraints such as Solvency II.
Emerging market debt
The Dutch have gradually started to buy emerging market debt again. A quarter of interviewees said they will increase allocation over the next 12 months, compared to only 8% in February. Moreover, the majority of EMD users are now overweight the asset class. Emerging market government bonds are more commonly used than their corporate equivalents, though many fund selectors do not have specific allocations to government bonds and credit respectively (see chart 6 and 7). They therefore prefer a manager who does this for them.
Developed market government bonds remain the least popular asset class with Dutch fund selectors, though some interviewees regret they missed this year’s government bond rally. Almost half of the interviewees said they will decrease their allocation to the asset class, while a number of fund selectors, especially from insurance companies, are currently overweight government bonds though (see chart 8). One investor of a large insurance company said they have recently transferred some €2bn from low-yielding government bonds to the more lucrative mortgage market. High yield bonds (see chart 9) have a comparable number of bears as government bonds, with several fund selectors saying they currently see more value in emerging market debt.