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Societal and economicimpacts of the Europeanasset management industryDecember 2014

3ContentsExecutive summary 51 Introduction 81.1 European asset management in the 21st century 81.2 Aim of the report 81.3 Methodology 81.4 Structure of the report 82 Context: the rise and shape of European asset management 102.1 The rise of European asset management 102.2 The shape of European asset management 123 Direct impacts of the European asset management industry 153.1 Direct and indirect employment 153.2 Financing European economies 173.2.1 Debt financing of the European economy 183.2.2 Equity financing of the European economy 203.3 Are European asset management firms systemically important? 213.3.1 Why some banks are systemically important 223.3.2 Why asset management firms are not systemically important 233.3.3 Second-order risk factors at product level 243.4 Added value of the European asset management industry 254 Indirect impacts of the European asset management industry 284.1 The costs and benefits of financial expertise 284.1.1 Costs of financial expertise in active investment management 294.1.2 Benefits of financial expertise in active investment management 304.2 The asset management industry and market quality 304.3 Asset management and the corporate governance of firms 335 Conclusions and implications 366 Appendices 39Bibliography 42Societal and economic Impacts of the European asset management industry

4Thank you to Bernard Delbecque, Christian Dargnat, Peter DeProft, Hermin Hologan, David Pillet, Roy Stockell, and ShahinShojai for helpful discussions on the subject areas analyzed inthis study. The views expressed here are those of the authorand do not necessarily reflect those of EY.AuthorJens Hagendorff, PhD MA BAProfessor of Finance & InvestmentUniversity of Edinburgh29 Buccleuch Place, Edinburgh, EH8 9JS, UKjens.hagendorff@ed.ac.uk+44 131 650 2796Societal and economic impacts of the European asset management industry

5Executive summaryThis research report examines the impacts of the Europeanasset management industry on Europe’s economy. The reportexplores both direct and indirect impacts.ContextThe European asset management industry is large, withassets under management (AuM) of over 115% of GDP (ornearly EUR €17 trillion). The industry is also growing fast andoperates on a pan-European basis with a strong economicfoothold in almost every European country. With Europe asthe second-largest center for asset management globally,European asset management is an economic success story.Demand for asset management solutions has grown to caterto older and wealthier societies that can look forward toincreased life expectancies and longer retirement periods.None of the factors responsible for the stellar growth of theindustry is likely to subside or reverse in the foreseeablefuture. The European asset management industry istherefore poised for further and fast growth.The size of the industry indicates that it meets importantneeds of European societies and, in doing so, has an importantimpact on European economies and societies.Direct impacts• The European asset management industry is a largeprovider of employment. The report estimates that theindustry generates a total of around 530,000 full-timeequivalent positions. Most of the employment is indirectand linked to support roles in related services such asmarketing, distribution, accounting, auditing, custodianshipand research.• The European asset management industry provides acrucial link between investors and the financing needs of thereal economy. Long-term savings and risk managementare at the heart of what the industry provides. Thismakes the industry suitable to provide long-term finance toEuropean corporations. The report estimates that Europeanasset managers hold 23% of European debt securitiesoutstanding or 32% of the value of European banklending. Similarly, the value of equity held by Europeanasset managers corresponds to nearly 40% of the freefloat of European listed firms.• The bond finance provided by asset managers is particularlyimportant as banks retreat from lending in Europe andexternal financing channels outside the banking sectorbecome increasingly important. Crucially, while theEuropean asset management industry provides debtfunding that is substantial compared to bank lending,it does so without the bailout subsidies afforded to thebanking sector. Bank subsidies, which follow from thesystemic relevance of the banking sector, are substantialand costly to taxpayers. Therefore, the European assetmanagement sector finances economic activity but doesso in a more cost-efficient way than the banking sector.• It is estimated that the European asset managementindustry contributes an average of 0.35% per year toEuropean GDP. This estimate is based on the industry’sprofits, staff costs and taxes paid. The value added isparticularly large in the UK, where it is in the region of 1% ofGDP per year. The figures are also large in absolute terms.Across Europe, it is estimated that the yearly value added isEUR €50 billion.Indirect impacts• There are a number of societal benefits linked to assetmanagement, many of substantial magnitude and indirectlylinked to the industry. By acting as an agent on behalf ofinvestors, the asset management industry is an importantprovider of investment expertise and risk managementservices to institutional and retail clients. Further, theindustry is instrumental in making markets more frictionlessplaces in which to operate. The resulting benefits includelower transaction costs, faster execution and price discoveryand enhanced market efficiency for all investor groups.• This report estimates that trading activity by Europeanasset managers generates cost savings of EUR €12 billionper year in the cost of providing and demanding liquidity.These savings result from tightening bid-ask spreads inEuropean equity, which can be linked to the trading activityof European asset managers. Crucially, these savings areshared among all investors in European stock markets.Societal and economic impacts of the European asset management industry

6• Further, the industry acts as a steward of Europe’scorporate landscape and has brought about improvementsin the corporate governance of European corporationsthrough periods of engagement. The report values the totalEuropean governance premium generated by Europeanasset managers at EUR €462 billion. In line with the otherindirect benefits, the governance premium is shared morewidely with other market participants.Implications• One of the key benefits the industry provides revolvesaround financing economic activity. This is likely to increasein the near future as the banking sector gradually retreatsfrom traditional lending activities. This leaves a growingand increasingly important role for European assetmanagers to fill the gap in providing finance to Europeaneconomies.• Against the backdrop of concerns that ever-larger tradingvolumes in financial markets carry no benefits for society,the report shows that the asset management industry hasbeen instrumental in making markets more frictionlessplaces to deal in. This translates into lower trading costsand higher net performance for all investor groups.• Only a small part of the population currently possessesthe financial literacy required to make financial decisions.The industry’s expertise is therefore not only warranted tocreate financial products, it could also play an importantrole in promoting financial education and to sensibilizeEuropean societies to their financial planning needs.• European lawmakers need to carefully balance the needsof the European asset management industry, its clientsand European economies without undermining some of thekey benefits the industry provides to society. As regardsEuropean economies, this report provides evidence that theEuropean asset management industry has a strong recordof positive impacts on European economies and societies.Societal and economic impacts of the European asset management industry

7Introduction01Societal and economic impacts of the European asset management industry

81Introduction1.1 European asset management in the 21stcenturyAsset management is a key industry in every financialeconomy. The industry channels the savings of millions offirms and households to companies and governments in needof funds. In doing so, the industry finances a sizable share ofeconomic activity while offering its investment expertise tosavers. As banks gradually withdraw from lending activitiesand aging societies look for ways to fund healthier and longerretirements, asset management is poised to play an evenmore important role in future years.Asset management is a European success story. Europe isthe second-largest center for asset management globally,and the industry is growing fast. The industry operates on apan-European basis: in almost every single European country,asset management is both a substantial and a growingindustry. The growth and scale of the industry suggest thatEuropean asset management addresses a number of importantneeds for a substantial client base.However, the aftermath of the recent financial crisis hasbrought a flurry of new regulations aimed at the industry andcreated a sense of wariness regarding the overall contributionof the industry to the economy. There are concerns thatthe industry may have grown too large and poses similarfragilities to the economy as the banking sector. Equally, thereare concerns that some asset management firms trade toofrequently and foster a culture of corporate short-termism,perhaps even jeopardizing the quality and integrity of financialmarkets.It is therefore important to understand the net effects that theEuropean asset management industry has on the economyand, more broadly, what impacts the industry has on societyat large.1.2 Aim of the reportThe aim of this report is to explore and quantify the variousimpacts the European asset management industry has onEurope’s economies and societies.This report looks at direct and indirect impacts and benefitsthat the European asset management industry has onEuropean economies. For the purposes of this study, directimpacts include those aspects that are relatively tangibleand therefore more easily measurable and attributable to theindustry, namely employment, the financing of real economicactivity and the overall economic value-add of the Europeanasset management industry (including tax revenues andwages).Further, the study aims to quantify less obvious, but by nomeans less important, indirect impacts in the form of thebenefits and costs of financial expertise, the quality andfunctioning of financial markets and the management ofcorporations.1.3 MethodologyThis report is based on original research to address the aimsset out above. The research involved reviews of academic andpolicy literature pertaining to the core aims outlined aboveand also detailed examination of data obtained from officialstatistical sources, including the European Central Bank(ECB), International Monetary Fund (IMF) and Organisation forEconomic Co-operation and Development (OECD), as well ascommercial data providers.For the purposes of this report, asset management isdefined broadly to include all professional management offinancial securities and other assets (such as commoditiesand real estate). Further, Europe is the geographic focusof this report. Where available, the report uses data on theEuropean Economic Area (EEA). Some sections in this reportrely on the availability of detailed and harmonized statisticsacross countries. In those sections, the analysis will focus ona narrower definition of Europe, such as the EU or the euroarea. The report provides details on how Europe is defined ineach section.1.4 Structure of the reportThe remainder of this report is structured as follows.Section 2 provides the context of the analysis by describingrecent developments, as well as the rise and shape ofEuropean asset management. Section 3 analyzes the directbenefits linked to the industry. These include employment,finance to firms and government and an attempt to computethe value-add of the industry. Section 4 attempts to quantifythe indirect benefits linked to the industry. This sectionanalyzes the costs and benefits of the type of financialexpertise underlying the products the industry creates, theeffects the industry has on European stock markets and thecorporate governance of European firms. Section 5 concludesand seeks to explore some of the implications of the reportedbenefits of the European asset management industry.Societal and economic impacts of the European asset management industry

9Context:The rise andshape ofEuropean assetmanagement02Societal and economic impacts of the European asset management industry

10Context: the rise and shape of European2asset managementThis section provides an overview of theasset management industry in Europe. Thediscussion focuses on those aspects of theindustry that are important for the analysisof the industry’s net benefits to society.2.1 The rise of European asset managementThe European asset management industry is very large. In2013, assets under management (AuM) of the European assetmanagement industry, the key measure of the industry’s size,stood at nearly EUR €17 trillion, slightly higher than EuropeanGDP. Figure 2.1 demonstrates how large the European assetmanagement industry is and how relatively stable the size ofthe industry has been, both during and after the financial crisis.However, the size of the industry across Europe, as shownin Figure 2.1, could mask important differences in the sizeof the industry among individual European countries. Forinstance, a small number of countries could account for thebulk of the industry’s AuM. Table 2.1 shows that this is notthe case. That is, although there are some differences withrespect to the scale of the assets the industry manages acrossEuropean countries, the industry is sizable in almost everyEuropean country. In 2012, AuM accounted for nearly 300%of GDP in the UK, 150% of GDP in France and about 50% ofGDP in Germany, Italy, Belgium and the Netherlands. Apartfrom Greece, where AuM accounted for 4% of GDP, assetmanagement is a sizable industry in every European country,making it a true pan-European industry.Further, Europe is home to some large asset managementfirms. As Table 2.2 demonstrates, the largest institutionalasset management firms operating in Europe, such asBlackRock and BNY Mellon Investment Management, manageassets worth hundreds of billions of euros. Section 3.3discusses whether this implies systemic relevance, in the sensethat large European banks are deemed systemically relevant,and argues that size does not imply systemic relevance inasset management. Table 2.2 also confirms that Europe’slargest asset managers can be found in a number of Europeancountries, which confirms the pan-European nature of theindustry.Figure 2.1 Size of the industry across Europe140%120%100%80%60%40%20%0%2007 2008 2009 2010 2011 2012 2013AuM/GDP AuM (EUR €trillion)Eur €18 tEur €16 tEur €14 tEur €12 tEur €10 tEur €8 tEur €6 tEur €4 tEur €2 tEur €0 tSource: European Fund and Asset Management Association(EFAMA, 2014). EFAMA members include current EU memberstates, excluding Estonia, Latvia and Lithuania, as well asLiechtenstein, Malta, Norway, Switzerland and Turkey.What makes the present size of the European assetmanagement industry particularly noteworthy is the speed atwhich the industry has grown over recent decades. OECD datafor the UK show that AuM accounted for around 50% of GDPin 1980. Comparing this figure with the figures displayed inTable 2.1 shows that the industry has grown nearly sixfold inlittle more than 30 years. This remarkable growth trajectorypaints the picture of an industry that responds to and meetsimportant needs of its clients. Further, these client needs mustbe rather substantive for the industry to have been able togrow to its current size over recent decades.The drivers of this growth, and consequently the needs of theindustry’s end investors, are well understood. Populationsin Europe and elsewhere have become larger, older andwealthier, thus increasing the industry’s potential client base.Over the last 60 years, life expectancy has increased by 50%,the population has tripled and world GDP has increased byalmost 40%. In Europe, the ratio of wealth to income hasdoubled to 400% to 600% of GDP (Piketty, 2014), partly dueto consecutive waves of capital market liberalization over thistime. Jointly, these factors have increased the demand forasset management solutions to cater to older and wealthiersocieties that can look forward to increased life expectanciesand longer retirement periods.Societal and economic impacts of the European asset management industry

112 Context: the rise and shape of European asset managementTable 2.1 Assets under management (AuM) across Europe2008 2009 2010 2011 2012AuM AuM/GDP AuM AuM/GDP AuM AuM/GDP AuM AuM/GDP AuM AuM/GDPUK 3,181 209% 3,783 241% 4,599 270% 4,977 270% 5,449 282%France 2,554 131% 2,816 148% 2,904 150% 2,756 139% 2,977 146%Germany 1,327 53% 1,460 61% 1,496 60% 1,438 56% 1,618 61%Italy 562 36% 6,584 43% 670 43% 611 39% 841 54%Belgium 468 136% 393 116% 227 64% 217 58% 225 60%Netherlands 438 73% 474 83% 492 64% 474 78% 469 78%Austria 79 28% 82 30% 85 30% 75 25% 84 27%Portugal 74 44% 82 49% 81 47% 70 41% 66 40%Greece 14 22% 14 6% 10 10% 7 3% 8 4%Hungary 23 59% 29 31% 34 35% 19 19% 21 22%Others 2,047 80% 2,554 79% 3,416 85% 3,127 77% 3,662 97%Data source: EFAMA, 2014Table 2.2 Europe’s top 20 institutional asset management firmsCompany2013 AuM (EUR €m)1 BlackRock 625,0652 BNY Mellon Investment Management 434,6533 Legal & General Investment Management 381,9754 APG 343,0005 State Street Global Advisors 260,1216 Amundi 255,0987 PIMCO 202,7598 Natixis Global Asset Management 165,4009 PGGM 154,89810 Deutsche Asset & Wealth Management 152,04711 Aberdeen Asset Management 138,40212 BNP Paribas Investment Partners 137,19213 Goldman Sachs Asset Management International 134,58014 UBS Global Asset Management 122,08015 Union Investment 108,20316 MN 92,23817 Helaba Invest 89,59418 Schroders 88,74019 F&C Management 77,16120 Robeco Group 74,655Source: IPE, 2014Societal and economic impacts of the European asset management industry

2 Context: the rise and shape of European asset management12Figure 2.2 Wealth-to-income ratios in selected European countriesMarket value of private capital (% national income)800%700%600%500%400%300%KeyGermanyFranceUK200%100%1870 1890 1910 1930 1950 1970 1990 2010Source: Piketty, 2014It is important to emphasize that none of the driving forces behind the recent growth of the European asset managementindustry is likely to subside or reverse in the foreseeable future. Life expectancy is due to increase further, and while the wealthto-incomeratios have increased in recent years (see Figure 2.2), the ratios remain below their historical highs. Therefore, thedrivers of growth in the asset management industry will remain intact for the foreseeable future. PwC research from 2014estimates that the European asset management industry’s AuM will increase by 4.4% per year and a total of 42% by 2020.2.2 The shape of European asset managementIt is interesting to point out that while the size of the industry has increased markedly over recent decades, its core client basehas remained constant. Figure 2.3 shows the make-up of the client base of the industry as at the end of 2012.Figure 2.3 Client base of European asset managersKeyRetailInstitutional24% 76%32%42%3%23%Pension fundsInsuranceBanksOther InstitutionsSource: EFAMA, 2014Societal and economic impacts of the European asset management industry

132 Context: The rise and shape of European asset managementAsset management is an agency activity performed on behalfof end investors. It is therefore not surprising that institutionalinvestors constitute the majority of the client base. AcrossEurope, institutional investors account for three-quarters ofthe industry’s client base, with retail investors accounting forthe remaining quarter.Among the institutional clients, three-quarters are insurancecompanies or pension funds. While the figures presented referto 2012, the relative importance of individual client groupshas not changed markedly over the past decade.There are differences across European countries with respectto the role that either pension funds or insurance firms playin the provision of asset management services for long-termsavings products. For instance, pension funds form a largershare of the client bases in the UK and the Netherlandsbecause occupational pension schemes are more widespreadin these markets.Figure 2.4 Investment portfolio of European assetmanagersOtherMoney marketinstrumentEquity29%15%10%Source: EFAMA, 2014Bonds46%By contrast, insurance firms account for a larger share of themarket in Italy and Germany, owing to the importance thatinsurance firms in the provision of long-term savings andtypically retirement-oriented products outside occupationalpension schemes. Research by EFAMA (2014) shows that ineach European country, pension funds and insurance firmsjointly account for the lion’s share of the asset managementclient base.Given that the structure of the liabilities of both pension fundsand insurance companies are rather long-term in nature, thefund management industry is particularly suitable to act asa source of long-term finance to corporations. Equity andbonds are most likely to meet client preferences as regardsinvestment horizons, liquidity and risk levels. It thereforecomes as no surprise that the asset allocation of the Europeanfund management industry is heavily geared toward equityand bond investments. Figure 2.4 demonstrates that bondsand equity make up 46% and 29%, respectively, of the assetallocation of European asset managers.Naturally, some differences remain across European marketsregarding the exact allocation of assets. These differencesreflect varying client preferences or continued differencesin the way that corporations raise external finance acrossindividual European markets. Therefore, European countrieswith widespread use of occupational pension schemes (suchas the UK) hold more equity, whereas countries where debtmarkets are much larger than equity markets (Germany,Austria, France) hold more bonds.Figure 2.4 also shows that alternative asset classes, includinghedge funds, private equity or infrastructure funds, jointlyaccount for 15% of the assets managed by the Europeanasset management industry. The relatively low holdings ofthese asset classes is noteworthy because so much of thepublic debate following the recent financial crisis over broaderregulation and improved transparency requirements havebeen targeted at these types of assets.While these alternative asset classes may have importanteffects, in particular on asset markets or local markets,investments in these asset classes by the European assetmanagement industry remain small compared with the overallinvestment universe of the European asset managementindustry. That is, the asset management industry investspredominantly in conventional bond and equity asset classesto meet the risk preferences of a largely institutional clientbase that offers savings and retirement-based products tomany of its end clients. Thus, the industry is predominantlyfocused on managing long-term and often retirementorientedsavings. This is an important point to emphasizewhen analyzing the overall impact of the European assetmanagement industry.Societal and economic impacts of the European asset management industry

14Direct impactsof the Europeanassetmanagementindustry03Societal and economic impacts of the European asset management industry

15Direct impacts of the European asset3management industryThis section provides an overview of thedirect impacts and benefits that the Europeanasset management industry has on Europeaneconomies. Later sections of this study willexamine impacts of a more indirect nature.For the purposes of this study, direct impactsinclude those aspects that are relativelytangible and therefore more easily measurableand attributable to the industry.While the distinction between direct andindirect impacts is not always clear-cut, thisstudy will examine the direct effects in relationto employment, the financing of real economicactivity, the lack of sizable public subsidies andthe overall value-add of the European assetmanagement industry (including tax revenueand wages).3.1 Direct and indirect employmentThe European asset management industry is a large-scaleprovider of employment across Europe. EFAMA (2014) researchestimates about 95,000 individuals are directly employed bythe asset management industry (on a full-time equivalent basis).Perhaps predictably, the UK accounts for a large share but byno means accounts for a dominant share of the Europeanemployment figures. As Figure 3.1 shows, Germany and Francehave sizable numbers of employees directly employed by theasset management industry, highlighting that it is a pan-European industry in terms of employment.It is worthwhile pointing out that employment in this sector ishighly skilled and somewhat less geographically concentratedthan in other financial industries. For instance, in the UKabout one-quarter of direct UK employment in the assetmanagement industry is located in Scotland (IMA, 2013).The same is true for a number of other European assetmanagement centers, such as Ireland and Luxembourg, whichare also located outside the main European financial centers.Therefore, the numbers in Figure 3.1 are likely to understatethe true impact of the asset management industry on locallabor markets. This is especially true where the industryemploys people in areas that are structurally weaker thanEurope’s main financial centers.Figure 3.1 Direct employment in the European assetmanagement industryRest of Europe33,000Germany15,000Source: EFAMA, 2014France16,000UK30,800Societal and economic impacts of the European asset management industry

16The numbers presented in Figure 3.1 also understate theoverall impact of the industry on Europe’s labor marketbecause they do not include indirect employment in relatedservices, such as accounting, auditing, custodianship,marketing, research and distribution; for instance, IMA (2013)reports that 79% of UK asset management firms outsourcesome parts of their business. Notably, this proportion hasincreased from 74% in 2008. Thus, the overall employmentfigures linked to the European asset management industry aremuch larger than the direct employment figures.Precisely how many individuals work along the value chainof the asset management industry is not straightforward toestimate. However, estimates of indirect employment haverecently been provided by the French Asset ManagementAssociation (2011). This report estimates the overallemployment for various types of indirect employment in theasset management industry using data from the French AssetManagement Association.The survey data from the French Asset ManagementAssociation (2011) indicate that for every individual directlyemployed in the asset management industry in France, 4.55full-time equivalent positions are created for individualsindirectly employed in the industry. This number includespositions in marketing and distribution (which account forabout three full-time equivalent positions), as well as positionsin accounting, auditing, and custodianship.This report applies that multiplier to the list of countries inFigure 3.1. That is, across Europe, for every person directlyemployed by the asset management industry, 4.55 peopleare indirectly employed by the European asset managementindustry. Applying the multiplier to the number of thosedirectly employed by the asset management industry (aspublished by EFAMA, 2014) yields a total of just under530,000 full-time equivalent positions that are generatedby Europe’s asset management industry. The substantialemployment numbers generated by the industry aregraphically depicted in Figure 3.2.Figure 3.2 Total employment in the asset managementindustry600,000400,000200,00002006 2008 2010 2012Source: EFAMA, 2014; French Asset ManagementAssociation, 2011Societal and economic impacts of the European asset management industry

173 Direct impacts of the European asset management industry3.2 Financing European economiesSection 2 outlines that one of the defining features of theasset management industry is the long-term nature of itsliabilities. This liability structure allows the industry to act asan important source of long-term finance to the economy,mainly by investing in equity and debt securities issued bycompanies and governments across Europe.The asset management industry provides a crucial linkin the financial system. Figure 3.3 illustrates that theasset management industry collects funds from savers totransfer to borrowers, including businesses, households andgovernments. This channeling of savings is made possiblebecause the asset management industry invests in financialassets on behalf of savers. These assets include certificatesof deposit, commercial paper, corporate bonds, governmentsecurities and stocks. When asset managers invest on behalfof firms, households or governments, it is known as indirectfinance. The term stems from the fact that asset managers donot directly own the marketable securities but purchase thesesecurities in an intermediary capacity.The role of channeling savings is not unique to the assetmanagement industry. Various other financial institutions —most prominently banks, but also insurance firms and pensionfunds — can perform the role of channeling surplus funds fromdeficit units to surplus units. In virtually all economies, banksare the dominant financial intermediary and bank loans thesingle most important way in which the external financingneeds of firms are met.Europe has a particularly large banking sector that providesfinance to firms and households. In 2013, the consolidatedbalance sheets of euro-area banks amounted to around 290%of GDP. By comparison, the equivalent ratio in the UnitedStates is 70%, thus highlighting that European firms areparticularly reliant on banks for their external financing needs.However, the share of bank lending across Europe isdecreasing. The size of bank balance sheets (relative to GDP)has declined by 15 percentage points since 2010 (see Figure3.4). Further, loan-to-deposit ratios fell from 142% in the firstquarter of 2008 to 117% at the end of last year. The ECB(2014) expects these ratios will fall further in the near future.Consequently, as structural changes in the banking industrycontinue, there is great need and demand for non-bankingbasedfinance.Figure 3.3Indirect financeFundsFinancialintermediariesFundsFundsLender — SaversBorrower — Spender1. Household2. Business firms3. Government4. ForeignersFundsFinancialmarketsFunds1. Business firms2. Government3. Household4. ForeignersDirect financeSocietal and economic impacts of the European asset management industry

3 Direct impacts of the European asset management industry18While some of the reasons for the gradual decline in bankfinance are cyclical — that is, driven by a lower supply ofeconomically viable projects and shrinking bank–asset valuesin the difficult economic times following the recent financialcrisis — the regulation of bank activities also has a role toplay in explaining why the balance sheets of banks shrink(IMF, 2011a). Successive capital adequacy rules such as thevarious versions of the Basel Accords have made lending amore capital-intensive and thus less attractive business line forbanks compared with capital-markets-based activities (BaselCommittee, 2010).Figure 3.4 EU-18 bank assets as % of GDP315%310%305%300%295%290%285%280%275%270%Source: ECB2008 2009 2010 2011 2012 2013Therefore, there is an important need for non-bank financein Europe, and the asset management industry already actsas a link between savers and the financing needs of the realeconomy. Financing takes the following two key forms:The study estimates the contribution that the Europeanasset management industry makes toward the financing ofcorporations using both debt and equity. The approach followsand further develops a methodology introduced by EFAMA tocalculate the contribution of European asset managers to thefinancing of the European economy as explained in EFAMA(2014) and Delbecque (2012).3.2.1 Debt financing of the European economyTo estimate the importance of the asset management industryto financing economic activity, we relied on detailed andcomparable data on the holdings of the asset managementsector and the amount of debt securities outstanding.We obtained harmonized statistics on debt securities financingand bank lending from the ECB Monetary and FinancialStatistics. The ECB data were then used to demonstrate theimportance of asset managers for debt financing Europeaneconomies along two dimensions:• Debt securities holdings of the European assetmanagement industry as a share of all outstanding debtsecurities issued by euro area residents. The purpose ofthis figure is to demonstrate the importance of the assetmanagement industry in terms of all debt-based (bond)finance. Figures on outstanding debt securities issued byeuro–area residents are from the ECB and are at year end.The figures include long- and short-term securities and allpotential holders.• Debt securities holdings of the European assetmanagement industry as a share of bank lending. Thepurpose of this figure is to demonstrate how importantthe European asset management industry is relative to thebanking sector in terms of financing the real economy. Banklending data¹ are the outstanding amounts of loans at the endof the fourth quarter of a given year based on consolidatedamounts from the balance sheets of all Monetary FinancialInstitution (MFI) residents in the euro–area.• Debt financing• Equity financing1Specifically, this study uses MFI loans to the private sector and government in the consolidated ECB statistics. MFIs include central banks, resident credit institutionsas defined in EU law, other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and,for their own account (at least in economic terms), to grant credits and/or make investments in securities.Societal and economic impacts of the European asset management industry

193 Direct impacts of the European asset management industryTable 3.1 shows that the European asset managementindustry plays a very important role in the financing ofeconomic activity. In 2012, the asset management industryheld debt securities issued by euro–area residents worthnearly EUR 4 trillion. This amounted to 23% of all debtsecurities outstanding at the time.Even more striking, the debt securities managed by theEuropean asset management industry are of a value thatcorresponds to 32% of the value of euro–area bank lending.The ratio increases to 43% if mortgage lending is excludedfrom the bank–lending figures. Thus, financing of the realeconomy performed by the asset management industry issubstantial both in absolute and relative terms.We also estimate the debt securities issued by euro–arearesidents and held by German, UK and French asset managers.To do so, we computed the market share of bond holdings byasset managers in a particular country relative to all bondsunder management in Europe (irrespective of the geographicorigin of the issuer) and applied this market share to theamount of debt securities issued by euro–area residents.²Table 3.1 Debt issued by euro–area residentsDebt securities issued by euro–area residents and held inEUR €b% euro–area debtsecurities financing% euro–area banklending% euro–area bank lending(excl. mortgages)Euro area2009 3,761 24.73% 31.91% 42.69%2010 3,704 23.46% 30.24% 40.48%2011 3,539 21.53% 28.71% 38.55%2012 3,875 23.35% 31.77% 42.84%Germany2009 595 17.81% 13.85% 17.26%2010 522 15.52% 11.90% 14.77%2011 449 13.25% 10.19% 12.67%2012 450 13.64% 10.17% 12.67%UK2009 884 25.73% 64.36% 68.35%2010 996 27.56% 73.41% 78.10%2011 1,054 26.30% 80.61% 86.29%2012 1,100 25.54% 82.30% 87.49%France2009 809 28.01% 26.23% 32.20%2010 768 24.82% 23.47% 28.81%2011 768 22.77% 22.67% 27.96%2012 812 23.72% 23.51% 29.00%Data on debt securities financing and bank lending are from the ECB. Data on debt issued in Europe and managed byasset managers in Germany, UK and France are estimated using data reported in EFAMA, 2014Societal and economic impacts of the European asset management industry

3 Direct impacts of the European asset management industry20Table 3.1 shows that the importance of asset managementfinance varies slightly across countries. The figures are lowerin Germany, where capital markets are less developed, incontrast to a very impressive 87% in the UK. In all countriesfor which data are presented in Table 3.1, the data show thatthe asset management industry is important for financingeconomic activity in Europe.Overall, the reported figures are a conservative estimate ofthe contribution of the industry to the financing of economicactivity because they include MFI lending to the financialsector. Further, holdings of debt securities by asset managersin Germany and France may be even higher than thoseestimated due to a home bias in the industry’s asset holdings.3.2.2 Equity financing of the European economyNext to debt markets, equity markets are also importantproviders of finance to European economies. To estimate theimportance of the asset management industry in providingequity finance to European economies, this study obtainsdata on the market value of equity issued by euro–arearesidents and managed by European asset managers fromEFAMA (2014). Data on the equity holdings of Europeanfund managers are then separately divided by two monetaryaggregates to indicate the importance of asset managementfirms in providing equity finance:1. The total market value of quoted shares issued by euro–area residents as published by the ECB. The figuresindicate the outstanding amount of all quoted sharesissued by every economic sector and at the end of a givenyear.2. The free float of quoted shares issued by euro–arearesidents. The free float excludes non-tradable equity,such as equity owned by governments, company officersor investors with a controlling interest. The free float istherefore more representative of the tradable universe ofequity. The free-float market capitalization is calculatedby multiplying the percentage of the free-float marketcapitalization of the STOXX Total Market Index (TMI) andthe total market value of quoted shares.³Table 3.2 shows that European asset managers managedequity valued at EUR 1,374 billion in 2012. This is asubstantial share of the value of European equity. The value ofequity held by European asset managers corresponds to 31%of the market value of euro–area listed firms and nearly 40%of the free float of European listed firms.2For instance German data for 2012, EFAMA (2014) show that bonds make up 46% (or EUR €7,099.64b) of European AuM. Equally, 51% of German AuM (EUR€825.17b) are allocated to bonds. Therefore, the market share of bond holdings by German asset managers in terms of all bonds managed in Europe is 11.62%(825.17/7,099.64). We apply this market share to the amount of bonds issued by euro– area residents to estimate that EUR €450b (0.1162*3875) of debtsecurities issued by euro–area residents are held by German asset managers in 2012.3The formula used to determine the free float is: free-floating market capitalization = (STOXX free-float/STOXX total)* Total market value of European listedcompanies. Data provided by STOXX Limited. As an illustration, the free float was around 77% of total market value of European firms in 2010.Societal and economic impacts of the European asset management industry

213 Direct impacts of the European asset management industryTable 3.2 Equity securities issued by euro–area residentsEuro areaEquity issued by euro area residentsand managed inEUR €b% Europeanquotedshares% Europeanfree float2009 1,371 31.09% 43.79%2010 1,418 30.95% 40.19%2011 1,212 31.23% 40.29%2012 1,374 30.51% 39.37%GermanyThe extent to which European asset managers hold equityvaries across European markets but remains significant inevery market examined.4 These figures confirm the centralrole that the industry plays in providing equity finance to euro–area corporations.3.3 Are European asset management firms systemicallyimportant?"Unlike in banking, history is not littered with examplesof failing funds wreaking havoc in financial markets.The historical examples we have tend to be confinedto small and isolated corners of the financial system."Andrew Haldane (2014) Chief Economist at the Bank of England2009 93 10.01% 13.85%2010 88 8.06% 10.46%2011 65 7.07% 9.42%2012 89 7.77% 10.36%UK2009 582 32.34% 44.74%2010 691 33.24% 43.11%2011 633 33.54% 44.73%2012 703 32.18% 42.91%France2009 207 16.11% 22.28%2010 171 12.95% 16.80%2011 150 13.64% 18.19%2012 164 12.98% 17.30%Data on equity securities financing are from the ECB. Dataon equity issued in Europe and managed by European assetmanagers are from EFAMA, 2014A number of European asset management firms have grownrapidly over the last decade and now manage AuM in thehundreds of billions of euros. With increases in the scaleof the industry come concerns that, similar to banking,some European asset management firms may have becomesystemically important.If asset management firms — or other financial institutions —become systemically important, this creates costs to society,mainly in the form of expected bailout costs and higherrisk-taking by financial institutions. Crucially for this report, ifthe European asset management industry is not systemicallyimportant and is therefore able to perform its valuableservices to an economy without subsidies, this furtherincreases the benefits of the asset management industryrelative to financial institutions that receive subsidies based ontheir systemic relevance.This section argues that the European asset managementindustry is not systemically important. Operating on an agencybasis, the industry does not manage significant amountsof credit and liquidity risk. In European asset management,potential fragilities to financial stability stem from the productlevel rather than from European asset management firms.4We use the same technique as in the previous section to estimate the amount of equity issued by euro–area residents and held by German, UK and French assetmanagers. For instance, German asset managers held 6.51% of all European equity under management in 2012, and we applied this percentage to the amount ofequity issued by euro–area residents (0.0651*1374) to reach our estimate of EUR €89b.Societal and economic impacts of the European asset management industry

3 Direct impacts of the European asset management industry22However, as will be argued below, these fragilities are ofsecond order compared with the negative externalities createdby the failure of systemically relevant banks.This section proceeds by demonstrating why banks aresystemically important and by valuing the safety–net benefitsafforded to European banks. It then goes on to argue whythe European asset management industry is not systemicallyimportant.3.3.1 Why some banks are systemically importantSystemic importance creates expectations among creditorgroups that an institution is too large or otherwise tooimportant to be allowed to fail in periods of distress. Theseexpectations are based on concerns that the failure of such aninstitution would create considerable negative externalities,often beyond a country’s financial system and its realeconomy.In the banking industry, bailout expectations allow financialinstitutions to raise external finance more cheaply than theyotherwise could and cause institutions to engage in a morerisky set of activities than external creditors would otherwisetolerate. Since governments (and ultimately the taxpayer) willbe called upon to finance a bailout resulting from undue risktaking,bailout expectations are akin to a subsidy that benefitsthe industry and is billed to the taxpayer.For the banking industry, there is plenty of evidence in supportof a size-related subsidy. By means of illustration, 7 of 10systemically largest banks were subject to a taxpayer-fundedbailout during the crisis. 5 Demirgüç-Kunt and Huizinga (2011)show that systemically large banks benefit from taking onmore risk. The authors find that when systemically largebanks increase their share price volatility, this increases theirmarket valuations and decreases their credit default swapspreads relative to systemically smaller banks. The size of thissubsidy can be substantial. There is persistent evidence oflower funding costs for large banks and more leverage on thebalance sheets of large banks. It is not uncommon for largeinternational banks to hold equity cushions of less than 3% oftotal assets.This report estimates the safety–net benefits granted toEuropean banks. The costs of bank bailout guarantees arecalculated based on a contingent claims approach that valuesthe safety net as a put option. Details of how this is worked outare included in Exhibit 3.1. Based on this approach, the reportestimates that the average subsidy to banks, and therefore thecosts to European taxpayers, was 0.04% of bank assets per yearbetween 2007 and 2013. Since average total assets of EU-28banks were EUR €43.89 trillion over this time period, thisvalues the costs of bank bailout guarantees as more than EUR€175 billion per year. It should be noted that the Europeanasset management industry does not attract a bailoutguarantee as outlined in the next subsection. By offeringfinancing services to the economy without the presence ofcostly bailout guarantees, the European asset managementindustry offers financing services in a more cost-efficient waythan banks and thereby generates a large saving for society.Exhibit 3.1 What are the taxpayer costs of bank bailoutguarantees?The value of bailout guarantees can be calculated usinga method developed by Ronn and Verma (1986). Thismethod assumes that bank liabilities will be bailed outand that government therefore advances a put option tobank liability holders. Thus, the value of the government’sfinancial safety net to shareholders is the value of a putoption underwritten by taxpayers.By guaranteeing bank debt, taxpayers write a put optionwhose value can be expressed as a percentage of a bank’sdebt as:Value of bank bailout guarantees = N(y + σA,t√T) - ((1 - δ)n(VA/Bt) N(y)) * Bty = (ln[B/VA,t(1 - δ)n] - σA,t2 T/2)/(σA,t√T),where Bt is the book value of liabilities, δ is the fractionof dividend to assets, n is the number of dividendpayments per year, N(•) is the cumulative standard normaldistribution, and T is equal to one, based on the assumptionthat bank deposits mature in the next year when abank examination or audit occurs. Values of the bailoutguarantees rely on calculating values for the market valueof bank assets (VA,t) and the risk of bank assets (σA,t),details of which are listed in Appendix A.On an intuitive level, the value of the put option tobank shareholders, and therefore, the value of bailoutguarantees, increases the leverage of banks and risk ofbank assets.5In order of magnitude, the 10 systemically most important banks (in terms of bank assets to GDP) in our sample during 2007 are (whether they were bailed out duringthe crisis is indicated in parentheses): UBS (yes), Ageas (yes), Credit Suisse Group (no), Danske Bank (yes), Dexia (yes), Arab Bank (no), Royal Bank of Scotland Group(yes), Nordea Bank (no), Depfa Bank (yes; via parent company), Bank of Ireland (yes).Societal and economic impacts of the European asset management industry

233 Direct impacts of the European asset management industryFigure 3.5 Value of bank bailout guarantees (in % of bank assets)0.30%0.10%0.08%0.20%0.05%0.10%0.03%0.00%Greece UK Germany Italy France Portugal Spain0.00%20072009 2011 2013Data from SNL Financial. The chart at right indicates average value.3.3.2 Why asset management firms are not systemicallyimportantGiven the substantial costs to European taxpayers linkedto the safety–net benefits afforded to banks, an importantquestion is whether European asset management industryreceives similar safety–net benefits. To answer this question,it is worthwhile considering three reasons that banks arevulnerable and to contrast these with asset managementfirms:1. Banks provide extensive maturity transformation.Banks use short-term funding to make longer-datedinvestments. This leaves banks vulnerable to suddenwithdrawals in short-term funding, for instance, whendepositors or other bank creditors “run” and withdrawfunding.2. Banks operate using extremely high leverage. Bankingis unusual in terms of the low equity funding relative toother industries. Since the role of equity is to absorblosses, even small losses in the region of a few percentagepoints in the value of bank assets threaten the solvency ofa bank.3. Banks benefit from explicit and implicit liabilityinsurance. Deposit insurance covers deposits up to EUR€100,000 (or the non-euro equivalent) in all EU MemberStates. 6 In addition to explicit deposit insurance, banksalso benefit from implicit guarantees when governmentsbail out institutions to prevent the type of large negativeexternalities for the economy frequently associated withbank failures. The end result is that most bank creditorsare de facto protected from losses and are therefore notinterested in monitoring bank risk-taking.However, asset management differs in important aspectsfrom banking, and although some asset managers may belarge, the industry is not as inherently fragile as the bankingsector. Since the industry operates on an agency basis, assetmanagers do not bear credit, market and liquidity risk on theirportfolios. Losses (and gains) are borne by end investors, andfalls in asset values do not threaten the solvency of an assetmanager in the way they threaten the solvency of a bank.The risk of failure of an asset management firm is remote.6Art. 7 (1a) of Directive 94/19/EC.Societal and economic impacts of the European asset management industry

3 Direct impacts of the European asset management industry243.3.3 Second-order risk factors at product levelHowever, while the asset management industry on the wholeis not systemically important, there are still reasons to bevigilant as a number of second-order risk sources are linkedto specific investment products (Office of Financial Research,2013; FSB 2014) rather than asset management firms.These second-order risk factors include the following:Counterparty risk. Direct connections between assetmanagers, banks, insurers and other financial servicesproviders have steadily grown over the past few years. Fundsact as counterparties to financial services firms, for instance,as clients of broker-dealer services, custody services andforms of credit to funds and firms. Banks and insurancecompanies also serve as counterparties for various types ofderivatives contracts and portfolio investments. Therefore,distress at a fund could potentially be transmitted directlyfrom an investment fund to the counterparties of a fund.Herding. Asset managers may herd into certain widelyemployed strategies. This could contribute to the build-up ofbubbles and magnify market instability generally (Dasguptaet al., 2011).Redemption risk. Some investment vehicles offer unrestrictedredemption rights to investors. In distressed markets, thisoffers a first-mover advantage to investors to sell early aslong as they believe that delays in selling will cause furtherdeterioration in the net asset value of a fund’s portfolio. Assetsales that follow accelerating redemptions could then spreadacross different portfolio types and markets (Manconi et al.,2012). There is a risk that accelerated redemptions couldincrease market risk generally if they were to create theimpression with some investors that the asset managementfirm could be under distress.Leverage. Leverage subjects borrowers to liquidityconstraints, particularly through the prospect of margincalls. Leverage for asset managers can be achieved usingvarious means: borrowing by firms asset managers investin, borrowing by funds or borrowing at portfolio level, forinstance, using derivative products. Derivative products allowfunds to obtain exposure to market risk over and above thefund’s investment in a derivative.While many regulated funds are subject to leveragerestrictions, others are not. The less–regulated assetmanagement sector, such as hedge funds, often relies oncomplex trading strategies in which leverage is often anintegral component to boost returns. Risks related to leverageare poorly understood owing to insufficient data available tounderstand the extent of leverage of the industry, particularlyin the non-regulated sector.Europe has an established and robust regulatory framework thatis designed to mitigate many of the above-mentioned productlevelrisk factors. The so-called Undertakings for CollectiveInvestment in Transferable Securities (UCITS) directives formthe basis of national regulatory requirements for European fundproducts that are marketable throughout EU Member States. 7UCITS already mitigate some of the above-mentioned risks by, forinstance, subjecting funds to high levels of liquidity requirementsand redemption settlement periods, as well as by regulatingcredit quality, asset concentrations and other risks. Equally, non-UCITS funds can manage redemption risk by imposing lock-inperiods or restricting redemptions in ways that other forms offinancial services, most notably banks, cannot.However, another risk factor rests on reputational andoperational risk. As the industry is largely agency-based, itsreputation as a trustworthy custodian is crucial. Events thatshake this belief can therefore cause large-scale redemptionsfrom a particular asset manager, asset management firm oreven the whole sector. Recent examples include fraud chargesbrought against AXA Rosenberg (see Exhibit 3.2), whichcaused substantial outflows.There were also concerns at the time that alleged fraud at onefirm could spark outflows in the entire industry to an extentthat would have an effect on financial markets along the linesdiscussed above.7The various UCITS directives have their origins in the UCITS I Directive (85/611/EEC in 1985), which was amended and adjusted over time. The key amendmentswere as follows: the Management Directive (2001/107/EC in 2002) and the Product Directive (2001/108/EC in 2002). The UCITS brand continues to evolve,notably with the introduction of Directive 2009/65/EC (known as UCITS IV), which introduced some modifications for enhanced liquidity management by funds.Societal and economic impacts of the European asset management industry

253 Direct impacts of the European asset management industryExhibit 3.2 Reputation as a risk factor: the case of AXARosenbergThree AXA Rosenberg entities were charged with securitiesfraud in February 2011 by the US Securities and ExchangeCommission (SEC). The SEC charged the firms for“concealing a significant error in the computer code of thequantitative investment model that they use to manageclient assets.... The SEC’s order instituting administrativeproceedings against the firms found that seniormanagement… learned in June 2009 of a material error inthe model’s code that disabled one of the key componentsfor managing risk. Instead of disclosing and fixing the errorimmediately, a senior… official directed others to keep quietabout the error and declined to fix the error at that time.”AXA Rosenberg Group, AXA Rosenberg InvestmentManagement and Barr Rosenberg Research Centre agreedto settle the SEC’s charges by paying US$217 million toharmed clients and a US$25 million penalty.The damage for the firms far exceeded the alleged investorlosses and fines. In the following quarter, AXA Rosenbergexperienced very substantial outflows of around two-thirdsof its AuM in 2011–12.Source: www.sec.gov/news/press/2011/2011-37In sum, the asset management industry is large and forecastto grow further in the future. While individual European assetmanagement firms are large, size is not a sufficient factorto classify the European asset management industry assystemically important.The risk of failure of an asset management firm is remote.Since the industry operates on an agency basis, it does notmanage significant amounts of credit and liquidity risk. TheEuropean asset management industry therefore operateswithout the bailout subsidies afforded to the banking sector.Thus, European asset managers fund economic activity to asimilar extent as banks but do so without the costly subsidiesafforded to banks.Figure 3.6 Value-add of European asset managementNetprofitStaffcostsTaxIn European asset management, potential fragilities tofinancial stability stem from the product level rather thanfrom European asset management firms. Fragilities existaround counterparty risk, redemption and leverage inherent inproducts. However, these risks are already mitigated to a greatextent by existing UCITS regulations. Non-UCITS productshave means of managing and mitigating product-relatedrisks to a much larger extent than banks. This is feasiblebecause the nature of the risk management performed bythe European asset management industry is fundamentallydifferent from the type of risk management servicesperformed by banks.However, there are reasons to remain vigilant about the roleof the asset management industry, especially as the industryis vulnerable to reputational and operational risks that havethe potential to destabilize funds, firms or the entire assetmanagement industry.3.4 Value-add of the European asset managementindustryThis section estimates the economic value-added that theindustry creates overall. Value-added is estimated using arevenue-based measure that includes the industry’s net profitsplus staff costs plus taxes paid.Not all of the three components of the value-added measure arepublished at an aggregate level in each country, and thereforethe data are not directly observable for the purpose of thisreport. Consequently, this report uses the following estimationtechnique for the value-added of the industry in 2012.Annual reports from listed asset management firms werecollected from Thomson Reuters Datastream. This yieldeddata on net profits, taxes and staff costs for a sample ofEuropean asset management firms. Data on staff expensesincluded indirect employment if published by the assetmanagement firm. For each firm, we scaled the value-addedby firm revenue.Societal and economic impacts of the European asset management industry

3 Direct impacts of the European asset management industry26Annual value-added as % of GDPAnnual value-added in €EUR0.97%EUR €50 b0.50%0.35%EUR €19 b0.21%EUR €10 bEUR €6 bUKFranceGermanyEuropeUKFranceGermanyEuropeFigure 3.7 Value-added of the European assetmanagement industryFor instance, the ratio of value-added to firm revenue is 75%for Aberdeen Asset Management and 84% for Amundi.Next, data on the industry’s revenues in each country were usedto estimate the value-added relative to industry revenues.In markets where data on industry revenues were unavailable,the ratio of revenues to AuM is set at the UK ratio of 0.43%. 8Assuming that revenues are proportionate to AuM, the valueaddedwas then calculated and presented as a percentage of GDP.The calculations in this report show that the European assetmanagement industry contributes an average of 0.35% peryear to GDP. The value-added is particularly large in the UK,where it is just under 1% per year. This estimate appearsaccurate. As a point of reference, TheCityUK (2013) reportsthat UK asset management generated about 1% of GDP in2012. The value-added figures are also large in absoluteterms. Across Europe, the report estimates that yearly valueaddedof the industry is EUR €50 billion.8The ratio of revenue to AuM is derived as follows. TheCityUK (2013) estimate that the total revenues of the UK asset management industry were €18.8b in 2012 (orEUR €23.2b if converted at end of 2012 exchange rates). Table 2.1 shows that UK AuM are EUR €5,449 b in 2012. Therefore, 23.2/5449=0.43%.Societal and economic impacts of the European asset management industry

27Indirect impactsof the Europeanassetmanagementindustry04Societal and economic impacts of the European asset management industry

28Indirect impacts of the European asset4management industryThe benefits estimated and discussed in thissection are of an indirect nature because,unlike the type of direct benefits discussedin the previous sections, they do not relateto monetary flows either in the form ofimmediate financing needs of corporations,households or governments or the ability ofasset management to provide employment.Asset management activities also generatea number of potential indirect benefits; forexample, the substantial holdings of debt andequity securities not only finance Europeanfirms (as discussed in Section 3.2), but alsoaffect the quality and functioning of financialmarkets and the management of corporations.4.1 The costs and benefits of financial expertiseBy acting as an agent on behalf of investors, the assetmanagement industry is an important provider of investmentexpertise and risk management services to institutional andretail clients. Asset managers are in a position to offer servicesthrough the investment products they produce and improvethe risk-adjusted returns in investor portfolios. Specifically, theindustry offers important expertise in terms of diversificationacross economic sectors, asset classes and geographies inways that would be difficult and time-consuming or impossiblefor individual investors to achieve.Figure 4.1 Global AuM by product type8%10%15%63%56%45%22%25%21%5%9%10%20032008 2013KeyOtherPassives and ETFsTraditional active core assetsActive specialistAlternativesSource: Boston Consulting Group, 2014Given aging populations and the demise of defined benefitpension schemes across Europe, expertise on constructinghigh-performing portfolios is timely and getting morehouseholds to make better use of the existing investmentand diversification opportunities is important. The issue thissection deals with is how the costs and benefits of financialexpertise measure up. As the next section demonstrates thatthe bulk of AuM continues to be actively managed, this sectionfocuses on the costs and benefits of financial expertise inactive investment management.Societal and economic impacts of the European asset management industry

294 Indirect impacts of the European asset management industry4.1.1 Costs of financial expertise in active investmentmanagementContrasting the benefits and costs of the type of financialexpertise the asset management industry provides is difficult.Data on costs across institutional and private mandates aredifficult to compare, not least because many of the costs toend investors are created further down the investment chain.Distributors of asset management products contribute greatlyto the costs of the end investor’s products.The bulk of the investment products are actively managedand involve debt and equity positions in highly liquid markets.This is shown in Figure 4.1 which demonstrates that 45% ofglobal AuM are classified as traditional (i.e., large-cap equityand government bonds). While investments in large-cap equityand government bonds have fallen (from 63% to 45% between2003 and 2013), active asset management continues to makeup the largest share of AuM. However, actively managed assetmanagement products and the financial expertise underlyingthese products are relatively expensive. Active assetmanagement includes stock picking, tactical asset allocationsand market timing to generate value for clients. Crucially,active asset management involves substantially higher costsfor end clients than passive asset management strategies thatseek broad exposure to benchmarks and do not rely on costintensivecompany analysis and stock picking.Exhibit 4.1 Insight: does active investing constitutevalue for investors?The efficient market hypothesis is the cornerstone offinancial economics. Formulated by Nobel LaureateEugene Fama, the theory holds that market prices reflectinformation available at the time. In its basic form, thetheory is widely accepted. In its applications to assetpricing models, however, the theory is seen as morecontroversial.For instance, the capital asset pricing model (CAPM) relieson the notion of perfectly efficient markets (in the sensethat all information, public or otherwise, is impounded intoprices) and various other assumptions, such as rationality,by investors.In its application to the CAPM, an efficient market meansthat if no investor has an informational edge, stock pickingwill not lead to outperformance. Instead, the return on anasset is determined by its exposure to certain risk factors.The key risk factor is market risk, i.e., the relationshipbetween an asset’s returns and a market benchmark (or“beta”). Later research has discovered additional riskfactors, such as the state of the economy or the relativevaluation of an asset.The main implication of the various modifications of theCAPM is deceptively simple. Outperformance (“alpha”) isnot possible, and returns above the benchmark are down toone of two explanations: the asset manager has increasedexposure to certain risk factors in her portfolio to a degreethat it no longer reflects the benchmark (in other words,she has assembled a portfolio that is riskier than thebenchmark) or, alternatively, the asset manager got lucky.In its strongest form, market efficiency suggests that stockpicking will not lead to outperformance. Therefore, activelymanaged portfolios will not deliver outperformance, andinvestors should opt for passively managed products thatprovide more cost-effective exposure to risk exposures, theultimate drivers of returns. In practical terms, this meansthat investors should opt for passive investment strategiesthat replicate returns on an existing benchmark index.The basic implication of an efficient market — that riskadjustedoutperformance over a benchmark is not feasibleon average — is not without controversy. Many economistshave analyzed in great detail how and why investors arenot always rational in their decision-making and therebyquestion the foundation of the efficient market hypothesis.Societal and economic impacts of the European asset management industry

4 Indirect impacts of the European asset management industry30Further, the industry’s expertise in active asset managementis expensive for clients, given that studies have repeatedlyshown that active management in heavily-traded marketsrarely creates value for clients after taking the higher costs ofactive asset management into account "see Fama and French,2010 or for recent European evidence, Blake et al., 2014".Exhibit 4.1 illustrates why the active asset managementindustry rarely constitutes value for investors. For the mutualfund industry, it is a well-documented finding that the vastmajority of actively managed funds underperform comparedwith passive funds once costs are taken into account.While the near impossibility of active asset managers creatingvalue for clients relative to passive fund management is welldocumented, this does not mean that the costs of financialexpertise are a deadweight loss to the economy, as explainedin the next section.4.1.2 Benefits of financial expertise in activeinvestment managementA number of factors have to be taken into account toillustrate the benefits of the financial expertise that the assetmanagement industry offers to clients:1. Evidence of the poor value of active asset managementfor investors refers to the most heavily traded financialassets. In other and less liquid markets, asset valuationsmay deviate from their fundamental values for extendedtime periods. In these markets, it may therefore bepossible for active asset managers to generate riskadjustedreturns above those of passive asset managersonce fees have been taken into account.2. The empirical literature has long documented thatretail investors in particular suffer from a number ofcognitive biases which cause them to forgo returns.These biases include: under-diversification (when retailinvestors hold too few different asset classes and alsosuffer from a home bias in their investment choices); lossaversion (most investors avoid realizing losses but notgains); and herding behavior (investors seek exposure toidentical or similar risk factors at the same time). Whileasset managers are not immune to cognitive biases,portfolio analyzes have shown professional portfoliomanagers to be less likely to succumb to these and otherbiases than retail investors.3. Third, even if active asset management does notconstitute poor value for investors, active investing isnot a deadweight loss to society. There are a number ofsocietal benefits, some of which are substantial, directlylinked to active fund management. For instance, activefund management affects the market quality by ensuringthat market prices are informationally efficient and pricediscovery more instantaneous (and cheaper), as well asimproving the quality of corporate governance. Thesebenefits are linked to active asset management and theyare shared among all investor groups.The benefits linked to active asset management on marketquality and the quality of corporate governance will bediscussed in the following two subsections.4.2 The asset management industry and market qualityTechnology changes have revolutionized financial marketsand the trading of financial securities. Recent years have seenincreasing automation in the trading process, and large tradeswhose execution once relied on the services of broker-dealersto identify and transact with suitable counterparties can nowbe executed by purely electronic means. One particularlynoteworthy innovation in the trading process has been theintroduction of computer-driven algorithms.Algorithms are employed by some investors to route orders toa particular trading venue as well as to determine the size andtiming of trades in order to minimize trading costs. Designatedfunds use algorithms to process information contained inorder flows to trade on patterns at high frequency. Highfrequencytraders are able to react to market updates withinmilliseconds. By most accounts, high-frequency trading isnow responsible for most of the trading volumes in financialmarkets worldwide (Boehmer et al., 2014). The result hasbeen nothing short of a revolution. Trading volumes haveincreased substantially, with trades executed faster, at higherfrequency and in smaller batches than in the recent past.Societal and economic impacts of the European asset management industry

314 Indirect impacts of the European asset management industryTable 4.1 Trading activity in selected European marketsMedian number ofmessages per stock in2001Median number ofmessages per stock in2012% change over 2001–12Euronext Amsterdam 41 2,762 6,637%Athens 179 25 -86%Brussels 11 156 1,318%Copenhagen 7 21 200%Dt Boerse Xetra 54 745 1,280%Helsinki 23 94 309%Istanbul 147 957 551%London* 21 122 481%Euronext Lisbon** 59 586 893%Madrid 156 904 479%Milan 108 529 390%Oslo 18 53 194%Euronext Paris 27 83 207%Swiss Exchange 20 113 465%Stockholm 59 55 -7%Wiener Boerse 14 276 1,871%Warsaw 11 31 182%Median 27 122 352%Source: Boehmer et al, 2014. Includes all intraday messages that present trades or changes in price or size of the best quotes foreach stock.*Quote messages computed based only on price changes because quote sizes were not available for the whole period.** Data begins in 2005.Crucially, rocketing trading volumes have caused a reductionin the costs of trading. A key component of the costs incurredby those trading in financial markets is the spread between bidand ask quotes. Spreads mark the difference in price betweenthe highest price that a buyer is willing to pay for an assetand the lowest price at which a seller is willing to sell it. Inrecent years, as trading volumes have increased, spreads havedeclined sharply. This phenomenon is widely documented inthe United States (Chordia et al., 2011), as well as in Europeanand other international equity markets (Boehmer et al., 2014).Since bid-ask spreads are essentially an indicator of the costsof demanding and supplying liquidity in financial markets,narrowing spreads significantly lower the costs of tradingfinancial assets for all market participants.Figure 4.2 shows bid-ask spreads for European stocks. Thefigure is based on stock market data on about 2,000 of themost frequently traded European stocks listed on ThomsonReuters Datastream. We calculate bid-ask spreads based onyear-end quotes at close of market provided by Datastream. 99Data include all European stocks listed in the Datastream Total Market Europe (TOTMKER) Index after excluding the 25% least– traded stocks in that index.This yields 1,862 stocks listed on all European stock exchanges. We define bid-ask spreads as: (ask-bid)/ask.Societal and economic impacts of the European asset management industry

4 Indirect impacts of the European asset management industry32Figure 4.2 Bid-ask spreads (in euros) for European stocks0.0120.0090.0060.00320022004 2006 2008 2010 2012Source: Thomson Reuters DatastreamFigure 4.2 shows a marked fall in the bid-ask spreads ofEuropean stocks. Liquidity premiums fell the most between2002 and 2007, and though they increased slightly between2007 and 2011, they have since fallen back to their historiclows. Between 2002 and 2013, bid-ask spreads have fallen by0.712 cents.Given the high volumes of trading activity on European equitymarkets, this is a substantial reduction in the cost of liquidity.To estimate the average yearly savings this reduction in bid-askspreads generates, this report multiplies changes in bid-askspreads between 2002 and 2013, the average ask price andthe average yearly trading volume of European investmentmanagers over the same period. It is estimated that the tradingvolume of European investment is 81.3% of total Europeantrading volume. 10 Therefore, this report estimates that tradingactivity by European asset managers has generated costsavings of EUR €12 billion in the costs of liquidity. 11These cost savings recur yearly and are shared among alltraders in European stock markets.This is a significant saving that benefits all market participants.It is worth noting that this report does not quantify to whatextent professional investors trading on their own account,other than investment managers acting in an agency function,have contributed to the lowering in spreads. However, EUR€12 billion is a conservative estimate of the cost savings fortwo reasons:1. The estimate does not include commission or delaycosts, which, owing to higher trading volumes, havealso been reduced in recent years. Bid-ask spreads are asubstantial, but not the only, component of the total costsof trading. There is evidence that most components ofthe trading costs, including commissions and delay costs(owing to the increased speed of price discovery), havedecreased significantly in recent years and the estimatedoes not account for that.2. The estimate focuses on European equity exchanges only.Bond and derivatives exchanges have also experiencedreductions in trading costs that are not accounted for inthis estimate.A key point behind the reduction in trading costs is that thesebenefits are shared among all investors dealing in financialmarkets. Granted, the bulk of trading activity is performed bysome specialist funds that focus on high-frequency trading,and it is those investor groups that account for the largestamount of trading and will disproportionately reap thebenefits of lower trading costs. However, the benefits of lowerspreads and speedier price discovery also benefit the assetmanagement industry more widely.The new execution tools are widely used in the industryand not just by high-frequency traders (BlackRock, 2014).After all, achieving best execution and reduced costs is ofimportance to all asset managers, given that transaction costsdirectly affect their ability to deliver outperformance (alpha)and/or track a benchmark. Finally, tighter spreads not onlybenefit asset managers but also benefit retail investors tradingon their own account. Savings in the costs of demanding andsupplying liquidity increase net portfolio performance of allinvestor groups and help investors achieve their investmentgoals, for instance, retirement-based savings.10We estimate the percentage of trading activity in Europe that is due to non-European asset managers as follows. First, we obtained data from the ECB on the equityholdings in the euro area by asset managers located in the rest of the world (ROW). Second, we assumed that 25% of the equity holdings by ROW asset managersinvolve euro–area equities. (The figure of 25% is based on a sample of ROW asset managers whose annual reports indicate that they assign on average 25% of theirequity to the euro–area). Third, we divided the ROW asset manager holdings of euro–area equity by the equity holdings of euro–area asset managers (the latter asreported in Table 3.2). The resulting figure is 18.7%. Finally, assuming that trading activity is proportionate to equity holdings, we estimate that European assetmanagers account for 81.3% of trading activity (=100% - 18.7%) in Europe.11The calculations to yield investor savings are as follows: Bid-Ask Spread 2002-2013 * Yearly Ask Price* Average Yearly Trading Volume * European Asset Managers’Share in Trading activity = 0.007118 * 72.87 * 28,874,954,000 * 0.813 = EUR €12.176 billion.Societal and economic impacts of the European asset management industry

334 Indirect impacts of the European asset management industryIn sum, the asset management industry has been instrumentalin making markets more frictionless places in which to operate.Thus, the industry plays an important part in making marketsmore informationally efficient and cost-efficient placesto invest in. This translates into lower trading costs for allinvestor groups.4.3 Asset management and the corporate governanceof firmsIn most listed firms, stockholders delegate management of thefirms they invest in to professional managers. This separation ofownership and control gives rise to agency problems where theinterests of corporate management diverge from shareholdersin ways that, if not addressed, harm the value of the firm.For instance, managers may engage in pet projects orotherwise extract benefits out of the firm, such as inflatedremuneration. The asset management industry is particularlysuited to tackling these and related agency problems becausethe scale at which it invests gives the industry a sufficientlylarge financial interest to engage with firms over corporategovernance issues.One reason why agency conflicts can be so economicallyharmful is that, in the presence of many small shareholders,there is no incentive for any one shareholder to monitorcorporate management. After all, the individual shareholderwould bear the entire monitoring costs while all shareholdersenjoy the benefits of improved monitoring. Because theEuropean asset management industry is a substantial investorin European equity and bond markets (see Section 3.2), theEuropean asset management industry plays a vital role inimproving the corporate governance of the firms it invests in.Table 4.2 shows ongoing differences in the governance system,ranging from the ownership of corporations (held widelyby many shareholders or held by families as concentratedownership) and the nature of financial systems (bank- ormarket-based) to the structure of boards (one-tier or two-tier).Table 4.2 Corporate governance in EuropeNetherlands Belgium France Germany Italy Spain UKWidely held 30% 0% 30% 35% 15% 15% 90%Family 20% 50% 20% 10% 20% 25% 5%State 5% 5% 20% 30% 50% 45% 0%Widely held financial 0% 35% 20% 25% 0% 15% 5%Widely held corporation 10% 0% 10% 0% 0% 0% 0%Miscellaneous 35% 10% 0% 0% 15% 0% 0%Civil law √ √ √ √ √ √Common law√Bank-based √ √ √ √ √Market-based √ √Board structureOne-tier √ √ √ √ √ √Two-tier √ √ √ √ √Say on payAdvisory √ √ √ √ √ √Binding √ √ √Source: Towers Watson, 2012It is widely recognized that the asset management industry has played a pivotal role in bringing about improvements in thecorporate governance of firms worldwide (see Morck and Steier, 2005). The industry has long criticized governance failuresand sought to put pressure on company boards and lawmakers to increase managerial accountability and corporate disclosurepolicies. Recent examples of activism against AstraZeneca, Barclays and HSBC on executive remuneration demonstrate that theindustry continues to play an important role in the governance of firms.While the role of the asset management industry behind corporate governance improvements is undisputed, it is more difficultto establish how to measure “good” governance and the benefits associated with it.Societal and economic impacts of the European asset management industry

4 Indirect impacts of the European asset management industry34Figure 4.3 Governance scores by country80%60%40%20%0%GreecePortugalBelgiumNorwayItalyDenmarkAustriaSource: Aggarwal et al., 2010 based on InstitutionalShareholder Services dataSwedenFranceA seminal investigation into the performance effects ofcorporate governance was conducted by Gompers et al.(2003). Using 24 governance indicators and a large sampleof US firms, the authors construct a governance index. Theauthors estimate a governance premium of 8.5% definedas the difference in abnormal (that is, above-index) returnsbetween a portfolio of the best governance firms and theweakest governance firms. This estimation has recently beenconfirmed by Bebchuk et al. (2013).SpainGermanyNetherlandsIrelandFinlandSwitzerlandUKUSAHowever, Bebchuk et al. (2013) also demonstrate that thegovernance premium cannot be detected after the year 2000.This suggests that the returns of good governance are finiteand stop accumulating once a certain level of governance hasbeen reached.A governance premium of 8.5% is consistent with a WorldBank (2011) survey of international asset managers in whichhalf the respondents put the premium at 10% based onthe responses, albeit for markets that included developingcountries. Using much earlier data, a McKinsey (2002)survey finds that European asset managers are willing to paya premium of between 18% and 23% for high governancestandards in a range of European economies.European economies have slightly lower levels of governancequality compared to US firms. Figure 4.3 shows thepercentage of listed firms that meet a list of 44 governanceattributes that are deemed to satisfy minimally acceptablegovernance standards. The data are based on a survey byInstitutional Shareholder Services (ISS). 12 Given the slightlylower levels of governance quality in Europe, it is reasonableto assume that the governance returns in Europe will havebeen at least as high as in the United States. Therefore, an8.5% value premium linked to governance improvements, asestimated and confirmed by US evidence, is a conservativeestimate of the value effect linked to good governance.Based on this governance premium, the estimate ofgovernance premium is 8.5% of equity issued by euro–arearesidents plus UK residents as published by the ECB in 2012.Non-European asset management firms are also likely to haveimproved governance. In Section 4.2, it is estimated that81.3% of European stocks held by asset managers are held byEuropean asset managers. Based on these calculations, thisreport values the European governance premium caused byEuropean asset managers to be EUR €462 billion. 13Therefore, nearly EUR €500 billion of the value of Europeanequity is due to improvements in the corporate governance ofEuropean firms. Improvements in the corporate governanceresult from periods of engagement with the asset managementindustry. Just like other indirect benefits caused by the assetmanagement industry, the value is shared with other marketparticipants, and therefore, the benefits caused by theEuropean asset management industry are shared more widely.12The attributes fall into four broad subcategories: (1) Board (25 attributes), (2) Audit (three attributes), (3) Anti-takeover (six attributes), and (4) Compensation andOwnership (10 attributes). Appendix 2 includes a full list of the governance standards used in this survey.13The calculations to yield the valuation premium linked to European asset managers are as follows (all in 2012 figures): value of euro-area-resident-issued and UKresident-issuedequity (EUR €6,686 billion)* 0.085 (governance premium) * 0.813 (share of European asset managers in stocks held by asset managers).Societal and economic impacts of the European asset management industry

35Conclusions andimplications05Societal and economic impacts of the European asset management industry

365Conclusions and implicationsThe European asset management industry is large andgrowing across Europe. Demand for asset managementsolutions has grown to cater to older and wealthier societiesthat can look forward to increased life expectancies and longerretirement periods. None of these driving forces is likely tosubside or reverse in the foreseeable future. The reasonsfor the stellar growth of the industry are therefore going tocontinue.Size and growth of the industry indicate that it meetsimportant needs of European societies and, in doing so, willhave an important impact on European societies. This reportexplores a number of identified benefits that have implicationsfor ongoing policy discussions.Financing economic activityOne of the key benefits the industry provides revolves aroundfinancing economic activity. The industry is able to performthis crucial financing role because the bulk of its liabilitiesis invested on behalf of a largely institutional client base inneed of long-term savings and risk management services.The financing role of the industry is likely to increase in thenear future as the banking sector continues its retreat fromtraditional lending activities. The retreat from lending, througha process known as disintermediation, can be observed in anumber of European markets and is set to continue in manyof Europe’s economies. This leaves a growing and increasinglyimportant role for European asset managers to fill the gap leftby banks in providing finance to European economies. Giventhe current underperformance of most European economiesand the ongoing credit crunch in parts of Europe, the role ofasset managers in providing a source of lending must surelybe welcomed.Systemic relevance of the industryRecent discussions over the supposed systemic relevanceof asset management firms raise the specter of additionalsupervision and costs to the industry. While individualEuropean asset management firms look after ever-largeramounts of AuM, size is not a sufficient criterion to classifythe European asset management industry as systemicallyimportant. The risk of failure of an asset management firm isremote. As the industry operates on an agency basis, it doesnot manage significant amounts of credit and liquidity risk.In European asset management, potential fragilities tofinancial stability stem from the product level rather thanfrom European asset management firms. Fragilities existaround counterparty risk, redemption and leverage inherentin some asset management products. However, in Europe,these risks are already mitigated to a great extent by existingand well-established UCITS regulations. UCITS mitigate risks,for instance, by subjecting funds to high levels of liquidityrequirements and redemption settlement periods, as well as byregulating credit quality, asset concentrations and other risks.Further, non-UCITS products are able to manage and mitigateproduct-related risks to a much larger extent than banks.This is feasible because the nature of the risk managementperformed by the European asset management industry isfundamentally different from the type of risk managementservices performed by banks.It is therefore important that European lawmakers balance theneeds of the industry with financial safety concerns and donot undermine some of the key benefits the industry providesto society. There are certainly reasons to remain vigilantregarding the role of the asset management industry andfinancial stability. As a mainly agency business, the industryis vulnerable to reputational and operational risks that havethe potential to destabilize funds, firms or the entire assetmanagement industry.Societal and economic impacts of the European asset management industry

375 Conclusions and implicationsFinancial expertiseThe European asset management industry offers financialexpertise to its clients via the financial products it createsand markets. However, questions remain over whether theseroles can be delivered in a more cost-effective way for theend investor. Most of the AuM continue to be managed onan active basis and in heavily traded markets where it hasproven to be difficult to beat index returns after the relativelyhigh fees of active asset management have been taken intoaccount. This does not mean that active management issuperfluous — indeed, some of it is essential for functioningmarkets — but that it can be delivered in a more cost-efficientway. Also, it is important to bear in mind that large parts of thecosts of asset management for end investors are caused bythird parties and issues further down the asset managementvalue chain.Further, it is widely accepted that only a small part of thepopulation currently possesses the financial literacy requiredto make financial decisions. The industry’s expertise istherefore not only required to create financial products,it could also play an important role in promoting financialeducation. In particular, the industry can play an importantrole in enhancing the quality of financial training of staffand financial intermediaries to help them enable potentialinvestors to make better-informed investment decisions andto sensibilize European societies to their financial planningneeds.Trading activityThe analysis shows tangible and substantial benefits linked tothe existence of asset management firms in financial markets.This comes against the backdrop of concerns that ever-largertrading volumes in financial markets carry no benefits forsociety. For instance, the recent Kay Review (2012) in the UKadvocates a model of long-term “buy-and-hold” investing.However, as this report shows, there are tangible benefitsthat higher trading volumes bring. These benefits includelower transaction costs, faster execution and price discoveryand enhanced market efficiency. Perhaps most importantly,with respect to this review, the benefits of higher trading areenjoyed by and shared among all participants in financialmarkets. Therefore, the asset management industry has beeninstrumental in making markets more frictionless places inwhich to deal. This translates into lower trading costs for allinvestor groups.This report comes against the background of ongoingdiscussions over a financial transaction tax (FTT) levied ontransactions involving specific asset classes such as stocksand bonds. The FTT, as discussed across Europe and alreadyimplemented in some markets, will have detrimental effectson market quality. For instance, the IMF (2011b) argues thatan FTT reduces trading volumes and lowers liquidity. An FTTwould therefore reverse some of the cost reductions linkedto higher trading volumes that are described in this report.As outlined in this report, the European asset managementindustry predominantly acts as a long-term investor andprovider of long-term risk management services to clients.Therefore, increasing the costs of trading is almost certainlygoing to have detrimental effects on the ability of the industryto offer its services to society in a cost efficient way.Finally, the industry faces increasing competition on a globalscale (EY, 2014). Parts of China and Southeast Asia are fastdeveloping into global centers for asset management services.The nature of the challenge is twofold: asset managers’ clientscan increasingly be found in Asia and investment opportunitiescan also be found in these markets. In the medium term, thesefactors challenge Europe’s position as the world’s second–largest center for asset management.It is therefore important that European lawmakers carefullybalance the needs of the European asset managementindustry, its clients and European economies.Societal and economic impacts of the European asset management industry

38Appendices06Societal and economic impacts of the European asset management industry

4015. Shareholders have cumulative voting rights16. Shareholder approval is required to increase/decreaseboard size17. Majority vote requirement to amend charter/by-laws (notsupermajority)18. Board has the express authority to hire its own advisors19. Performance of the board is reviewed regularly20. Board-approved succession plan in place for the CEO21. Outside directors meet without CEO and disclose numberof times met22. Directors are required to submit resignation upon achange in job23. Board cannot amend by-laws without shareholderapproval or can do so only under limited circumstances24. Does not ignore shareholder proposalCompensation and ownership35. Directors are subject to stock ownership requirements36. Executives are subject to stock ownership guidelines37. No interlocks among compensation committee members38. Directors receive all or a portion of their fees in stock39. All stock-incentive plans adopted with shareholderapproval40. Options grants align with company performance andreasonable burn rate41. Company expenses stock options42. All directors with more than one year of service own stock43. Officers’ and directors’ stock ownership is at least 1% butnot over 30% of total shares outstanding44. Repricing is prohibited25. Qualifies for proxy contest defense combination pointsAudit and anti-takeover26. Consulting fees paid to auditors are less than auditfees paid to auditors27. Audit committee composed solely of independentoutsiders28. Auditors ratified at most recent annual meeting29. Single class, common30. Majority vote requirement to approve mergers(not supermajority)31. Shareholders may call special meetings32. Shareholder may act by written consent33. Company either has no poison pill or a pill that wasshareholder—approved34. Company is not authorized to issue blank—check preferredSocietal and economic impacts of the European asset management industry

41BibliographySocietal and economic impacts of the European asset management industry

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43Bibliography• IMA (2013) “The industry in figures,” InvestmentManagement Association, London UK.• IMF (2011a) “Bank behavior in response to Basel III: Across-country analysis,” IMF Working Paper No. 11/119.International Monetary Fund, Washington DC.• IMF (2011b). “Taxing Financial Transactions: Issues andEvidence.” IMF Working Paper No. 11/54. InternationalMonetary Fund, Washington DC.• IPE (2014). “IPE's Top 400: Dutch managers increase shareof European institutional market.” Investment & PensionsEurope, PE International Publishers Limited, London.• Kay Review (2012). “The Kay review of UK equity marketsand long-term decision making.”• Manconi, A., Massa, M. and Yasuda, A. (2012) “The role ofinstitutional investors in propagating the crisis of 2007–2008,” Journal of Financial Economics, 104, 491–518.• PwC (2014) “Asset management 2020: A brave new world,”PwC, London.• Piketty, T. (2014) “Capital in the twenty-first century,”Harvard University Press, Cambridge, USA.• Ronn, E. I. and Verma, A. K. (1986) “Risk-based capitaladequacy standards for a sample of 43 major banks,”Journal of Banking & Finance, 13, 21–29.• TheCityUK (2013). “Fund Management 2013.” TheCityUK,London.• Towers Watson (2012) “European corporate governance,”Towers Watson Report, Amsterdam.• World Bank (2011) “Corporate governance matters toinvestors in emerging market companies. International financecorporation survey report,” World Bank, Washington DC.• McKinsey (2002) “McKinsey Global Investor Opinion Survey onCorporate Governance – Key findings.” McKinsey & Company.• Morck, R. and Steier, L. (2005) The global history ofcorporate governance: An introduction, In: “A history ofcorporate governance around the world: Family businessgroups to professional managers” edited by RK Morck.University of Chicago Press, pp. 1–64.• Office of Financial Research (2013) “Asset management andfinancial stability,” US Department of Treasury, Washington DC.Societal and economic impacts of the European asset management industry

44ContactsIf you would like to discuss any of the findings in this study, please do not hesitate to contact your local EY Wealth & AssetManagement Leader.Belgium:Frank de JongheE: frank.de.jonghe@be.ey.comT: +32 2 774 9956Italy:Stefano CattaneoE: stefano.cattaneo@it.ey.comT: +39 0272212452Channel Islands:Mike BaneE: mbane@uk.ey.comT: +44 1481 717435Luxembourg:Michael FergusonE: michael.ferguson@lu.ey.comT: +352 42 124 8714EMEIA:Roy StockellE: rstockell@uk.ey.comT: +44 20 7951 5147Netherlands:Jeroen PreijdeE: jeroen.preijde@nl.ey.comT: +31 88 40 71679France:Hermin HologanE: hermin.hologan@fr.ey.comT: +33 1 46 93 86 93Switzerland:Bruno PatusiE: bruno.patusi@ch.ey.comT: +41 58 286 4690Germany:Oliver HeistE: oliver.heist@de.ey.comT: +49 6196 996 27505UK:Gillian LoftsE: glofts@uk.ey.comT: +44 20 7951 5131Ireland:Donal O’SullivanE: donal.osullivan@ie.ey.comT: +353 1 2212 455Societal and economic impacts of the European asset management industry

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