Having looked at the impact of the pandemic on the tourism industry and the mobility of international students, in this chapter we turn our attention towards labour migration. This change of emphasis may appear strange to some readers, with migration traditionally seen as separate from what are considered ‘softer’ forms of mobility. However, while the experience of moving to another country for employment purposes substantially differs from other forms of global circulation, all three of these mobilities depend on the existence of a fully functioning international travel infrastructure and relatively open national borders. We can, therefore, anticipate a certain amount of shared experience among people on the move, even if their experiences are fundamentally different in many other respects.

Another commonality might be the idea of expansionism, discussed previously. As with tourism and student mobility, in the years preceding the onset of the pandemic, levels of labour migration to Portugal appeared to have increased, though not reaching the same levels recorded in other European countries. Residents with a foreign nationality represented around 5.7 per cent of the population residing in Portugal in 2019, rising to 6.4 per cent in 2020 (Oliveria, 2022). This represents a major contrast with, for example, Luxembourg, which had an equivalent figure of 47.4 per cent, and Malta, with 20.1 per cent (Monteiro and Oliveira, 2021). The actual size of the foreign population in Portugal is, however, a difficult issue to assess due to ambiguities within recording systems, although we can say that there has been a growth in the visibility of foreign workers. Also prominent in our evidence are signs of what might be termed ‘periodic migration’, with people travelling to Portugal repeatedly, but for relatively short stays, coinciding with the times during which they were needed by certain sectors of the economy. We might, then, see this as another example of the fractional or fluid migration we discussed in Chapter 4. But again, due to a lack of adequate statistics, we do not really have a precise idea of the scale of such circuitous practices.

Equally difficult to estimate is the exact contribution to the national economy made by labour migrants, although we are aware of the value of these workers to strategically important sectors, including agriculture. Public discourse on migration in Portugal also recognizes the contribution made by these workers to social security, and this is reflected in relevant statistics.

In this chapter, we explore the impact of the COVID-19 pandemic on the tourism industry in Portugal, using findings from fieldwork conducted during 2021 and 2022. The aim is to learn more about the challenges industry stakeholders have faced during an unprecedented and unpredictable public health emergency. In Chapter 1, we noted the extent of the financial losses incurred during the first two years of the pandemic, and in Chapter 2, some of the moral quandaries that arose out of attempts to keep travelling during times of restricted circulation. We now wish to take a more in-depth look at these issues.

In order to do this, we have adopted a number of preexisting theoretical concepts. The first is a relatively familiar theme: the idea of overtourism. This is a topic that attracted a large amount of academic scrutiny during the decade of expansionism that preceded the pandemic (see, for example, Capocchi et al, 2019; Milano et al, 2019; Volo, 2020), becoming a cause celebre in many of the cities that were most visited by international tourists. This includes Lisbon and Porto in Portugal – and elsewhere, Amsterdam, Barcelona and Venice – where in the years prior to the pandemic, tourist numbers increased massively (Malet Calvo and Ramos, 2018). As well as revisiting the concept of overtourism, we try to make sense of the sudden collapse in tourist numbers during the public health crisis. While in Chapter 1, we discussed this transformation using statistics on lower visitor numbers and lost revenue, we now wish to appreciate changes in the meaning of international tourism using the idea of ‘undertourism’. While this is another pre-existing concept, having been used in the past by tourism researchers to help identify new sites for exploitation (Gaitree Gowreesunkar and Vo Thanh, 2020), we interpret undertourism somewhat differently, as a term that describes issues arising from the sudden decline in visitor numbers within a previously popular destination.

Tourism in Portugal

Before we address these theoretical issues, we want to provide a brief commentary on the significance of tourism in Portuguese society. While most countries attract visitors who make a contribution to the national economy, in Portugal the tourism industry occupies a prominent place in public and political discourse, with the country's status as a popular destination for people from across the world seen as a source of civic pride.

With so many funds available, and new launches coming to market so regularly, one might expect intense price competition among funds in the UK and Europe. But the European fund management industry is different. Cutting fees to attract clients is barely, if ever, used by active fund managers. For most firms, to take this approach would be to tacitly admit that their performance, or expected future performance, is not as good as their rivals. Regardless of the reality, the possibility that this could be suggested is enough to stop most active firms from taking this step. Index-tracking funds, on the other hand, do compete on price, which in turn puts competitive pressure on active asset managers to demonstrate that it is worth paying more for potentially higher returns. Trying to unpick the reasons for the limits of price competition in the industry touches on both the way fee structures are determined for active funds and the way funds are distributed in Europe.

How funds ignore the law of demand

As we briefly discussed in Chapter 1, the law of demand suggests that the higher the price of a product, the less will be demanded, all other things being equal, while the lower the price of a product, the more people can afford it and so will purchase more of it. The ways in which the funds industry does not abide by this law are explored below.

Firstly, funds do not have a price tag that is distinct from a client's investment. Clients’ investments in a fund are collectively used to pay for the costs the fund incurs. A fund pays these costs, such as those for its management, from its assets on a daily basis. These costs are then presented as an annualized percentage charge to investors. For example, if a fund manager's investments generate an annual return of 7 per cent over one year and the fund incurs costs equivalent to 1 per cent of its assets over that year, then the fund’s investors receive a return of 6 per cent over the year (7 per cent less the 1 per cent costs). So a fund's charge reduces the return it generates by that amount every year.

The aim of this chapter is to give an overview of the main fund structures used by UK and European asset managers, as well as the evolution of product regulations that have supported the growth of mutual funds across Europe. It is not intended as a detailed primer on fund regulation. There is an ongoing tension between asset managers’ desire for less regulation (and its associated costs) and regulators’ instinct to regulate (to safeguard investors’ interests). Despite this, the European asset management industry can thank supportive fund regulation as part of the reason for its impressive growth over the past 30 years.

Fund structures

The first fund in the UK was set up in 1868, the Foreign & Colonial Government Trust, which is now the £5.6 billion F&C Investment Trust. Originally established with a trust structure, the fund is now a closed-ended investment company, also known as an investment trust. The UK had to wait until 1931 for its first open-ended fund, the Municipal & General First British Fixed Trust, which had a fixed term of 20 years and so was then replaced by the M&G General Trust, which in turn has had several reincarnations, latterly as the M&G Blue Chip fund, which merged into the M&G UK Growth fund in 2006. In turn, this fund was renamed M&G UK Select in 2015 and had assets of £500 million in May 2022. M&G had originally been inspired by the first US open-ended fund, the Massachusetts Investors’ Trust that launched in 1924. This US-based fund has fared better than M&G's UK product and now manages assets of $7.1 billion (£5.3 billion).

While tracking an index is an investment strategy, rather than a distinct fund structure, it is worth noting that after some false starts by other firms, the first index fund open to retail investors was launched by John Bogle in 1975, the First Index Investment Trust. Today it is the Vanguard 500 Index Fund, with assets of $770 billion in May 2022. Developing index-based products further, the first exchange traded fund was established in Canada in 1990, Toronto 35 Index Participation units. Today this is the iShares S&P/TSX 60 Index ETF, which had assets totalling CA$12.6 billion (£8.1 billion) in May 2022. The first US product was launched in 1993 by State Street Global Advisors, the S&P 500 Trust ETF, which manages $346 billion (in June 2022).

The internal functions of an asset management organization are similar across organizations, even if the way individual roles are defined are likely to vary between firms. However, differences between the types of business managing mutual funds are much more apparent. Some of these aspects overlap, but it is still helpful to be aware of a firm's size, parent company, ownership, and operational structure when comparing firms. After exploring these considerations, the chapter will then move on to explain the value chain in which fund management businesses sit, their associated costs, revenues and profitability.

Boutiques vs Behemoths

It is possible to set up a fund management business with relatively few resources. Improvements in outsourced services and technological advances have made it eminently feasible for those with knowledge and experience of the industry to get a business off the ground. (Making the business a financial success by attracting clients is a different matter, which will be discussed later). The lack of office infrastructure and reliance on those providing services externally was put under pressure through the pandemic and proved resilient. Traditionally the greatest barrier to entry for the UK and European funds industry was deemed to be regulation, but many small firms say that even this is not the hurdle that it once was.

The large number of small asset managers – commonly referred to as investment boutiques – is a pronounced feature of the industry. There are more than 1,650 firms managing mutual funds with less than €20 billion in assets under management and so rank outside the largest 100 firms in Europe. Many of these firms remain profitable despite their relatively small size (see Figure 3.1).

Smaller firms tend to limit the range of products they manage and offer to clients, feeding into the perception that boutiques are more focused in their approach to investing. This is reflected in some academic research showing that there is a “boutique premium”, in other words that fund managers at smaller, standalone investment firms perform better than other businesses (Clare 2020). In some countries, the development of boutique asset managers is more pronounced, for example, France often promotes its credentials and the number of investment boutiques active in the market.

It is largely as a result of the belief that investment managers work better in small teams and should determine their own implementation of investment strategies that some large asset managers adopt a so-called multi-boutique model.

My ideas for this book had been milling around for several years, but there is nothing like having surgery during a pandemic to focus your mind. I was fortunate that Steven Gerrard at Agenda read the resulting outline and suggested that it could form the basis for an addition to Agenda's series on the Economics of Big Business – short, accessible introductions to the economics of major business sectors. I cannot thank him enough for giving me the chance to take this on. I am not an economist, so readers certainly do not need to be to gain an understanding of how the fund management industry functions and operates. The vast majority of literature relating to asset managers concerns how they invest, so there seems ample room to explore the array of other functions as well. There is even more room to explore asset management in Europe and the UK when so many books are focused on the United States, either intentionally or as a result of it being the world's largest market for mutual funds.

Writing this book has prompted me to reflect on what has changed, and what hasn’t, over the years since I entered the asset management industry in the late 1990s. This has made the process of writing particularly enjoyable as time for reflection of this kind is less easy when writing about what is new in the industry day-to-day as a journalist. Unusually, my earliest experience in asset management was analysing funds’ charges, which perhaps explains why I have found this part of the industry (how it makes money) just as interesting as its investment role (how it makes money for clients). I have been fortunate that over the intervening years I have been involved in researching and writing about funds’ performance, flows, regulations, distribution, as well as the impact of technology and the development of new products on fund businesses.

Working variously at a research firm, inside an asset manager and as a journalist has given me the chance to hear diverse perspectives on the industry, both from colleagues and from those at other firms across Europe, as well as in the United States and Asia. This has been made more interesting, and sometimes more lively, by often trying to explore issues that asset managers tend to prefer to be left unexplored.

High levels of profitability, rising markets that boost growth, and the prospect of increased demand as governments push individuals to take greater responsibility for their retirement savings, all point to the attractiveness of running an asset management business. And each of these is accentuated by the recurring revenues that mutual funds provide. So despite fund holding periods averaging just over three years, which might seem relatively short compared to changing home every 14 years, or changing car every 8 years, revenues are generated on fund assets every single day (IA 2021; Gibson 2021; SMMT 2021; Gillies 2017). And this holding period does not reflect that aggregate net inflows to mutual funds typically rise year-on-year, and certainly do so over any given three-year period. No wonder Bernie Cornfeld proclaimed, “If you want to make money, don't horse around with steel or light globes. Work directly with money.”

But the management of other people's money brings with it potential conflicts of interest that need to be managed when growing a business while staying aligned to the purpose of fund management. The main purpose of fund management is to grow clients’ wealth over the long term by prudently investing in companies and other assets. The main vehicle for doing this is the mutual fund, where clients’ assets are shared and the manager is obliged to act in their best interests. Inherent in this is a fiduciary duty that goes beyond managing the fund in the way set down in legal documents. While the exact nature of this duty remains contested in Europe, pressure is increasing from regulators for firms to justify their charges and demonstrate that consumers’ interests are at the centre of their businesses. Firms have so far largely resisted this pressure as it has the potential to threaten their profitability.

The shock of some in the funds industry to regulators’ efforts both to make firms put client interests first, and to define how far-reaching these interests might be, suggests that many asset managers struggle with groupthink in some areas of their business. In other words, they struggle to think beyond what is accepted industry practice (asking one of the highly paid mega consultancies to repackage existing thinking about how to succeed does not really count). Groupthink can even become a subconscious part of a company’s culture – “this is the way we do things”.

Fund managers sit at the heart of an asset management company, providing an investment service that is then wrapped in a product and sold to clients. It is these investment products that form the building blocks on which an asset manager builds its business. A firm's investment management team undertakes a range of activities, with security selection – the decision to invest in a particular stock or other asset – representing the culmination of contributions from other members of the team. Linked to this are the decisions to disinvest from investments, reflecting that investing is an ongoing process. An investment management team broadly covers three other areas: economic analysis, asset allocation, and company research. Increasingly, data analysis represents a fourth, distinct contribution to the process. As with many other functions, these roles may overlap or be divided up in different ways, which will be partly dictated by the size of the company.

Economic analysis provides a macro view of the economic and political backdrop for individual countries or sectors, together with views on how the dynamics shaping these markets might change in future. This includes a mix of short-term perspectives, such as the impact of a particular political election or Bank of England's decision on interest rates, and longer-term strategic changes, such as the ripple effects through the economy of more people working from home.

Asset allocation is the strategy or tactics relating to which types of securities to invest in and when, as well as ensuring the portfolio of investments is appropriately diversified and in line with the fund manager's approach to investing. Most funds will use asset allocation insights as one of the inputs to decide how a fund should be invested. However, some funds’ primary focus is on getting judgements about the correct asset allocation across a wide range of potential assets. For these funds, the rest of the investment process is focused on how best to implement the fund manager's views on asset allocation, rather than focusing on individual companies. For example, the manager might implement his or her views by investing in a range of exchange-traded funds that replicate the returns of particular countries’ stock markets.

Investment analysts carry out research into individual companies, drawing on external research as well as their own analysis of a company's profile, past growth and future prospects.

By now the purpose of fund management might seem to be clear. But this is sometimes confused with the role and function of fund managers (and their colleagues). The distinction is worth considering to better understand the nature of the industry, and as a means to identify potential challenges for firms and resulting flaws in the way they behave.

At a basic level, there is a clear difference between the function of each role at an asset management company and the purpose of the industry as a whole. When defining an asset management company's role, elements of the former – the various functions – are often highlighted, rather than the objectives of the latter that should influence all roles within a fund company. This may appear to be more of a technical clarification rather than a broader comment on the industry. However, the distinction is a useful way to check whether a fund company actually considers the industry's purpose and its place within it. Most firms are focused on the way their business functions and the roles within it, and often they only fleetingly or obliquely appear to have a conception of their purpose and to use that understanding to influence the way their business is run.

The purpose of fund management is to grow clients’ wealth over the long term. This purpose may have beneficial by-products, but the industry's existence cannot be justified by such by-products because of the primacy of the relationship between fund manager and client. It may well be that some clients invest to make a positive impact on aspects such as the environment (which will be discussed later in this chapter), but even asset managers that manage money in this way are still focused on long-term returns for their investors – the primary purpose of the business remains the same. At the same time, an asset management company may offer products, such as short-term investment strategies, or services, such as an online investment platform, that help the growth of its business by attracting clients, but these do not change the industry's raison d’être. I would contend that the same is true for smaller parts of the overall funds industry, such as hedge funds, which often argue that their purpose is to offer differentiated returns from their more conventional rivals.

Many investors and fund management companies are united in their desire to find a particularly elusive individual: the star fund manager. So elusive is their quarry that a sub-industry of researchers and analysts has developed over the years to support this quest. Investors that choose actively managed funds want to find an individual who can generate better returns than the market over prolonged periods of time, while asset managers understand this desire and want to attract the money that follows it by promoting their fund managers and key members of their investment teams. “We are a people business” and “it is our people that sets us apart” are popular refrains from fund companies.

The desire to find a star fund manager is understandable, both commercially (it makes money for fund companies and, if one is found, investors) and philosophically (if active managers are able to consistently outperform the market, then this must involve skill). It is worth pointing out that, at a basic level, over any given time period some fund managers outperform the market average (either the average returns offered by replicating an index or the average returns across a range of fund managers with a similar investment focus). This is not just a theoretical view, it is reality. Some stocks will rise more than others over a certain period, and so some fund managers investing in companies listed in the same stock market will perform better than the average. The difficulty for fund investors is identifying if, and when, a particular fund manager (via a fund) will outperform the average. Star managers are those that are deemed to have the skill to be able to outperform over prolonged periods of time, or who have built up a following of clients in the belief that the manager can do this.

Client following is a particular feature supporting the status of star fund managers because their performance alone does not make their star shine, but instead it is their ability – and that of the sales and marketing team supporting them – to translate this into inflows and therefore to build increased scale in a fund that boosts their reputation. Crucially, a fund's scale also builds greater influence with the companies in which a fund manager invests.

Each fund management company is divided broadly into three divisions: its investment management team, those involved in sales and marketing, and support functions including operations and administration. This does not mean that every firm will neatly divide up its business in this way, but the division provides a useful model by which to understand an asset manager’s organizational structure. In addition, various elements of this structure can be outsourced to external organizations (third parties). For example, many start-ups and smaller firms outsource operational and governance functions. This chapter provides an overview of these different functions and the roles within them, as well as areas where outsourcing is used.

Approximately 42,000 people are directly employed by asset managers in the UK (IA 2021). A breakdown of these figures shows that operational roles account for half of those employed in the industry, while investment roles account for roughly one quarter of the total (see Table 2.1). The figures provide a useful way to visualize the shape of an asset management business through its staff, despite the composition of larger firms inevitably impacting the overall figures and also bearing in mind that outsourced roles are not included.

The 2008 financial crisis hit employment at UK asset managers, with those directly employed falling from 25,500 in 2007 to 24,000 in 2009, according to surveys by the UK asset managers’ trade body, the Investment Association. Employment has risen each year since. The surveys also suggest that one of the most significant responses to the financial crisis was an increase in staff in compliance and oversight functions, which now stand at 8 per cent of the total, up from a low of 4 per cent in 2010, although the current level looks to be stable, having been reached five years ago. The rise in internal IT appointments continues, however, accounting for 11 per cent of the total five years ago and 14 per cent today (IA 2021).

The European Fund and Asset Management Association (EFAMA) uses the UK figures, together with equivalent information from France and Germany to extrapolate a European total of around 115,000 individuals directly employed by the asset management industry (EFAMA 2021). The European trade body then considers the indirect employment generated by the industry through related services, such as distribution and advice, auditing, custodianship, legal, marketing, research and technology, and estimates that together these firms help create 644,000 full-time jobs.