Despite the problems of dealing with a fragmented European industry, not least of which is penetration, US fund managers remain enthusiastic about the business potential it offers
For the past 20 years, US fund managers have been promoting their products in Europe. Yet despite their substantial marketing budgets, their experience and, often, their impressive track records, the actual penetration has often been frustratingly low.
Attempts at direct selling have generally come a cropper and, with a few notable exceptions, such as Fidelity, US managers are becoming resigned to having to deal with local distributors, often white-labelling products to get them on the radar screens of local investors.
Nonetheless, the enthusiasm from companies such as MFS, SEI, Putnam, Vanguard and Janus is undiminished, because relative to the saturated and efficient US market, the EU could be the basis of a high-growth business venture.
Research from Vanguard Investments shows the European market is clearly attractive, with about $12 trillion in assets under management. However, the average penetration rate of mutual funds is rather low compared with the US, where fund assets are $1,989 per head compared with $218 in Europe, showing room for progress.
The European market remains quite different from the US, the main difference being that the latter is a single market whereas the former is made up of many different countries with different rules and regulations in each.
François Passant, head of marketing at Vanguard Investments Europe, says: "The European market is a fragmented one and this results in inefficiencies for fund manufacturers and additional costs for the end investor. Despite the progress made since the first European Asset Management Directives in 1985, the market as a whole has failed to realise a truly single European market. The absence of true regulatory and tax harmonisation, combined with a fragmented operational and distribution infrastructure, has resulted in little or no economies of scale and a proliferation of small funds. At $7.5 trillion, the US funds market is roughly twice as big as the European funds market at $3.4 trillion."
According to Passant, more integration would be beneficial to the end investors in mutual funds, not only in terms of their ability to access the best products but also in terms of costs through economies of scale. He has calculated that the potential cost saving of more integration could be e5bn annually. This should, of course, benefit the end investor in the form of reduced total expense ratios.
In Europe, the number of funds is actually three times as great as in the US, roughly 26,000 against 8,000. This means that the average fund size in Europe is around $136m compared with the US's $887m.
Mark Rogers, managing director of MFS International, pointed out: "Europe is not quite there yet with a universal industry. It has too many funds and if it was easier to cross register funds across borders, it would make it less expensive."
The Heinemann report estimates that achieving efficiencies in the European mutual fund industry could increase the value of the average saver's pension by 9% or 120,000. Because of the lack of harmonisation, pressing retirement issues and potential conflicts of interests amongst the various stakeholders, a champion flagging the interests of the European investor is urgently needed. Everybody would win: the end client but also the regulatory bodies and the fund providers.
For example, at present it is expensive for managers to register a French domiciled fund in another country. Economies of scales can only be achieved in Europe if managers domicile funds in Luxembourg and Dublin, and distribute their products under the Ucits III umbrella.
Most US managers distribute their products either through Luxembourg or Dublin to achieve economies of scale. Rogers feels the Ucits III framework gives players additional flexibility in cross-border registration and in the management of funds. MFS distribute its funds cross border through a Luxembourg umbrella, while Vanguard uses Dublin as its base.
According to Jon Little, chief executive officer of Mellon Global Investments, Ucits means that managers can address the market with one range of funds and that puts managers onto a level playing field. EU convergence has helped as most European investors now regard bonds and equities as their domestic asset class rather than their own local exchange.
Little says: "Ucits III will see a convergence in cross border marketing and, as we see regulation change across Europe, so we will be able to offer new product to European investors, for example alternative investments. In addition, many European financial institutions will find asset management too expensive and time consuming and will begin to outsource - this represents a great opportunity for groups like ourselves.
"We wanted to diversify our revenue streams and take part in the rapid growth available in Europe due to increased pension provision, higher savings ratios and the beginning of a trend for banks and insurers to outsource their investment business."
The Mellon philosophy is that there are opportunities for business growth across all markets, although Little has found they develop at different speeds and therefore each requires a tailored strategy.
For example, the mutual fund market is particularly well developed in Italy and Spain, whereas alternative investments are proving popular in Switzerland, France and Italy. Little has seen particular demand for Far East and income products in Europe. European investors have traditionally focused on bonds but Little is beginning to see more diversified portfolios and stronger weightings towards equities.
MFS has been distributing assets where all the money is. Rogers feels 70%-80% of all the money in Europe is in the UK, Italy, France, Germany, Spain, Switzerland and Luxembourg. He feels Spanish investors favour more fixed income-type funds, while UK investors are more equity driven.
Move into mutual funds
According to Bob Parker, vice chairman of Credit Suisse Asset Management, investors are moving away from banking products into mutual funds. There has been an increase in demand for emerging markets and high income equities. He sees this as a long-term trend as bank deposits only offer a low rate of interest, whereas funds can offer tax efficiencies for investors.
However, Vanguard has chosen to focus on a relatively narrow list of countries in Europe. Passant says: "We have chosen to focus on what we believe to be priority markets, given their size, degree of 'openness' and the importance of their occupational and private pensions segment. This is why, for example, we registered our funds for distribution in Sweden, a market with which we have several values in common such as transparency, good governance, ethics and low costs, and it is one which has a mature retirement market."
Vanguard considers France to be one of these priority markets. It manages two equity index mandates as part of the government's pension scheme, the French Reserve Fund. It has also recently registered its funds in Switzerland, allowing it to move to the next phase of development.
So the same story appears to be emerging from all players in the US market: despite the regional problems, European markets are still hugely attractive for US players that have the ability to learn the intricacies of this highly-stratified region, and have the patience to wait for an improving environment as the EU countries submit to the pressure to open up their investment markets to international players.
Relative to the saturated and efficient US market, the EU could be the basis of a high-growth business venture.
The potential cost saving to fund managers of more integration could be e5bn annually.
Ucits means that managers can address the market with one range of funds and that puts managers onto a level playing field.
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