Kurt Schoknecht is the CEO and director of Alliance Capital Management International of New York, overseeing the firm's offshore and international businesses. Schoknect recently discussed his career, ACM International's key markets outside the U.S., and the firm's strategies to develop those markets with Mutual Fund Market News reporter, Andrew Greene. An edited account of their conversation follows.
MFMN: What sort of funds does ACM International offer?
Schoknecht: We offer a full family. We have over 20 different mutual fund families and well over 150 different funds if you include all of the share classes. And they run from whatever Alliance is strong in, so large-cap growth funds, a broad array of fixed income, regional, geographic funds, sector funds like technology, healthcare and biotechnology. So it's a full range of funds.
MFMN: Does ACM International have plans to offer new products?
Schoknecht: In fact, this year we are going to introduce a value family of funds offered through the Sanford Bernstein acquisition, which was a great merger and we are looking forward to their products complementing ours. We've been very strong in the growth area and they are a top value manager, so the combination of the two will provide a tremendous competitive advantage.
MFMN: Are there any other areas in which Sanford Bernstein will be able to complement ACM International?
Schoknect: On the mutual fund side, besides the value family and maybe some specific local funds we will introduce through our joint ventures, we feel our product line is fairly broad. We tend not to be a product-of-the month type of shop. We listen to what the investors are looking for, but then we also make sure that we can deliver it with the level of quality and investment discipline that Alliance has built up over the years. I mean, we wouldn't introduce a Latvian hedge fund for the three investors who thought that was a good idea.
MFMN: For the first quarter of 2000, ACM International's funds made up 27 percent of Alliance's overall sales, a net increase of 91 percent over the same period the previous year. What was the percentage for the rest of the year?
Schoknecht: For the third quarter, the percentage was the same... the net, long-term fund sales ... were 27 percent non-U.S. and 73 percent U.S.
MFMN: Do you expect that percentage to increase over the next year?
Schoknecht: The markets outside the United States have tremendous growth potential and the U.S. is still growing, but the penetration of mutual funds in the United States is much higher. The U.S., per capita mutual fund penetration is $22,000. Outside the United States, there is no one even close. I think France has around $8,000 and that's the next closest. Even at Alliance, we look to the international market to continue to play an increasingly important role.
MFMN: Is the growth potential outside the U.S. the reason Alliance established an offshore center in Singapore? What else did ACM International do in the past year to position itself internationally?
Schoknecht: The center we set up in Singapore is an operations center. So now we have one in Singapore and Luxembourg and three in the United States. So we really provide 24 hour global coverage for operations activities. At the same time we moved our sales groups closer to their local marketplaces, so before the beginning of 2000 we had a large concentration of wholesalers in Luxembourg. Now we have a major sales office in Munich, which opened last May, we have a new sales office in Zurich, a new sales office in Madrid and a growing sales office in Paris. For 2001, we are looking at other markets like Scandinavia and the Netherlands to see if it makes sense to grow there and also in Asia and Latin America, where we need to establish a stronger presence.
MFMN: It sounds like Alliance spent 2000 building its sales channels in Europe. How do you plan to generate sales in 2001?
Schoknecht: Naturally, we're going to continue to increase the number of wholesalers in each one of the key markets, so getting people out into the local marketplaces and calling on the key channels. We look at this in two big directions. One is the traditional distributor networks like wirehouses, securities houses and banks and the other is what we call individual. It's a combination of individual and institutional product and sales cycles. Think of it as sub-advisory or fund of fund managers. So, that's the second tact we take. We are going to target both of those channels fairly aggressively. We do also have a pretty good investment in dealer-distributor support through an organization called Business Development Institute, which helps train distributors on things like generating referrals and managing client expectations. We put on targeted investor seminars for our key distributors in each region and we are revamping our distributor website. We have an offshore website right now that's undergoing a major facelift to insure that it's getting the information out to the distributors.
MFMN: Worldwide, is there one marketplace or region that you find especially promising?
Schoknecht: In absolute terms, I would say Europe is the most attractive and then it would be hard to call between Latin America and Asia. Also, in general regions, you want to look at specific countries. India, for example, is a good case where we have close to a billion dollars in assets under management and that's not a market that is targeted by a lot of major fund companies. The Indian marketplace has tremendous potential. We had a good opportunity to team up with some very experienced people there and the Alliance name was already well known in the marketplace. What we've tried to do is prioritize countries within regions. So in Europe it's the usual suspects - Germany, France, United Kingdom and perhaps Italy - all of these countries are moving toward more open architecture and are naturally more attractive. The savings rate in Germany is eight or nine percent, in the United States it's four percent. In France it's 14 percent. The penetration of mutual funds is miniscule - all of these people are putting their money in savings deposits or straightforward investments.
MFMN: There has been a lot of talk about China and the opening of that market to outside firms. Is that a market that Alliance is interested in and what are you doing to position yourself there?
Schoknecht: We are absolutely interested in it. It's hard to ignore a billion plus people. The way we're going at that is we have a very solid partnership with Sun Hung Kai, a financial real estate conglomerate in Hong Kong. The joint venture is called New Alliance, based in Hong Kong, and that's our representative for distributing our offshore mutual funds in the greater China area. New Alliance covers Hong Kong, Taiwan and the People's Republic of China. We definitely have an aggressive strategy of growth for that market. For example, the Taiwanese market is extremely attractive for mutual funds. Hong Kong in December launched its Mandatory Provident Fund, which is a pension fund, which will dump a huge volume of assets into private asset management. The question of how quickly it will grow, I think, is open.
MFMN: What sort of timeline do you think China is on?
Schoknecht: You have to be very patient. This is not a one-year event, this is not a two-year event. This is maybe a five-year event. It's taken that long to get here. The WTO inclusion was a big event and that will help a lot, but I was working at Citibank in the late 70's and China was very promising then and everybody has always thought China was very promising. It's only now, with the WTO, that you actually start to see some rays of hope for a little bit of western activity.
MFMN: But there are some big question marks there. The Chinese government is a big unknown, isn't it?
Schoknecht: It is fraught with risk. On the political side, there is the tension in the straits with Taiwan. There is a huge bureaucracy built up and there are large dominant local players that aren't easily going to give up big pieces of this marketplace. The people are becoming more affluent and are making more money, the local Chinese banks, naturally, don't want to sacrifice a lot of that.
MFMN: Other than China, what specific Asian markets are attractive?
Schoknecht: A couple of markets are attractive in Asia right now and are growing, so we want to make sure we're focused on that. The markets are Singapore, Taiwan, South Korea and then Greater China - Hong Kong, Taiwan and the PRC. But, if you look at them together, I guess Taiwan and South Korea are the markets that are most accessible and rapidly growing over the short term. Taiwan, just because of the technology manufacturing, and South Korea because the market is western-oriented but hasn't really been penetrated that much. The longer term prospects for a country like China are unbelievable but you're going to have to be patient and that's what we are doing now. We are just now starting to look at the best way to penetrate mainland China. It's a marketplace with 1.2 billion people ... but it's not a slam-dunk. The people are wealthier now, the pension funds are privatizing and with the WTO inclusion now China will open up its financial markets more so its currency will ultimately become convertible, the stock markets will open up. Right now, I think the stock market is dominated by retail clients, I think 90 percent, so they are going to have to have more institutional funds enter the stock market to stabilize it a little bit. They haven't, up until now, had any open-end mutual funds. They have 10 asset management companies, but they don't have any open-end mutual funds. And they are going to start to allow foreign partnerships with foreign companies. So, I wouldn't say we are looking at a joint venture structure in China. But what we will do is work with our partner in New Alliance, Sun Hung Kai, and structure some sort of strategic alliance with some Chinese players because they have the distribution, they have the local knowledge and they can get through the red tape, because it's very bureaucratic.