The mutual fund industry set its passionate sights on the European market in the 1990s, and a rash of acquisitions ensued.
But as the earnings of fund companies have been hammered during this bear market, expansion in the region has slowed. But industry projections would indicate that overlooking Europe would be a mistake. Cerulli Associates expects Europe's $3.5 trillion mutual fund industry to grow at a 14% average rate through the end of 2006 (see MFMN 10/2/02). This will surpass the projected global expansion rate of 10% and dwarf the cumulative aggregate growth rate of the U.S., which is expected to grow by 9%.
Magnus Spence, president of Sector Analysis, a mutual fund consultancy in London, recently spoke with Money Management Executive reporter Colin Nagy on the outlook for U.S. mutual fund companies already in or trying to make inroads into Europe.
Money Management Executive: How much has the mutual fund business grown in Europe over the past five years and how great a market share have American firms achieved in that time?
Spence: Well, I can't answer either of those questions. I'm going to tell you why I can't - but why I can answer a similar question.
First of all, we at Sector Analysis don't really present ourselves as measurers of the total mutual fund business. We measure what we think is a much more interesting subset of it, which is the third-party mutual fund business, often referred to in the States as the non-proprietary mutual fund business.
The reason why this is more interesting, we think, is because if, say, Deutsche Bank creates some product and then sells that to its own clients, other firms don't really get a chance at that. They can't realistically compete with this proprietary or in-house stream of business. So, we don't feel it's relevant, therefore, to start measuring the size of that market.
What's much more interesting is when, say, Deutsche Bank goes out and uses a third-party product. That's the point at which it's sort of an open market. And it's that business, that third-party business that we measure.
MME: So, proprietary banking channels aside - which have long been the dominant force in Europe and the reason why U.S. companies have not been able to make inroads in Europe - how has the third-party mutual fund business grown in Europe over the past five years?
Spence: In terms of dollars, we think that the third-party mutual fund business among the 10 biggest nations in Europe is now approximately $1 trillion, representing less than 20% of the market.
That has undoubtedly grown very significantly in the past five years. I don't have a figure for five years ago on a like-for-like basis, because five years ago, we were only looking at four countries rather than 10. So you'll have to forgive me if I can't give you a percentage growth.
But there has been very significant growth in that number in the past five years, no question, to reach this point that we're at now.
MME: Didn't proprietary funds used to dominate sales in the U.S., as well?
Spence: Yes. Financial Research Corp., on our request, once calculated that equivalent figure for the U.S. If my memory serves me right, they found it was approximately two-thirds non-proprietary, one-third proprietary, and they projected that non-proprietary funds would grow even further, reversing the trend of 15 years ago.
We think sales of non-proprietary funds in Europe, while less than 20% today, will follow the trend in the U.S.
MME: How great a market share have American firms achieved in Europe over the past 15 years?
Spence: Foreign firms represent about half of the third-party fund market in any given country, and American firms have a significant part of that half.
MME: Since growth expectations have not yet been met, should U.S. firms still look to the European market?
Spence: Up to the beginning of 2000, when we last made a serious wide-scale measure of this market, we had been seeing significant growth in third-party funds in what is commonly called "open architecture," or when both proprietary and third-party funds are sold. However, anecdotally and observing things since then, we can guess that there may have been some reversal of that situation.
The rumor that is making the rounds in Europe is open architecture is under significant strain at the moment.
MME: So, while there have been significant inroads by foreign firms to capture half of the 20% of non-proprietary funds, or approximately 10% of the market, you see that slipping.
Spence: Particularly the big banks, which, as the industry knows, have a very significant share of the distribution fund products, are choosing to distribute third-party products less and less. It's almost as if they have decided they do not want to bear the associated costs of third-party distribution at this difficult time.
They're also saying that third-party distribution perhaps has not brought with it the benefits that they had hoped and that they are scurrying back to their roots to distribute only their own in-house products to their clients, instead. There's a sort of protectionism in the air.
It's a very interesting moment in the European fund industry, because if open architecture, is indeed, in decline after a very short time of growth - and if the roots of open architecture are so shallow that they get blown away at the slightest ill wind - then that's not saying very much for the potential longevity of open architecture in Europe.
And if there isn't going to be open architecture in Europe, then the opportunity for U.S. firms is very significantly reduced.
MME: If it's still such a closed market, how can a U.S. fund be successful in Europe?
Spence: Firms with a big name and with a very focused strategy, be it on distribution or a particular market or a particular investment style, have been successful. Becoming indispensable to the sellers, or distributors, of funds. That's the key.
We have a ranking of competitive provisions of suppliers of third-party funds in Europe. We rank them based on a poll of distributors, asking them three things:
The interesting thing about this ranking is that if you look at the top 10, six of those firms are U.S. Fidelity, JP Morgan Fleming, Morgan Stanley, Merrill Lynch, Franklin Templeton and Invesco are the leading six American firms in the top 10.
However, further down the line, looking at the top 30 firms, 23 of them are European, so it is only at the very top that American firms have succeeded in dominating.
MME: Aren't there other American firms making a name for themselves in the European mutual fund market?
Spence: Yes, but they are much further down the line, not in the top 30 but lower down the rankings. We get Goldman Sachs, Vanguard, Mellon, Alliance Capital, Frank Russell, American Express, CitiBank and so on. Pioneer is within the top 10, but as it is now owned by UniCredito Italiano, I will not classify it as an American firm.
And then you have to look much further down the rankings until you get to some of the even better known names in the U.S., such as Putnam or MFS or others.
So the question that could be asked is why are some U.S. firms doing very well and others doing not so well, on the basis of this ranking, anyway.
Besides the focus I spoke of earlier, I would add patience and skill to the triad of characteristics that it takes.
Patience is incredibly important. Taking a long-term view is something that a privately owned firm like Fidelity is obviously in a much better position to do than a firm that is responding to the day-to-day needs of impatient shareholders.
Clearly, there are some firms better positioned to be patient than others. It is fair to say that there are more U.S. firms driven by shareholder needs than there are European firms - and that has given European firms an advantage.
Skill. Marketing skill is the final quality, and it is in short supply in some firms. By marketing, I mean the most broadly defined range of marketing skills, such as understanding your customers, segmenting your market, being able to identify the growth patterns within your market, identifying the most appropriate sales strategy in relation to customer needs - and, finally, developing products according to those customer needs.
The U.S. firms that have made the list, both at the top and the bottom, have the skills, the patience and the focus to target customer segments.
MME: Finally, any predictions for the next 15 years?
Spence: Right now, there are 200 firms in the European investment management marketplace. My guess is that only 20 to 60 are going to make it.
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