A lot is expected of the European mutual fund industry in the next three years. Industry executives predict growth there will yield a fund market similar to that of the U.S., driven, in part, by rejuvenated retirement systems.

Last week, executives from Europe's mutual fund centers in Luxembourg and Dublin, and U.S.-based executives with global coverage discussed the prospects of asset management growth in Europe at the National Investment Company Service Association's 20th Annual Operations Conference in Miami.

Driven by pension reforms throughout Europe and the expansion of distribution channels, the EU fund industry is on the verge of significant growth in the coming years, the executives said.

Ten years ago, there were 700 funds with US$90 billion in Luxembourg. Today, there are 7,000 funds with US$900 billion, according to Rafik Fischer, head of operations for Kredietbank S.A. Luxembourgeoise. And, despite difficult market times, growth in Luxembourg and the whole of Europe in general is not likely to subside.

"I think the glory days are definitely not over, certainly in Luxembourg, and I think also throughout Europe," Fischer said.

The European fund market, which currently stands at US$3 trillion, is expected to grow to US$6 trillion or US$7 trillion by 2005, according to Fischer. Likewise, the number of mutual fund accounts in Europe is expected to grow from 75 million to 190 million, and bankable assets of high-net-worth individuals from $20 trillion to $40 trillion over the same period, he said.

"I believe we're really only at the start of a very long road," said Brian Collins, chairman of Bank of Ireland Securities Services. "The prospects in Europe in general are very bright. There's a huge amount of potential. I might say that we're 10% down that road."

It is not only the European executives who are optimistic about growth there in the coming years. American firms are increasingly looking to Europe as an attractive area for development, said Kathy Dodd, an executive with J.P. Morgan Investor Services' global transfer agency business. Dodd's firm projects European growth of 18% per year for the next five years.

"We definitely believe that the U.S. industry will predict the future of the European marketplace," Dodd said. J.P. Morgan Investor Services, which once viewed the European market as six years behind that of the U.S., now sees a lag of only three years. "Distribution channels will mirror the U.S. by 2005," Dodd said.

There are several driving factors for the predicted growth in Europe, according to the executives. For one, pension systems throughout Europe, which in the past have been State-run and completely underutilized, have seen tremendous developments, and represent the area with, perhaps, the greatest potential for growth, Fischer said. Compare the $7 trillion U.S. fund market, which is largely comprised of pension assets, with the $3 trillion European market, which is almost completely made up of retail assets.

Banks, which sell proprietary products almost exclusively, continue to dominate the distribution channel in Europe. But other channels have started to break into that business, Dodd said. In 2000, 8% of mutual fund assets were sold through financial advisers. That will jump to 11% in the coming year, with further growth down the line, according to Dodd. Another distribution channel that could chip away at the banks' stronghold is the European fund supermarket.

"The European supermarkets are only in their initial phase," Dodd said. "We see that, by 2005, 5% of mutual fund assets will be going through the supermarkets."

In the U.K., sub-advisory opportunities abound, according to Dodd. Currently, U.K. sub-advisors manage $350 billion, and J.P. Morgan Investor Services sees a very attractive five-year growth pattern of approximately 25%.

On the product side, the emergence of exchange-traded funds and funds of funds in Europe will further propel asset management growth, according to Dodd. Currently, there are the same amount of global ETFs as there are in the U.S., 102. And in Germany specifically, 14 new ETFs have already been introduced so far in 2002, with 15 more expected to launch in the coming months.

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