Roger T. Servison is managing director and executive vice president of Fidelity Investments of Boston and president of Fidelity Investments Brokerage Services Japan. Servison will discuss globalization in the mutual fund industry at The National Investment Company Service Association's operations conference this week in Miami. Servison recently discussed the benefits and difficulties of trying to expand fund businesses abroad with Mutual Fund Market News reporter Mike Garrity. An edited account of their conversation follows.
MFMN: Are there particular regions internationally in which you expect the mutual fund industry is most likely to grow?
Servison: I think the two regions that have the most promise are Asia and continental Europe.
MFMN: Anything in particular that you attribute that to?
Servison: I attribute that to a couple of things - economic conditions, population demographics and the need to shift toward more individual responsibility for retirement funding and away from corporate pensions and government social security systems.
MFMN: My take on the international markets is that asset management companies serving them are mostly regional.
Servison: I think that is true. I would say in almost all of these markets, most of the dominant players are local-based financial institutions. You have a handful of players who have developed not a global but certainly a transnational franchise.
MFMN: Do you expect that financial services consolidation will lead to more international efforts or more international asset management companies?
Servison: I think so. Certainly Zurich Financial [Services of Zurich] has been aggressive about buying businesses in the United States and presumably we will see other major European banks that have always been players in the asset management business trying to globalize their franchise.
MFMN: What are the obvious obstacles for a U.S. company trying to expand abroad?
Servison: There are a number of obstacles. Generally you have to create special products in each of these markets, so that means setting up new funds. Nobody today has a global mutual fund transfer agent system so you have to run different systems in different markets and understand how to run those different systems. Trying to link those systems together into a global network is tricky.
Hiring local people and then trying to merge people who understand the local market with the culture and business philosophy of the parent company is always a big challenge. And it's expensive to get set up.
MFMN: With those obstacles, is international expansion particularly difficult for smaller companies?
Servison: I think it is. Some of these markets are extremely expensive to do business in, much more expensive than Boston or New York. And coming in as a foreigner, one of your big obstacles early on is getting qualified people because successful people look at a foreigner and say "Gee they may or may not make it. Why would I risk my career with an unproven startup? They may be successful in the U.S. or in Great Britain but will they be successful in Tokyo or in Frankfurt?" Good people don't necessarily want to take those risks.
MFMN: With those obstacles, do companies need to view international expansion as a loss leader for some period of time?
Servison: I think at best you're going to lose money for three to five years and in some of the bigger markets, more likely five to seven years.
MFMN: Nevertheless, international expansion is the place to go, at least for larger mutual fund companies?
Servison: I think everybody is of the opinion that the rate of growth in the U.S. mutual fund industry is slowing quite significantly and at best will grow in the next 10 years at half the rate of the past 10 years. That's still decent growth. You're probably talking growth in the most optimistic scenario averaging 10 or 12 percent a year. That's not bad, but it's not the 25 to 30 percent growth that we've enjoyed as an industry in the 1990s. The market is very crowded in the U.S. You're beginning to see pricing pressures in segments of the market.
You've got a scenario now where the top 10 firms account for about 99 percent of all new cash flow coming into the industry. A lot of firms have had growth because of rising stock prices, not because of cash flow. If the market were to turn down for any sustained period of time, those firms would see pretty significant declines in revenues.
You're seeing the market become dominated by a few firms. You're seeing rates of growth slow. You're seeing some pricing pressures beginning to crop in. So it's not going to be as easy to make money and grow rapidly as it has been in the past.
On the other hand, you look at some of these markets in Europe and in Asia and they look very similar to what you saw here in the U.S. in the late 70's and early 80's. People are asking themselves if these markets are going to repeat what we did here in the U.S. between 1980 and 2000, an incredible 20-year period. I think that there's a chance that a couple of those markets might have a similar pace over the next 10 to 20 years.
How big a piece of that action a foreign firm can get, I don't think any of us really knows. We certainly bring some expertise that helps and yet we bring some of the handicaps going against local competition.
MFMN: How much of a handicap is the lack of cultural familiarity?
Servison: Understanding the culture of a particular country I think is one of the big challenges. We've found it very tricky to blend the local market custom with a company's culture. Each company has a way they want to do business. You've got to adapt that in these various markets in getting the balance between expats, who know a company culture, and local people, who understand the local culture. Getting those two to marry in an effective way is a tricky thing to do.
MFMN: Is it easier to enter a foreign market by way of a joint venture?
Servison: It certainly has been a popular route to go for a lot of people but Kurt Cerulli, [whose mutual fund consulting firm in Boston tracks industry trends] in his latest report, predicted that at least in Japan, more than 90 percent of the joint ventures would fail and would not be around in five years. Again, joint ventures are tricky because you're merging two corporate cultures and two country cultures.
Whether the partners really have a synergistic fit, whether they really have common objectives, and whether you can develop an effective decision-making process, are all very tricky things. I think some of the joint ventures may work if they're well conceived. But I think a lot of times, if you're going to do it, you're better going in and doing it on your own. It certainly takes longer and is more expensive to do it that way. But in a number of cases, I think ultimately going in that way can be more successful.
MFMN: Isn't that the way Fidelity has done it in Japan, without a joint venturer?
Servison: That's right.
MFMN: You have linked up with other companies on the distribution side though.
Servison: We've done a shotgun approach to distribution. Currently, we sell our funds through 22 Japanese securities brokerage houses, 29 banks, four insurance companies and we have our own direct marketing activity. So we've got a very broad, diversified distribution strategy.
We're doing everything that we do in the U.S. It's just a smaller scale. We've got about 350 employees in Japan. We've got about 30,000 here in the U.S. We have our own back office. We've got our own telemarketing center. We've built our own transfer agent system. We've got our own systems people, our own trading desk, our own analysts, our own portfolio managers in Tokyo, our own sales staff calling on the various intermediaries.
MFMN: Have you found any surprising obstacles?
Servison: I wouldn't say that there's anything that caught us by surprise on the negative side. I think, frankly, we were surprised by how quickly we grew in Japan. We were also pleasantly surprised by how cooperative the government has been in the past few years.
MFMN: What are your assets under management?
Servison: We ended the year at $14.6 billion. We started last year at $4.4 billion so it was a year of tremendous growth for us.
MFMN: Was a lot of that market action?
Servison: Market action was a piece of it but we did almost $5 billion in net sales.
MFMN: Were there any distribution channels that dominated sales?
Servison: The Japanese brokers were the dominant channel last year. The banks - which just started in December of 1998, so they've only been at the business for 13 months - came on very, very strong in the fourth quarter. By the fourth quarter, the banks were accounting for almost 50 percent of our sales. So they're coming on very strong.
MFMN: What are the prospects for unified government regulation?
Servison: I don't think you're going to get any unified regulation in Asia. You certainly are beginning to see it in Europe because of the European currency union. That has helped. But unified regulation doesn't change culture and business traditions. You may have unified regulation that makes some things easier but my philosophy still is, "Think global. Act local."
Each of those countries has a very different local culture. The form of distribution, the type of funds investors buy, the state of knowledge about personal investing is tremendously different. When it comes down to product development, marketing strategy, distribution strategy, advertising, you still have to deal with the local culture in each of those countries.
MFMN: Are there differences in brand marketing from country to country?
Servison: It is not all that different. [But,] creative execution and the messages vary.