International markets need not be overly complicated, industry executives plan to tell their peers this week at a panel on selling funds overseas at the Investment Company Institute's Tax & Accounting Conference to be held in San Diego, Calif.
While most fund companies try to form joint ventures with indigenous firms or enter into new markets on their own, there are other alternatives, said Robert Leach, controller of American Century Investment Management of Kansas City, Mo., in an interview prior to the conference. Leach is scheduled to speak on the panel.
One of the easiest but least glamorous ways to enter a foreign market is to sub-advise funds, Leach said.
"It does not have your name on it, but you get sub-advisory fees" and gain critical contacts, Leach said. American Century has operated since the early 1990s in Europe and Japan as a sub-adviser and is now planning to introduce its own brand name in these markets, Leach said.
Fund companies can also turn to a global distributor, such as Merrill Lynch Asset Management of New York, he said.
"The toughest route is to build it yourself, whether you are building retail offices or acquiring a large asset manager," Leach said.
He also said aligning with a service company that is well-connected with distributors is critical and urged fund companies planning to do business abroad to thoroughly research the clout of potential partners.
"There are only 30 to 40 providers in each location, so it is a pretty small industry in each of the main domiciles and it is easy to read up on these companies," Leach said.
At the conference, Robert Grohowski, assistant counsel at the Investment Company Institute, plans to enumerate laws in Japan and Australia that make these countries the most conducive for U.S. firms selling funds overseas. Other foreign countries have a myriad of tax and legal restrictions that make them more difficult to do business in, Grohowski said in an interview.
"In Argentina, for instance, 75 percent of a fund's portfolio has to be locally invested, so that makes it very unattractive to a U.S. fund company," Grohowski said.
Australia recently amended its tax rules so that Australian investors in U.S. investment companies will no longer be taxed for unrealized gains, he said.
"This is very good news for U.S. fund companies," he said.
However, in spite of the gradual easing of distribution channels and legal and accounting requirements abroad, the Internal Revenue Service will soon require more paperwork from U.S. fund companies selling funds abroad, said Chip Collins, national director of the information reporting practice of KPMG of New York.
Beginning in January, 2001, the IRS will require foreign investors in a U.S. fund to send copies of their local tax filings to prove their foreign residency and, therefore, their qualification for lower capital gains taxes as non-U.S. residents. Previously, the IRS would accept mailing address lists from a mutual fund company as proof of the residency of its foreign investors, Collins said. The U.S. imposes only a 15 percent capital gains tax on foreign investors in 50 countries with which it has a treaty agreement, he said. That tax is about half of the usual 30 percent assessed on investors in countries with which the U.S. does not have such a treaty, Collins said.
The forms will also be required of a foreign bank or intermediary that sells U.S. funds to investors, he said.
The new foreign shareholder status forms "are extremely complicated and sure to result in significant confusion from shareholders," Collins said. "It is a lot of paperwork - not a pretty picture."