Currently, mutual fund supermarkets in Europe represent only about one percent of net new flows into European funds. However, as the European fund industry continues to develop, fund supermarkets there will become a crucial distribution channel, according to a report that will be released later this month by the London office of Cerulli Associates of Boston.
"We analyzed the main supermarkets in Europe and we found that from the flows that they have at the moment, and comparing those flows with the forecast we have of the mutual fund market in the future, we estimate that in Europe, flows through fund supermarkets will represent around 25 percent of all new flows by 2005," said Stephanie Bologna, an analyst at Cerulli.
In addition to results from surveys of 34 of the top European supermarkets, the report is based on interviews with fund executives, regulators, data vendors, and industry analysts, according to Cerulli.
For the next five years, the mutual fund industry in Europe will have the greatest potential for expansion for asset management firms worldwide, according to the report. Cerulli projects that assets will grow at a rate of 14 percent per year, which would outpace its expectations for the U.S. market over the same period. European fund assets are expected to double in the period.
During the last four years ending in 2000, European funds have had average net flows of about $280 billion per year, or compound annual growth rates of 23 percent, compared to U.S. funds which averaged about $373 billion and compound annual growth rates of 20 percent, over the same period, according to the report. Mutual funds in Europe have gained a great deal of popularity recently and combined with current fears of inadequate retirement provisions by local governments and changing distribution dynamics, that market has enormous potential to grow, according to the report.
Increasing equity fund assets will be a major driver of the industry growth, according to the report. The percentage of European fund assets in equity funds grew from 27 percent in 1996 to 42 percent today, according to Cerulli. That percentage will continue to rise and should reach 58 percent by 2005, according to the report.
"This shift will be particularly dramatic in some of the larger locally domiciled marketplaces, such as France and Italy, while far less dramatic in equity-heavy countries like the U.K., Sweden and Germany," according to the report. "This is partly due to supply: deeper and broader equity markets have allowed vendors to roll out a vast number of specialized equity products, helping to maintain strong product proliferation rates throughout Europe."
Fund supermarkets will play a significant role in that growth, according to Cerulli. That is in part because independent financial advisors are becoming increasingly popular as additional products are introduced, according to Cerulli. Supermarkets, having had meager success in selling directly to consumers, are beginning to take advantage of this movement towards independent financial advisors, according to the report.
"Of the models that we saw, there are many fund supermarkets which are going ... basically direct," said Bologna. "They're trying to get funds direct off the street into the supermarkets without the advice attached. The success rate [of that approach] is low because in Europe, people are still trying to familiarize themselves with investing in a mutual fund, let alone buying a mutual fund without some advice and definitely let alone buying a mutual fund off of an Internet platform. These aren't supermarkets like Schwab. These are very small outfits and there's still a big education process, which has to be developed. In the future, what we are seeing is that these fund supermarkets are now developing a business to business approach."
Independent financial advisors have begun to seek out supermarkets as a way to differentiate themselves because they can get tools to give advice based on a much wider array of products than one complex provides and it can be done both quickly and with reasonable cost, according to the report.
Supermarkets have begun to adopt the financial advisor platform as a means of getting in contact with consumers, according to Bologna. Once relationships with financial advisors are cemented, the supermarkets will promote their online businesses, something that has been very difficult so far, she said.
Another reason supermarkets will become a more significant distribution channel is that European investors are demanding increased product choice and an open architecture platform, both of which supermarkets are poised to offer, according to the report.
"European fund supermarkets are gravitating toward greater ranges of product choice, as the platforms seek to secure access to once and future top-performing funds in order to make sure their customers can always purchase best-of-breed product," according to the report. "Some 54 percent of mutual fund assets on fund supermarkets reside in platforms offering more than 3,500 funds."
Also, supermarkets are differentiating themselves by discounting or eliminating initial sales charges, which is something investors are paying more attention to, according to the report. Only about 23 percent of funds on European fund supermarkets still carry their full initial sales charges and about 44 percent are sold with discounted loads, according to the report.
However, the large market needed for a supermarket to be successful will make it difficult to dominate the fund market in Europe and will probably force consolidation in that area, according to Hans Fjarem, CEO of Morningstar Europe of London.
"To be able to survive as a supermarket, you have to have a huge audience," said Fjarem. "There will probably be few true supermarkets that will survive ... in the smaller local market. You have to think global. If you have the supermarket approach, you have to have a huge market to cover the cost. And for example, Sweden's a tough market to get into and there's been huge consolidation going on there."
Because of the scale necessary for successful supermarket operations, each major European fund management marketplace will only support two to four profitable supermarkets, according to the Cerulli report. However, consolidation beyond that is limited because of legal and consumer demand differences in each market, according to the report. Seven major European countries constitute the seven major marketplaces, according to Cerulli.
"[Cerulli] believes pan-European' fund supermarkets will resemble holding companies of locally domiciled platforms, sharing common infrastructure where possible - and likely relying on a core sets of UCITS domiciled in either of the pan-European hubs," according to the report. "But the legal structures will remain local - each platform's local face' will have to conform to local marketing and distribution regulations. Product demands differ from country to country, especially because tax breaks often apply to locally domiciled product. Straight-through processing is not yet a Europe-wide technological possibility. Advice needs differ from country to country, and regulatory differences make it difficult to imagine a platform effortlessly able to offer consolidated reports in several countries."