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Fund Companies Grapple with Tech Issues on International Expansion

US mutual fund companies contemplate distributing their funds in Europe.

With the advent of the Internet as a distribution vehicle, many fund companies have already, or are considering, distributing their mutual funds in Europe. The question of whether the market is ripe for U.S. mutual fund infiltration was a major topic of discussion at the National Investment Companies Services Association’s annual Operations conference in late February.

The issue of technology was raised both as a reason to distribute funds; as it is easier and less expensive to do so now with the Internet, and as a hindrance; as the European market uses systems that are different from those in the U.S.

There are two trains of thought on whether the market is ready. One is that the mutual fund investment boom that occurred in the U.S. is sure to follow in Europe, making it ripe for U.S. mutual fund distribution. “They argue that the U.S provides an appropriate model for predicting the future of the European fund markets,” says a representative at Sector Analysis in a session on Global Distribution: The Changing Landscape. However, he adds that, “Others believe just the opposite, that the U.S. fund industry is so different from European markets that it holds no bearing on predicting Europe’s future.”

Despite the dueling views, Sector’s studies show that, indeed, Europe is following in the footsteps of the U.S., as it is undergoing some of the same trends according to two thirds of the 19 measures it studied, which cite technology as a main factor with the emergence of Internet-driven sales. Other factors that back the consultancy’s views are: Europe has seen a shift of assets from deposits to funds, the market has seen growing press coverage leading to increased visibility of product, and Europe has had a sustained bull market which has seen growth since 1994. One of the main differences, however, is that in Europe most of the mutual funds are proprietary and are distributed through banks.

Sector Predicts Key Elements of the Landscape in Europe in 2005
• Fund distribution through bank branches will decline by 17% by 2005
• New channels will make up 15% of fund distribution by 2005
• New channels threaten the economics of retail banks
• Fund manufacturing and distribution will diverge
• Bank fund management skills will be tested
• A clear shift to non-proprietary funds
• Competitive environment:excellent news for new entrants
• Price will become a big buying driver
• Price pressures will help index funds
• More pricing models
• Brand strength will be a big issue
• Equity fund will be even more popular
• Pension related investing in funds will grow
• Foreign investing in funds will have grown
• Mutual fund growth will be at expense of bank deposits
• The industry will continue to concentrate
• Europe will increasingly become one market
Sector, however, says this will change. The rep predicts that the European proprietary fund domination will shrink, as it did in the U.S., and eventually pension plans will grow to become bigger buyers. And Europe will increasingly adopt a U.S. style range of pricing models, he says, (see chart for other key predictions). With these trends occurring, he believes that the European markets are ripe for U.S. mutual fund expansion.

Despite the bright picture suggesting that the market might be ready for U.S. fund “infiltration,” there are some pitfalls and technology is one of them. One panelist notes that the systems used abroad are very different from those in the U.S. and to distribute, fund companies would have to seriously access these systems, and ensure compatibility. Thomas Karol, U.S. Coordinator, Global Investment Management Servies, at Deloitte Touche Tohmatsu, emphasizes the importance of creating alliances, which would assist in understanding the systems and the clientele. Roger Servison, managing director and executive vice president of Fidelity Investments, which manages $150 billion in assets outside the U.S., also emphasized the importance of alliances. He pointed out, that in some markets, such as France, there might be some resistance to buying from U.S. financial services firms.

Servison adds that one of the major problems for mutual fund companies trying to reach other nations is that there are no global mutual fund transfer agency systems. He says, you need to learn how to operate with systems that are being used in all the different markets, which can be a major challenge.

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