The Euro Has Yet to Unify Europe
April 5, 1999
NEW YORK - The Euro, Europe's single currency that was meant to unite 11 countries into a single financial market as of January 1, has changed portfolio managers' strategies but has had negligible affect on unifying Europe's $2 trillion mutual fund business.
That was the consensus of panelists at a symposium here last week on the Global Money Management Industry sponsored by Putnam, Lovell, de Guardiola & Thornton of San Francisco.
Each European country continues to have separate and distinct mutual fund distribution channels, speakers said. In addition, retail and institutional investors' appetites for mutual funds vary widely from country to country, they said. And the look, feel and presentation of the products have to be different in each culture, they said.
Bernard Fauche, the director of Euro equities for CDC Asset Management of Paris, said his company's portfolio managers have shifted their asset allocation focus away from country, sector and then stock selection to an approach that now emphasizes sector allocation first. CDC's portfolio managers then look at stock selection, and finally, country allocation.
"In a Eurozone' where there is one currency, stock valuations move increasingly with their industry peers, and industry influences on price become more important," Fauche said.
However, that investment approach is clearly not being taken by most European investors. Different appetites for investment products continue to exist in each country in Europe.
"The country factor is still very much alive and we are just at the beginning of the rebalancing process," Fauche said.
"The shift from country to industry segmentation has yet to really take place," said Julia Hobart, a principal with William M. Mercer Ltd. of London. "A pan-European mutual fund market is largely still a myth."
Highly fragmented distribution systems, complicated tax structures and the need to register funds in each country are also deterrents to selling mutual funds across Europe, the panelists said.
"Just because there is a Euro doesn't mean there's a single passport for a mutual fund company to do business throughout Europe," said Richard Wohanka, head of global asset management for West LB Asset Management, London. "Registering a fund in one country isn't enough. You need approval in each country. It's a lengthy and expensive process."
Taxation is also complicated on both the retail and the institutional sides, Wohanka said.
"You need patience and a Kafka-esque ability to deal with bureaucracy," he said.
Europe is further fragmented because there are no known mutual fund brands across Europe, said Hobart. Distribution systems that transcend borders still have to be developed, she said.
"No bank is powerful outside its own market," Wohanka said.
To break into the market, it is practically a prerequisite for a U.S. mutual fund company to find a European partner with strong distribution channels, panelists said.
Rodney Schwartz, the founder of Catalyst Fund Management & Research of London, said a firm might be able to build a distribution network by buying an asset management company. But, it makes better sense to work with partners, he said.
Because those who control distribution channels now are in such enviable positions in Europe, an outside mutual fund company must have something especially valuable to bring to a partnership, Schwartz said. A company could make itself especially valuable by providing exceptional customer support, marketing information, portfolio modeling, back-office technology and transaction execution systems, he said.
There are bright spots for U.S. mutual fund companies looking to do business in Europe, the panelists said. The bond market, which is currently government-led and not highly developed, is one area in which U.S. mutual fund companies could excel, said Hobart.
"The European bond markets will become more like the U.S. markets with breadth, depth and sophistication," she said.
Wohanka of West LB said there are great opportunities for mortgage-based assets, which are "not sophisticated" in Europe.
Equity mutual funds will take a longer time to take hold, Hobart said. But once European companies begin consolidating, equity mutual funds will gain greater popularity, she said.