Promise Is in Europe, Not Japan, Study Says
May 10, 1999
While global asset managers have rushed to build footholds in Japan, a new report suggests that with a $5 trillion pool of retail and retirement fund assets, Europe should be considered the most promising fund management marketplace outside the United States. The report, "Global Asset Gathering Strategies, Volume II: Country Profiles," was written by Cerulli Associates of Boston.
Much of the recent rise in European managed assets has been fueled by the explosive growth in the Italian and Spanish mutual fund marketplaces and the expansion of the British pension fund industry, the report said. Also, with low interest rates reducing bond returns, equities and equity funds have become more attractive to European investors who have traditionally preferred fixed-income investments. In fact, Cerulli Associates estimates that retail and retirement fund assets in Europe will exceed $7 trillion by 2002.
While competition is stiff today among Europe's many asset mangers, foreign fund companies with good performance records will see increased opportunities throughout the region over the next four years, Cerulli said. Product proliferation and an increase in sources for fund performance data will slowly turn European investors into more choosy shoppers who will seek products from multiple vendors, some of them foreign, the report said.
The 400-plus page study of 30 countries also outlines, on a country by country basis, roadblocks foreign fund companies may encounter in their expansion efforts. In addition, it provides country-specific market entry strategies that fund managers have deployed across the globe.
Chief among the hurdles for foreign managers to clear is managing the significant expense of distribution in Europe. Another potential stumbling block is that it is very difficult for fund companies to create a pan-European marketing strategy, the report said.
"Each country is different, primarily from tax and legislation standpoints, but there are also significant cultural differences," said Ben Phillips, a consultant at Cerulli Associates, in an interview. "That forces a foreign fund company to use a degree of customized marketing. Fund companies will really have to choose their battle fields."
Italy and Spain are good choices for expansion for foreign fund companies, with Germany running a distant third, the report said.
"In Italy and Spain, distribution seems to be very fragmented and that somewhat eases foreign entry," said Phillips. "The main roadblock in Germany is that there are huge banks that maintain fairly tight control of distribution and they will not be willing to give that control up. We think that the German banks will eventually ease up and that will open up distribution channels for funds managed by foreign managers, but it will be a more difficult road than in Italy or Spain."
While Japan holds enormous promise, the country remains a difficult marketplace, the report said. Although, in theory, a critical underfunding of pensions coupled with the largest pool of personal savings outside the U.S. - $11 trillion - should make Japan a gold mine for both domestic and foreign fund managers, the reality is far more complex, the report said.
Japanese investors remain very risk averse. Convincing the Japanese to move their savings out of bank deposits and into mutual funds will require concerted educational efforts from foreign fund companies, the report said.
"Everyone talks about the $11 trillion in personal savings in Japan," Phillips said. "What's a lesser known fact is only three to four percent has been placed into mutual funds. Pulling more of that money into mutual funds is going to be very difficult. In fact, from 1994 to 1998, the Japanese mutual fund industry actually shrunk by a few billion - and if you go back to 1989, it actually shrunk more."
Distribution costs are also high in Japan and management fees are currently very thin, especially in the institutional segment.
The report concludes that attracting assets in Japan will be more difficult than attracting assets in Europe.
"If foreign fund companies want to be profitable faster, they should consider Europe over Japan," said Phillips. "In the long run, Japan could be a bonanza, but it won't be that without a lot of hard work and a lot of time. Only asset managers who understand that the Japanese market requires a long-term investment will be profitable."