International Markets Said to be Rewarding
February 21, 2000
Roger T. Servison is managing director and executive vice president of Fidelity Investments of Boston and president of Fidelity Investments Brokerage Services Japan. Servison will discuss globalization in the mutual fund industry at The National Investment Company Service Association's operations conference this week in Miami. Servison recently discussed the benefits and difficulties of trying to expand fund businesses abroad with Mutual Fund Market News reporter Mike Garrity. An edited account of their conversation follows.
MFMN: Are there particular regions internationally in which you expect the mutual fund industry is most likely to grow?
Servison: I think the two regions that have the most promise are Asia and continental Europe.
MFMN: Anything in particular that you attribute that to?
Servison: I attribute that to a couple of things - economic conditions, population demographics and the need to shift toward more individual responsibility for retirement funding and away from corporate pensions and government social security systems.
MFMN: My take on the international markets is that asset management companies serving them are mostly regional.
Servison: I think that is true. I would say in almost all of these markets, most of the dominant players are local-based financial institutions. You have a handful of players who have developed not a global but certainly a transnational franchise.
MFMN: Do you expect that financial services consolidation will lead to more international efforts or more international asset management companies?
Servison: I think so. Certainly Zurich Financial [Services of Zurich] has been aggressive about buying businesses in the United States and presumably we will see other major European banks that have always been players in the asset management business trying to globalize their franchise.
MFMN: What are the obvious obstacles for a U.S. company trying to expand abroad?
Servison: There are a number of obstacles. Generally you have to create special products in each of these markets, so that means setting up new funds. Nobody today has a global mutual fund transfer agent system so you have to run different systems in different markets and understand how to run those different systems. Trying to link those systems together into a global network is tricky.
Hiring local people and then trying to merge people who understand the local market with the culture and business philosophy of the parent company is always a big challenge. And it's expensive to get set up.
MFMN: With those obstacles, is international expansion particularly difficult for smaller companies?
Servison: I think it is. Some of these markets are extremely expensive to do business in, much more expensive than Boston or New York. And coming in as a foreigner, one of your big obstacles early on is getting qualified people because successful people look at a foreigner and say "Gee they may or may not make it. Why would I risk my career with an unproven startup? They may be successful in the U.S. or in Great Britain but will they be successful in Tokyo or in Frankfurt?" Good people don't necessarily want to take those risks.
MFMN: With those obstacles, do companies need to view international expansion as a loss leader for some period of time?
Servison: I think at best you're going to lose money for three to five years and in some of the bigger markets, more likely five to seven years.
MFMN: Nevertheless, international expansion is the place to go, at least for larger mutual fund companies?
Servison: I think everybody is of the opinion that the rate of growth in the U.S. mutual fund industry is slowing quite significantly and at best will grow in the next 10 years at half the rate of the past 10 years. That's still decent growth. You're probably talking growth in the most optimistic scenario averaging 10 or 12 percent a year. That's not bad, but it's not the 25 to 30 percent growth that we've enjoyed as an industry in the 1990s. The market is very crowded in the U.S. You're beginning to see pricing pressures in segments of the market.
You've got a scenario now where the top 10 firms account for about 99 percent of all new cash flow coming into the industry. A lot of firms have had growth because of rising stock prices, not because of cash flow. If the market were to turn down for any sustained period of time, those firms would see pretty significant declines in revenues.
You're seeing the market become dominated by a few firms. You're seeing rates of growth slow. You're seeing some pricing pressures beginning to crop in. So it's not going to be as easy to make money and grow rapidly as it has been in the past.