Supermarkets Take Root in the U.K.
February 21, 2000
Two U.S. companies are preparing to export one of the mutual fund industry's most widely recognized innovations - the mutual fund supermarket - to the United Kingdom.
Charles Schwab & Co. of San Francisco and Fidelity Investments of Boston both are planning to introduce mutual fund supermarkets in the U.K. before Dec. 31, according to executives at the firms. The companies' initiatives will be among the first of perhaps 10 supermarkets that are expected to go online in the U.K. in the next 18 months, according to mutual fund and supermarket executives and consultants.
Some financial institutions are offering mutual funds for sale online in the U.K. now. The existing websites, however, are more limited in scope than the mutual fund supermarkets that Schwab first began popularizing in the U.S. in 1984, executives from Schwab, Fidelity and other industry observers say.
"The supermarket, although a lot of people talk as if it exists here, hasn't arrived yet," said Will Kinsman, senior marketing manager for Charles Schwab Europe of London. "In the U.K., there is no supermarket as you know it in the U.S."
That, it seems, is about to change. Schwab and Fidelity both expect to include funds from roughly 10 fund families in their supermarkets. Although details remain sketchy, Schwab expects it will offer 50 to 100 funds through its supermarket. Fidelity says investors will be able to choose from about 400 funds through its supermarket.
Those numbers are modest in comparison to the U.S. fund supermarkets today. Schwab's mutual fund supermarket, for example, includes more than 1,700 funds. But when OneSource, Schwab's no-transaction fee supermarket began in 1992, its numbers were not far different from what the first U.K. supermarkets will have. OneSource started with 80 funds from eight fund families, a Schwab spokesperson said.
Activity in supermarkets at first is expected to be light, but executives are convinced it will grow thanks to improvements in technology and an increasing interest on the part of U.K. residents in investing in equity funds, executives said.
"The whole equity mutual fund revolution hasn't happened here yet," said Gareth Thompson, finance director for Investia Ltd. of London, a technology company serving the mutual fund industry. "It's like going into a time warp."
Financial Research Corp. of Boston, a mutual fund tracking and consulting firm, made the same analogy in a report it issued last month. FRC likened the current market in Europe to that of the U.S. in the mid 1980s. European mutual fund distribution now is approximately 75 percent based on the sale of proprietary products, said Charlie Bevis, an analyst for FRC. Banks alone account for about 77 percent of fund distribution in Europe, with insurers accounting for most of the balance, Bevis said.
In 10 years, FRC expects proprietary sales will account for only 40 percent of the market. Fund supermarket sales, now nonexistent, should constitute perhaps five percent of fund sales in five years, Bevis said.
The dominance of proprietary fund sales is attributable in part to the absence of advanced securities technology, according to fund executives and consultants. In the U.K. and continental Europe, much of the book-keeping and trade settlement that supports mutual fund sales and redemptions is done manually, executives said. Banks have sold only their own funds in part because the lack of an industry-wide settlement system made selling outside funds difficult, executives said.
The UK's mutual fund - or unit trust - industry is combating that settlement problem. This summer, a U.K. fund industry trade group, the Association of Unit Trusts and Investment Funds of London, is expected to take the first step toward automating the securities trading systems that make rapid settlement of fund transactions possible. The automated system, known as the Electronic Message Exchange, ultimately will automate a clearing and settlement process that now often is done manually, according to fund executives and consultants.
"That's a very big development for us because we know that the industry is moving into the 20th century, if not the 21st century," said Richard Wastcoat, a managing director for Fidelity in London.
Technology is not the only change that is making supermarkets possible in the U.K. Investors there and in continental Europe increasingly are seeking choice from those who sell funds, according to executives. In continental Europe, for example, some banks that sell funds now are seeking out widely-recognized funds to sell, said Stanley Bronisz, managing director for Pioneer Fonds Marketing of Munich, part of the Pioneer Management Corp. of Boston. The banks want to offer recognized funds along with their own proprietary funds, Bronisz said.
Now banks are saying, "we want a piece of that action too," Bronisz said. "They recognize the draw of it."
There is at least one additional hurdle for supermarkets, however. In the U.K and continental Europe, direct sales make up a small piece of mutual fund sales, executives said. FRC estimated that the direct market constitutes only about one percent of sales, Bevis said. Supermarkets must change that, at least to the point that there is sufficient interest to justify the expense of building a fund supermarket.
"The no-load concept has not really arrived," Kinsman said.
Nevertheless, Schwab and Fidelity have little doubt that there is an appetite for sales over the Internet. There was a dramatic increase in online trading last year in the U.K, Kinsman said. That was driven by strong equity markets, especially for technology companies, he said.
Fidelity believes that, with improved technology, the spread of the Internet and existing demographics, the market for a mutual fund supermarket will be sufficient to make the business worthwhile, Wastcoat said.
"I think the outlook is very bright," Wastcoat said.