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Europe to Leapfrog Fund Growth in the United States


The European mutual fund industry is expanding at a faster pace than the global fund rate and the U.S. fund tempo, according to a recent study.

The report, published in Cerulli Associates of Boston's CA Global Update, says Europe's $3.5 trillion mutual fund industry will expand at a compound annual growth rate of around 14% between 2002 and 2006. This will surpass the projected global expansion rate of 10% and dwarf the cumulative aggregate growth rate of the U.S., which is expected at 9%, according to the 400-page report.

Designed to assess the retail and institutional fund management marketplaces in 16 countries worldwide, the report outlines many reasons why different markets are growing in fits and starts. The reasons vary, some because of fundamental structuring, while others have to deal with local political and social issues. Still others are products of shorter-term implications, or how their respective economic markets are dealing with the current downslide in the global community.

First Contraction Ever

The fund industry, in general, has been sinking along with the rest of the global economy. Assets under management worldwide for the industry, as estimated by CA, fell to $38.2 trillion at the end of June, down from $39.3 trillion at the end of 2000. The firm claims this is the first time in recent memory that the worldwide investment management industry contracted.

However, Europe has been far ahead of other parts of the world in recent history. While its collective assets have grown 10% annually since the end of 1997, expansion by European fund managers into other parts of the world has only grown 6%. In the U.S., European managers have only experienced 5% growth.

Growth catalysts should bring Europe's mutual funds to $6.2 trillion by the end of 2006, according to the report.

Furthermore, European vehicles have accounted for 42% of new net inflows into collective investment products around the world in 1999 and 2000, but Italian and Spanish redemptions dragged that number down to 26% last year.

CA, which put out its inaugural issue of CA Global Update recently, estimates that Europe has rebounded in the first half of 2002, maybe even as high as 60%.

There are a number of factors leading to Europe's growth rate, including a "savings gap," pension privatization, a growing equity culture, mass affluent wealth management solutions and tax efficiency.

The savings gap in the household balance sheet shows that Europeans have to invest in excess of $1.5 trillion in funds just to keep up with the proportion of mutual funds in personal financial assets in the U.S. The study also predicts that a number of European governments, now considering issues relating to pension privatization, will have no other choice but to create solutions based on individual retirement savings vehicles.

Shying Away From Stocks

Another factor is a growing equity culture in Europe that the bear market has hurt, but not destroyed. Additionally, the number of affluent has decreased since 1999, the height of the bull market, but portfolio management for these clients is getting more systemized and advisers are looking for more ways to invest more portfolios in less time. Mutual funds are providing a partial solution to this problem.

Another difference between the direction in the U.S. fund market and Europe's is tax efficiency. Tax efficiency remains concentrated in the fund structure in Europe, while the opposite is true in the U.S.

The report goes on to say that Cerulli expects the growth rate for the overall asset management marketplace in Europe to be 8% compounded annually, between 2002 and 2006, which would match the figure projected for the U.S. The reason CA expects them to be on a par is because it claims that Europe's mutual funds are counterbalanced by less-than-intriguing growth numbers from institutional mandates from occupational schemes.

As for the rest of the world, CA said it expects countries with the smallest fund management industries to experience the fastest growth rates. Asia's total assets under management, excluding Japan, will grow by 15% per year between 2002 and 2006. Latin America will boast a similar growth rate. Australia is expected to jump by 11% per year. However, each of these smaller industries will remain at less than $1 trillion by the end of 2006.