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European Growth Has Stalled But Still Holds Promise

The mutual fund industry set its passionate sights on the European market in the 1990s, and a rash of acquisitions ensued.

But as the earnings of fund companies have been hammered during this bear market, expansion in the region has slowed. But industry projections would indicate that overlooking Europe would be a mistake. Cerulli Associates expects Europe's $3.5 trillion mutual fund industry to grow at a 14% average rate through the end of 2006 (see MFMN 10/2/02). This will surpass the projected global expansion rate of 10% and dwarf the cumulative aggregate growth rate of the U.S., which is expected to grow by 9%.

Magnus Spence, president of Sector Analysis, a mutual fund consultancy in London, recently spoke with Money Management Executive reporter Colin Nagy on the outlook for U.S. mutual fund companies already in or trying to make inroads into Europe.

Money Management Executive: How much has the mutual fund business grown in Europe over the past five years and how great a market share have American firms achieved in that time?

Spence: Well, I can't answer either of those questions. I'm going to tell you why I can't - but why I can answer a similar question.

First of all, we at Sector Analysis don't really present ourselves as measurers of the total mutual fund business. We measure what we think is a much more interesting subset of it, which is the third-party mutual fund business, often referred to in the States as the non-proprietary mutual fund business.

The reason why this is more interesting, we think, is because if, say, Deutsche Bank creates some product and then sells that to its own clients, other firms don't really get a chance at that. They can't realistically compete with this proprietary or in-house stream of business. So, we don't feel it's relevant, therefore, to start measuring the size of that market.

What's much more interesting is when, say, Deutsche Bank goes out and uses a third-party product. That's the point at which it's sort of an open market. And it's that business, that third-party business that we measure.

MME: So, proprietary banking channels aside - which have long been the dominant force in Europe and the reason why U.S. companies have not been able to make inroads in Europe - how has the third-party mutual fund business grown in Europe over the past five years?

Spence: In terms of dollars, we think that the third-party mutual fund business among the 10 biggest nations in Europe is now approximately $1 trillion, representing less than 20% of the market.

That has undoubtedly grown very significantly in the past five years. I don't have a figure for five years ago on a like-for-like basis, because five years ago, we were only looking at four countries rather than 10. So you'll have to forgive me if I can't give you a percentage growth.

But there has been very significant growth in that number in the past five years, no question, to reach this point that we're at now.

MME: Didn't proprietary funds used to dominate sales in the U.S., as well?

Spence: Yes. Financial Research Corp., on our request, once calculated that equivalent figure for the U.S. If my memory serves me right, they found it was approximately two-thirds non-proprietary, one-third proprietary, and they projected that non-proprietary funds would grow even further, reversing the trend of 15 years ago.

We think sales of non-proprietary funds in Europe, while less than 20% today, will follow the trend in the U.S.

MME: How great a market share have American firms achieved in Europe over the past 15 years?

Spence: Foreign firms represent about half of the third-party fund market in any given country, and American firms have a significant part of that half.

MME: Since growth expectations have not yet been met, should U.S. firms still look to the European market?

Spence: Up to the beginning of 2000, when we last made a serious wide-scale measure of this market, we had been seeing significant growth in third-party funds in what is commonly called "open architecture," or when both proprietary and third-party funds are sold. However, anecdotally and observing things since then, we can guess that there may have been some reversal of that situation.

The rumor that is making the rounds in Europe is open architecture is under significant strain at the moment.

MME: So, while there have been significant inroads by foreign firms to capture half of the 20% of non-proprietary funds, or approximately 10% of the market, you see that slipping.