U.S. Mutual Funds Aim for Europe
In the early 1980s, money market maven James Benham decided to go global. He opened an office in Luxembourg, went through the regulatory hoops, created a no-load U.S. Treasury bill fund and set out to sell it to retail customers in Europe the same way he sold money funds to customers in this country.
The fund was a flop.
Despite vigorous sales efforts and prospectuses in three languages, the fund never collected more than $4 million, and, after four years of frustration, Benham closed it down and returned the money to shareholders.
“It wasn’t credible, because it was no-load,” Benham said.
Since no-load funds are sold without commissions, Benham had no way of paying a bank or other distributor to sell the fund. And since no-load funds are almost unknown in Europe, they only made investors suspicious.
“If you don’t have a marketing partner and you want to go outside America, you’re going to stumble and fall,” said Benham, president of Benham Capital Management Co. in California.
Benham recalled his costly European excursion--$1 million before a tax writeoff--during the annual convention in Washington last week of the Investment Company Institute, the mutual fund trade association.
‘Go to Luxembourg’
Convention-goers were cheered to hear ICI Chairman Thomas R. Powers, head of the Criterion Funds, report that total industry assets have reached the $1-trillion mark--counting open-end and closed-end funds and unit trusts--one of several signs that the mutual fund industry survived and recovered from the 1987 market crash.
But when it comes to future growth, mutual fund executives are thinking in terms of global strategies. And with historic changes taking place in the European financial system, “Luxembourg Fever” was a lively topic among the 1,000 fund executives at the convention.
“Go to Luxembourg” is the byword for American firms that are looking to 1992, when trade barriers will come down all across Europe and the nations of the Common Market will operate under a common set of financial regulations. In fact, to be registered in one country after next October will be the same as having registered in all 12 nations.
The rush to Luxembourg by American financial institutions is being widely encouraged by officials of that small country of 350,000 people. Officials have made vigorous efforts to attract American investment companies by creating a minimum-tax environment and an otherwise comfortable atmosphere for corporate location. Luxembourg’s aim, in effect, is to become the Delaware of Europe.
Mutual fund executives are receptive to Luxembourg’s pitch, just as they were receptive to the idea that they eventually will be competing in the European market. But the sense at the ICI convention was that the mutual fund industry at the moment is like a race car driver who has one foot on the gas and one foot on the brake, revving his engine and inching toward the starting line for one of the biggest financial races in history.
If the experience of James Benham is any indication, the barriers to Americans grabbing a piece of the European investment market may go far deeper than laws and regulations that are to be simplified and unified under the 1992 process.
The difficulties reach into the cultural and ethical core of American and European business practices. Major differences are likely to continue to exist between the United States and Europe on the definition of what a mutual fund is, how they should be governed and whether a fund prospectus ought to spell out the meaning of corporate negligence.
In anticipation of 1992, Debra McGinty-Poteet, a vice president of Security Pacific National Bank’s investment group, recently spent a year getting approval in Luxembourg for several Security Pacific funds.
It was a process that involved the endless redrafting of the prospectus as it shuttled between bankers, lawyers and accountants on three continents--and then was delayed when Luxembourg advisers and officials went on vacation.
“There’s no sense of urgency,” complained McGinty-Poteet, whose funds are being sold through European banks.
As things stand, legal and tax issues effectively bar mutual funds on both sides of the Atlantic from setting up retail operations on the other side of the ocean.
Doubters think the problems that must be solved to create true reciprocity are just too tough--and complex--to permit any real speed.
For instance, a key reason that Europeans cannot sell their funds in this country is that they simply do not meet the standards of investor protection and accounting practices that are demanded by U.S. laws and the Securities and Exchange Commission. But without that kind of reciprocity, it is unlikely that the Europeans will allow U.S. mutual funds free rein to compete overseas.
Going in the other direction, there are several reasons that Americans cannot sell their funds in Europe. One big obstacle is the U.S. tax code, which requires, among other things, that U.S. funds pay out their capital gains each year.
European investors would likely be disadvantaged by such a practice, and U.S. funds would find it difficult to compete if their European offerings were required to stick by those rules.
Michael Lipper, the mutual fund expert, thinks that for many reasons it will be difficult for U.S. firms to crack the European market.
“I don’t see anybody willing to spend the money to build a distribution system in another country,” said Lipper, who is often asked for advice by fund officials on both sides of the Atlantic.
Because of the cost of building an international sales force, Lipper said he does not expect to see much cross-border movement of funds. What he does foresee is a considerable movement of investment expertise.
For example, Europeans could come to the investment managers of the Fidelity or Vanguard funds and contract with them to manage and invest the money raised from European investors. The Americans would neither own nor control the funds, Lipper said, but their investment expertise and track record would become a key ingredient in selling the funds.
“That’s how it is going to play out,” Lipper predicted.
Another way it could play out would be for funds on both continents to engage in joint ventures. This would permit a U.S. company, for instance, to clone one of its popular U.S. funds and register it in Europe, where it would be sold by a European company. The money raised then would be managed by the American investment adviser.
In an industry in which profits are made from commissions for selling shares and from fees for managing money, each partner would have a motivation for making the venture succeed.
Huge Market
One of those who see the potential for such joint ventures and who has devoted considerable time to clearing away the obstacles to doing business in Europe, is David Silver, president of the Investment Company Institute.
“While views differ as to how rapidly European integration will actually occur,” Silver told ICI members, “we are determined that our industry will not be left behind or shut out.”
It was, indeed, difficult to find a mutual fund executive at last week’s gathering who was not interested in doing business in Europe, with its 320 million consumers and billions of dollars in savings.
“There is an opportunity in Europe, but it will be slow in arriving,” said C. Herbert Emilson, president of the Colonial Group of Boston, who just returned from Europe. “It will take millions of dollars and a patient attitude.” As a relatively small fund family--only $10 billion--Colonial was exploring the idea of a joint venture but came to no conclusion, Emilson said.
One company that has already established a beachhead in Europe has been the Pioneer Fund, which since 1972 has sold Pioneer II, a growth and income fund, through dealers in West Germany. Pioneer II apparently is one of the few U.S. funds registered in West Germany, and partly on the strength of its overseas sales, it has grown to a $4-billion fund.
