When Sam Mitchell-Ines, a 46-year-old communications consultant in London, comes home from work in the evening, he goes straight to his Apple computer to indulge in his latest nocturnal passion: playing the stock market. In the year since he began buying shares, he has racked up a three-figure return. His portfolio consists mostly of companies offering Internet encryption technology, an industry he follows closely. But he also made a tidy sum from a deftly timed first-quarter move into such beat-up Old Economy stocks as U.K. brewer Scottish & Newcastle.
Like many of his friends, Mitchell-Ines wants to make sure that Europe’s economic growth and healthy stock markets have a direct impact on his personal wealth. And the electronic service he uses, E*Trade, makes investing seductively simple. “I used to telephone brokers, but the ability to trade and research at home in my own time is particularly attractive,” he says. “Investing online is trouble-free and quick. Best of all, it is supported with a wealth of information.”
Mitchell-Ines and millions like him present both the biggest opportunity and the greatest threat to financial services providers doing business in Europe. Their hunger for stocks is driving feverish growth in equity mutual funds and direct share ownership. But because they aren’t tied to traditional distribution channels, they are forcing banks, insurers, brokerages and asset managers to rethink time-honored sales and marketing strategies. These institutions are frantically building, buying and partnering in a race to get their products to the people. Will the traditional financial services outlets adapt fast enough to hold on to a surging marketplace? Will an outsider like Charles Schwab & Co. or Fidelity Investments grab a big piece of the business? Or will a European electronic upstart rise to dominate?
Equity culture has come to the Old World at last - but not in the same way it came to the U.S. Mutual fund ownership skyrocketed in the U.S. after 1987, when the tax-favored 401(k) retirement plans enacted by Congress to supplement Social Security and to replace dwindling corporate pensions took effect. Employees had it drummed into them that over a long time horizon, stocks outperform other investments, and they clamored for 401(k) funds that channeled their money into equities. Then, during the 1990s, low interest rates and the Internet-driven information explosion turned more and more investors into individual stock pickers.
Different forces are at work in Europe. For one thing, pension reform remains uncharted territory in most countries, where government-run, pay-as-you-go systems are still politically sacrosanct. So Europeans aren’t flocking to the stock markets because they are worried about dying broke and hungry. Instead, they see share ownership as a way of participating in their gradually liberalizing economies. As companies get serious about profitability and governments privatize and deregulate key industries, investors want to reap the benefits. In addition, many countries lowered short-term interest rates to enter the European monetary union in 1999. That has shrunk the appeal of savings accounts and fixed-income investments.
But Europe’s investment environment can be a hostile one for the companies seeking to satisfy consumers’ appetite for equities. With no Glass-Steagall-type fire wall between investment banking and commercial banking, the Continent’s so-called universal banks are currently the main purveyors of securities and mutual funds. In 1999 bank branches were responsible for 74 percent of mutual fund sales to Europeans, according to London-based fund consulting firm Sector Analysis. In the U.S., by contrast, most fund customers shop through discount brokerages like Schwab or fund giants like Fidelity.
And, until recently, European banks rarely pushed products other than their own. In France and Germany most still sell in-house fund brands exclusively. Fund supermarkets, including Citigroup’s CitiChoice and the U.K.'s Egg Intermediation, are making inroads, and the Internet allows asset-management firms to target young, wired investors directly. Still, Europeans in the market for a mutual fund have little information to help them navigate the thousands of choices. For the vast majority, visiting the neighborhood bank branch seems the safest and simplest route. Until Europe’s big financial institutions begin offering a wide range of third-party products, independent fund managers will fight an uphill battle for retail assets.
Another hurdle for financial services providers is that despite monetary union, Europe remains a market of markets. To be sure, 11 of the European Union’s 16 countries now denominate all financial transactions in euros rather than in local currencies. But they retain their own securities laws and settlement systems. Even where regulatory barriers are coming down, Europeans show strong preferences for home-country products and familiar names.
They also have investment idiosyncracies that can’t always be explained and that can cause headaches for marketers. Italians, for instance, refuse to buy products with front-end loads, but will pay relatively high management fees. So mutual funds that want to sell in Italy must create a separate share class if they want to win customers. “We have reengineered our whole strategy,” says Jill Paitchel, head of retail at Citigroup’s SSB Citi Asset Management Group, which has $370 billion under management worldwide. “We originally thought it would be possible to base most of the infrastructure for our European efforts in London. We have now adopted the model of having local business managers.”
The grail for SSB Citi and its rivals is a flood of retail investment representing decades of pent-up demand. European mutual fund assets now top $3.5 trillion, more than twice what they were just four years ago, according to Schroder Salomon Smith Barney. Salomon predicts that at current growth rates the total will be more than $5 trillion by the end of 2002.
About $150 billion has flowed into the coffers of European equity mutual funds in the past 12 months alone. Germany saw 3.2 million new fund investors (a 70 percent increase) in the first six months of this year, J.P. Morgan figures indicate. And with $501 billion in assets, France now ranks third in the world in terms of mutual fund assets under management, after the U.S. and Luxembourg.
Besides plowing their savings into funds, Europeans are beginning to get the hang of stock picking. Direct share ownership by investors in Finland (20 percent of individuals), Ireland (20 percent) and the U.K. (25 percent) now outstrips that in the U.S. (13 percent). In the first half of 2000, the number of retail shareholders in Germany grew by 25 percent, to 6 million, or 7 percent of individuals, while France saw the first increase in a decade as the number of shareholders grew from 5.2 million to 5.8 million, or 10 percent of individuals.
For continental Europe, these millions add up to a revolution. Twenty years ago, stock ownership of any kind was confined to a tiny corporate elite. Most countries had no insider-trading laws. The equity markets were considered high-risk financial playgrounds for institutions and rich executives, so individual investors stuck with savings instruments or, if they were really savvy, AAA-rated bonds from blue-chip companies. Now it’s not uncommon to hear German grandmothers swapping stock tips over their afternoon coffee and cake.
Yet Europe’s retail revolution is probably just beginning. If the socialist governments of France, Germany and Italy finally embark on pension reform and shift even part of the burden of retirement funding to the private sector, trillions more euros could enter the mutual fund market. One yardstick of future growth: Total U.S. assets invested in mutual funds amounts to 57 percent of gross domestic product, compared with 23 percent in Europe. About 50 percent of U.S. households have some exposure to mutual funds, compared with 15 percent or so in Europe, according to the Brussels-based Fédération Européenne des Fonds et Sociétés d’Investissement. Private pensions would mean a bonanza for fund providers on the Continent.
So far, however, the soaring fund flows and rising direct investment are coming mostly from individuals like Mitchell-Ines, eager to boost their net worth as conveniently as possible. To reach such customers, says Richard Garland, chief executive of London-based Janus International, a subsidiary of U.S. mutual fund giant Janus, finding the right distribution channel is more important than promoting the product itself.
“I went to the distributors first,” he says, describing how Janus launched its initial attack on non-U.S. markets in December 1998. “Specifically, I went to see the private banking division of Merrill Lynch and said, ‘We want to build European product around your distribution channel.’ We are now the third-biggest provider in that channel.”
Meanwhile, Garland has been building contacts with local distributors, and he now employs full-time sales forces in Germany and Italy. Last year the firm launched Janus World Funds in Dublin. Among the ten funds it offers are flagship products of its parent, such as Janus Twenty, plus some funds designed especially for European investors. As a result, Janus has won $2.5 billion worth of European assets.
But breaking into European distribution channels is tough. For instance, many big German banks and insurers have paid top dollar to acquire asset management companies in the past few years, trying to boost margins and improve their business mix. Deutsche Bank bought Morgan Grenfell; Dresdner Bank snapped up Thornton Management, Kleinwort Benson and RCM Capital; Commerzbank acquired Jupiter and Montgomery Asset Management; and last October insurer Allianz bought Pimco. The logic behind these alliances: using the German institutions’ extensive branch networks to sell well-known, high-margin fund brands. Independent asset managers are seen as interlopers.
Finding a distribution partner in France is even harder. While Germany has a developed network of independent financial advisers, and mutual societies and the Landesbanken and other savings institutions offer some competition to the big banks, BNP-Paribas, Société Générale and Crédit Lyonnais dominate the French fund market. The country’s largest mutual fund distributor, Cortal, which has more than 450,000 clients, is owned by BNP-Paribas. When asked about distribution opportunities in France, SSB Citi’s Paitchel gives a brief answer: “Cortal. That’s it.”
Resistance to outsiders can be so forbidding that some companies decide it’s not worth their while to tackle the retail market directly - especially if retail has never been their bread-and-butter business. For example, J.P. Morgan Investment Management in 1997 signed so-called white labeling agreements with Deka, the fund management arm of the German savings banks, and with France’s Banque Populaire. J.P. Morgan will provide fund management for products carrying the brand names of its partner banks.
Such agreements are common in the U.S., where banks often hire outside fund managers for the products that will keep their customers happy and loyal. But white labeling is still relatively rare in Europe, where large banks and insurers prefer to sell clients the proprietary products of their own asset management subsidiaries. Nevertheless, J.P. Morgan believed that the advent of the euro would create an appetite for international funds, which neither the German savings banks nor Banque Populaire offer.
That proved to be a good bet. Deka has generated more than $5 billion for J.P. Morgan to manage in three years, and Banque Populaire has raised $2.5 billion. The new funds have come for a fraction of what it would have cost J.P. Morgan to establish a retail presence in Germany or France. However, the bank relationships need careful nurturing. Ramon Secades, head of J.P. Morgan’s individual investor group, says the firm maintains a three-man team dedicated solely to its German bank clients. “Their job is to get close to Deka’s internal sales and marketing teams,” he says, “who in turn represent 20,000 [savings bank] branches. So it is fair to say we are still learning from Deka.”
Italy and Spain offer greater scope for independents because local banks were slow to spot the rise of the retail investor. By the time they did, the price of asset management expertise had already been bid up, ruling out acquisitions. As a consequence, local banks tend to be more willing to work with external fund managers. These joint ventures can be very remunerative. For example, since Putnam Investments’ 1995 acquisition of a 20 percent stake in Cisalpina, the mutual fund arm of Italy’s Banco Popolare de Brescia, it has attracted more than $6 billion in new Italian investment.
Independent fund managers struggling for market share against behemoths like Putnam could find salvation in fund supermarkets. Well established in the U.S., where Schwab and Fidelity together account for 90 percent of supermarket fund sales, such distribution channels are relatively new to Europe. But they could soon level the playing field for asset managers.
Citibank has been one trailblazer for this new distribution channel. Its CitiChoice fund supermarket opened in Belgium in April 1999 after a trial run in Bahrain and the United Arab Emirates - “a relatively controlled environment,” notes William Sheridan, vice president of business development at Citigroup’s global consumer banking division in London. Now the supermarket has launched in Germany, offering 400 different funds from 18 investment managers. The bank plans to offer CitiChoice soon in Greece, Italy, Oman and Spain but is for the time being avoiding the U.K., where its branch network is limited.
CitiChoice does not like to call itself a supermarket. Instead, “we think of ourselves as a large boutique,” says Sheridan. That’s because it’s not going head-to-head with SchmidtBank’s ConSors, Europe’s second-largest online retail broker, which offers some 2,500 funds from 75 providers, or with Deutsche Bank’s online Bank 24, with 1,500 funds from more than 50 providers. Nor does CitiChoice offer the cheapest funds on the block. Whereas ConSors or Britain’s Egg sell many no-load products, Citi makes no apology for charging up-front distribution fees.
“We’re not selling price to consumers,” says Sheridan. What he’s selling is one-on-one advice. Some 2,500 salespeople in Citi’s 300 German bank branches ply clients with information on the available funds.
Egg Intermediation is taking the opposite approach in the U.K. Part of Internet bank Egg, which belongs to British insurer Prudential Corp., it launched its online financial supermarket in March with 170 funds from 17 fund families. Twenty percent of its funds carry no front-end load, and a further 30 percent charge only 50 basis points. “We looked at the U.S. model and learned that the proposal you make to customers has to be visibly better than your competitors’ in terms of price and ease of access,” says Egg Intermediation head Alistair Milne. The company makes money by taking 50 percent of its funds’ management charges, rather than by collecting distribution fees. By the end of August Egg had attracted more than $30 million.
Egg allows users to build a virtual portfolio and experiment with investing before they spend any real money. Once they sign on as customers, they can create a personal balance sheet that values their mutual fund holdings daily. If they also use an Egg credit card or take out a home mortgage, they can get a daily snapshot of their total net worth. And they can shop for flowers, music and underwear as well. Within a year, says Milne, Egg plans to offer insurance products and financial advice.
Clearly, Egg aims to be a category killer in the U.K. But it faces plenty of competition. Big local banks, such as Abbey National and Halifax, are launching fund supermarkets as a defensive measure. Fidelity’s U.K. supermarket, FundsNetwork, already offers 250 funds from 14 companies and is aiming to expand to 1,800 funds in the U.K. eventually. The Boston-based giant spent $16 million to roll out the service in July and is plowing millions more into marketing.
And FundsNetwork has a twist: Fidelity is selling funds both directly and through independent fund advisers. “Our simple philosophy is that people who need advice will continue to use advice,” says Richard Wastcoat, who heads FundsNetwork from London. He sees FundsNetwork both as an online retail service and as a business-to-business site for IFAs.
Competitors aren’t sure this approach can work. A typical front-end load paid to a distributor still runs as high as 5 percent in the U.K. If a fund is available online with no load, the IFA is at an obvious disadvantage in trying to sell it. “An IFA has no incentive to use this site,” says one observer of FundsNetwork. “It would be like turkeys voting for Christmas.”
Settlement poses another problem. U.S. giant Schwab expects to launch a U.K. supermarket by year-end, but Nigel Reynolds, who is leading the effort, says that inefficient clearing and settlement systems have held back the rollout. “You can’t control volumes when you are running an Internet site, and the last thing we want is a backlog and bad publicity,” he says. Schwab tells fund managers that unless they can settle through the Crest electronic clearing system, their funds won’t be eligible for its supermarket. Cross-border settlement issues are even more complex (see box, page 60).
Fidelity’s Wastcoat thinks that, ultimately, only a handful of fund supermarkets will succeed in Europe - a few national champions and just one or two that make it in pan-European trading. Nevertheless, the new distribution is galvanizing traditional fund outlets into offering third-party products. Munich’s HypoVereinsbank plans to sell off Foreign & Colonial, the venerable British fund manager it has owned for 11 years, and is focusing on selling multiple products through its branches, its Activest fund distribution arm, and online through Direkt Anlage Bank, already Germany’s third-largest online brokerage. In France insurer Axa Group and financial services group Caisse des Dépôts et Consignations have begun offering fund-of-funds products.
Timothy Connelly, head of Fund WorldView, a fund supermarket developed by Brown Brothers Harriman & Co. for its private banking clients, draws an analogy with the computer industry. “The eventual winners in that business were firms like Sun Microsystems and Microsoft, which were ‘open architecture’ from very early,” he says. “Banks that think they can meet all the needs of their clients with proprietary products have their heads in the sand.”
While asset management companies battle to deliver their products to the fund-buying public, a burgeoning army of online discount brokerages is fighting for the souls of Europe’s day traders. This market offers fabulous growth: According to a J.P. Morgan report, the number of online investors has more than doubled in the past six months, from 1.4 million to 2.9 million. At the end of 1997, the year brokerages first went online in Europe, the market stood at 400,000 intrepid investors. In Germany the Deutsche Börse estimates that online brokerages now account for 16 percent of all transactions. Sweden’s exchange puts the figure for that country at close to 25 percent.
Many of these traders start out as investment novices. “We conduct surveys among our customers, and 40 percent of them have never invested before,” says Michel Sidier, head of international development at Cortal subsidiary E-Cortal, France’s leading online brokerage. “People were shy. Online brokers give them the freedom of making small investments and following their own strategy anonymously.”
Yet despite the spreading popularity of e-investing, supply is outrunning demand. The J.P. Morgan report points out that Europe has more than 120 online brokerages. That is unsustainable. To keep from degenerating into price-differentiated commodities, the brokerages are trying desperately to stand out from the crowd. The ability to offer pan-European and U.S. trading is high on their list of priorities.
E-Cortal stole a march on competitors by offering cross-border trading in eight European markets and the U.S. for E15 ($13) per trade, beginning in September 1999. But the company’s first-mover advantage may prove short-lived. Menlo Park, California-based E*Trade is pursuing a similar cross-border strategy, with attractive pricing. For example, it charges Swedish investors E28 per trade to invest in the U.S.
A new service expected in November could make it unnecessary for online brokerages to build their own cross-border trading infrastructure. It also could shrink transaction costs for individual investors. Jiway, a joint venture between Sweden’s OM Group (with a 60 percent stake) and Morgan Stanley Dean Witter & Co., will offer trading to brokers for only E4 per trade in 6,000 securities across eight European countries and the U.S. The company intends to pass on to brokerages the savings achieved by standing between the retail order flow and local exchanges and settlement bodies; clearing and settlement will take place on Jiway’s books. To date, 30 brokerages have signed letters of intent.
Jiway, the Cantonese word for wisdom, has signed up seven market makers so far. The service “will operate a bit like the specialist system in the U.S.,” says chairman Lynton Jones. Trades will be netted, and the balance will be routed to domestic clearing systems. But Jiway will have to capture hefty order flows to get the cost savings it envisages. And rivals are mustering their forces. Europe’s two biggest online brokerages, Commerzbank’s ComDirect and ConSors, announced in August that they were in preliminary talks to create a pan-European retail trading platform with the Berlin Stock Exchange.
Fierce competition for online investors’ eyeballs is already fueling cross-border consolidation. In September Self Trade, France’s third-largest online brokerage, announced that it would be acquired by HypoVereinsbank’s Direkt Anlage in an all-paper deal worth $774 million. According to Self Trade founder Charles Beigbeder, the new group will be able to offer cross-border trading by next summer.
The next step for the e-brokerages will be snaring a new generation of online investors. Most day traders are already online. Now the challenge is to lure more conservative users. These customers are likely to want mutual funds as well as cheap transaction services - especially if the equity markets turn down sharply. That will favor brokerages such as E*Trade and E-Cortal. A pioneer of online discount brokerage in the U.S., E*Trade also offers mutual funds there and in Sweden and Japan and is examining ways to launch the service in France and the U.K. E-Cortal’s parent distributes 12,000 mutual funds in France, all of which can be bought on its French Web site.
Online brokerages are betting that another way to lure and keep customers is by offering investment advice. As Allan Anderson, who heads U.K. and European operations at Edward Jones, says, “If self-directed investment was easy, we would all be rich and fund managers would be out of jobs.” In fact, Edward Jones is bucking the trend by avoiding the Internet and expanding its European branch network instead (see box, page 54).
Adds E-Cortal’s Sidier: “If a customer buys France Telecom shares, he probably has a reasonable knowledge of what France Telecom is. If he is looking for a European equity fund, it is much harder. There are lots to choose from, and the buyer has very little information on what the fund’s investment strategy is.”
So more and more online brokerages plan to add value to their services by providing investment counseling. France’s Selftrade has signed a joint venture with the Italian IFA network Fondiaria. Later this year it will staff kiosks inside French supermarket chain Casino, where shoppers will be able to chat with trained representatives about portfolio-building.
The final frontier for European retail investors, seamless cross-border trading, remains a distant prospect. Although monetary union was supposed to create a single equity market, individual investors still find it hard to buy stocks issued in the country next door.
The mechanisms for distributing cross-border are creaky. Few retail brokerages have a significant presence outside their home countries. According to research by J.P. Morgan, Germany’s ConSors is the only online brokerage to rank among the top five in a country other than its own. (It is No. 3 in Spain and France.)
That’s not to say companies aren’t trying to expand the market for their shares. A case in point: the second tranche of Deutsche Telekom’s privatization. The first tranche, in 1996, went mainly to international institutions. In 1998 the company decided to make a pan-European retail offering that raised E11 billion. Nothing like it had been attempted before, and lead manager Dresdner Kleinwort Benson had to enlist the help of the EU in clearing regulatory roadblocks. Twenty-eight percent of the issue was distributed outside Germany.
In the third share offering, in June 2000, Deutsche Telekom made its first global retail share offer. It allocated 30 percent of the E15 billion, 200 million share issue to institutional accounts, 33 percent to German retail investors, 22 percent to retail investors in the rest of Europe and the remainder to retail investors in the U.S. and Japan.
Conor Killeen, head of equities at DKB, says that although the second and third tranches were successful, it would be a mistake to get carried away with the potential of retail investors as a share distribution channel. “For a pan-European issue to work, you need to have a company that is well known, has a good story and, best of all, some local presence,” he says.
Regulatory changes may help cross-border retail offerings. The EU’s Federation of European Securities Commissions, established by the regulators of Europe’s 17 stock exchanges in 1997, in May proposed a pan-European passport for issuers. The passport would allow “a company to make EU-wide-based public offers to all European investors in a manner that simplifies regulatory compliance for issuers and ensures proper investor protection.” In addition, regulatory barriers to European retail buying are falling, under pressure from mutual fund supermarkets and online brokerages.
Yet Europe still resists turning into one big, happy trading floor. Centuries of nationalistic competition isn’t about to disappear in a couple of years. Regulators have already written legislation to encourage undertakings for collective investment in transferable securities, or UCITS - the umbrella term for mutual funds - to cross European borders. A fund established as a UCITS in any EU country can register in any other simply by filling out a form available from the local regulator. Nevertheless, most funds are still registered only domestically. According to research by Moody’s Investors Service, just 30 percent of all UCITS-registered funds are sold in more than one European country. That’s one reason Fidelity’s FundsNetwork supermarket has yet to launch a pan-European product, says managing director Wastcoat.
For the time being, the new players in Europe’s retail revolution are peddling their wares in one country at a time. “You still have to put the hard work in and research market by market,” says Citigroup’s Paitchel. For individual investors that hard work means more freedom every day.
Bricks, not clicks
Allan Anderson, who runs the U.K. and European operations for U.S. retail brokerage Edward Jones, is used to plowing a lonely furrow. In the early 1980s he was a broker working his patch in Milwaukee, Wisconsin. “The Dow had gone sideways for more than a decade,” he recalls, and customers were avoiding equity mutual funds like the plague.
Now based in London, Anderson is bucking the trend again, eschewing the popular notion that to win customers in Europe the best place to be is online. Instead, in the past two years, Edward Jones has opened 85 offices in the U.K., from Aberdeen in the far northeast of Scotland to Plymouth in the southwest corner of England. By 2003 Anderson aims to have 400 U.K. offices. The next stop is continental Europe.
Anderson acknowledges that the Internet has changed the business of selling retail financial services beyond recognition. However, he insists that some people will never do business online and that advice is still key.
Says Anderson: “When you work in finance, it is easy to forget that not everyone gets up in the morning and reads The Wall Street Journal. If I’m running a plumbing business, the chances are I don’t want to worry about what mutual funds to buy when I get home at night or on the weekend. I don’t want to search on the Net. I want advice. That’s where Edward Jones steps in.”
This focus on providing face-to-face advice to the individual, middle-class investor has propelled Edward Jones from a regional brokerage in St. Louis, Missouri, to one of the great success stories in U.S. financial services over the past 20 years. (In 1980 the firm had 304 offices; it now has more than 4,900.) It is a simple philosophy that Anderson believes will work in Europe, too.
He may be right. Conventional wisdom holds that the more substantial European welfare safety nets have made mutual funds less popular than they are in the U.S. But Anderson thinks this view simply reveals the industry’s complacency. The problem, he believes, is that European mutual funds aren’t user-friendly.
U.K. unit trusts, for example, with their dual pricing structure and high management fees, are designed to benefit the producer rather than the consumer. “The distribution channels that have dominated in the U.K. and Europe have not been particularly effective at encouraging the public to participate,” says Anderson. Edward Jones intends to profit from their mistakes by doing what it has always done best: reaching out to investors one at a time. - A.C.
Clearing a path for pan-European funds
Nowhere is there a sharper contrast between the U.S. and European mutual fund industries than in trading, clearing and settlement. That’s because Americans have Fund/SERV and Europeans don’t.
Established in 1986 by the National Securities Clearing Corp., Fund/SERV allows brokerages and other fund distributors to purchase and redeem mutual funds from 553 fund families using a single electronic platform. In 1999 Fund/SERV handled an average 192,000 orders per day, with a value of $3.9 billion. Although it’s not perfect, the system means U.S. mutual funds are only a little more difficult to trade and settle than securities. By most accounts, the service has allowed the inherent popularity of equity mutual funds to be fully realized.
There’s no equivalent in Europe. A distributor who wants to buy or sell a particular mutual fund must contact that fund’s transfer agent. Fax machines are still the favored method for these communications.
If a brokerage tries to buy a mutual fund from another country, the job is even more frustrating. In spite of monetary union, each European Union nation still has its own settlement, tax and regulatory reporting regime. And even when funds are denominated in euros, a foreign exchange transaction may be involved to square an investor’s account.
These annoyances deter cross-border mutual fund trading. Funds domiciled in Luxembourg, where regulations are designed to facilitate cross-border transactions, still complain about the problems. “Distributors simply choose to invest in funds in their own jurisdiction,” says Fréderic Perard, head of product development in the European investor services division of BNP-Paribas. “The difficulties they run into when they trade cross-border mean that for many it isn’t worth the effort.”
Still, there is hope. Sicovam, the French settlement system for securities, has been able to settle locally domiciled funds for two years. And since June the U.K.'s EMX allows fund distributors to trade unit trusts over an electronic platform.
Computer gurus, for their part, are pushing to create standard electronic message formats for mutual fund orders and settlement. French technology consulting firm Cap Gemini has put together a group of transfer agents and custodians to develop messages based on XML, the enabling technology for the next generation of trading systems, and Swift, the interbank communications network, is looking to adapt its message types for mutual funds.
FundSettle, an Internet service set to be launched by Brussels-based Euroclear at the end of the year, aims to become the pan-European settlement mechanism for mutual funds. Meanwhile, a number of other initiatives could simplify cross-border fund trading. In June Brown Brothers Harriman & Co. launched Fund WorldView, a business-to-business platform aimed at its custody clients, largely European private banks. “Most of these banks know they need to get a mutual fund product on their desktop to show their clients but don’t know how to do it,” says Timothy Connelly, who heads the effort.
One of the most promising innovations for the industry is FundsHub, a joint venture formed by Chase Manhattan Bank and British e-commerce technology supplier Investia in April. FundsHub will provide business-to-business technology allowing distributors to create their own branded fund supermarkets, with pan-European offerings. Christopher Edge, head of European mutual fund services at Chase, notes that the first distributor has already signed up and will go live in the fourth quarter. “After that is up and running, we expect to roll out the product to distributors aggressively, first in the U.K. and then in the rest of Europe,” he says. - A.C.
