Overseas Investors Not the Gold Mine the Industry Had Hoped For

The mutual fund industry is encountering some slow going as it tries to extend its success in the United States to other countries.

For years now, the idea has tantalized fund company managers: that they might find a broad export market for their products, the way American makers of movies, fast food and consumer goods have.

But so far, “the ultimate hard reality is that overseas citizens are not clamoring for U.S. fund management like they are for U.S.-made hamburgers, soft drinks, razors or toothpaste,” says Cerulli Associates, a Boston consulting firm.

The picture may brighten, however, according to the firm’s just-published “Trends in the Offshore Mutual Fund Market.” Still, some significant obstacles need to be overcome.

The funds’ effort to sell themselves overseas bears watching for U.S. investors because it stands to play a big role in determining whether the industry, in the years ahead, can maintain anything like its recent growth rate.

“Though asset growth and inflows continue to be robust,” the Cerulli report says, “there is consensus that the mutual fund industry has become saturated. Many U.S. fund companies are wondering from where future assets will come. In most cases, they are setting their sights on the non-U.S. market.”

To date, U.S. fund managers have built up about $56.6 billion in overseas assets, Cerulli reports, with the three biggest entrants in the field--Fidelity, Citibank and Merrill Lynch--accounting for about 40% of that total.

The asset number is rising. But it still represents only about 3.7% of the total international fund-management market, as gauged by research firm Lipper Analytical Services Inc.

In trying to sell U.S.-style fund management to foreign customers, managers must adapt their vehicles to local conditions in each country, including cultural and traditional values as well as economic and regulatory differences.

In many overseas markets, Cerulli notes, investors don’t have quite the taste for stocks that the U.S. population has developed, leaning more toward bonds and other fixed-income investments.

Whereas U.S. investors are accustomed to investing on the presumption of economic growth, the idea of growth may be newer or look more tenuous to many foreigners with money to manage.

“In Europe,” Cerulli says, “banks’ domination of mutual funds distribution has seriously hampered growth among nonbank sponsors.”

Also, Cerulli says, an image of U.S. investment managers as superior in skill and experience has not traveled as well as some thought it might: “The consensus overseas is that the United States is more active in money management but not better at it.”

Nonetheless, the Cerulli report says, there is much about the world beyond the United States that continues to look enticing to fund company management.

“The conditions are right,” it says. “For the most part, there is increased political stability around the world. Most countries are moving away from socialism and communism to free-market-based economies.

“The advent of advanced communications and technology has created a more condensed global economy and is facilitating international commerce. There is a strong likelihood that cross-border investing will become standard practice in many regions of the world.”

On top of that, Cerulli says, the push toward private planning for retirement that has spurred the growth of arrangements such as employer-sponsored 401(k) plans in this country is making its presence felt in other countries as well.

“As this trend fully takes hold,” the firm says, “it will trigger tremendous growth in the collective investment funds market. This increased investment activity is what some U.S.-based fund companies are positioning themselves to capture.”