The European market is alluring to U.S. firms, but making the jump isn't cheap or easy.
This article first appeared in the April/May 2011 issue of Morningstar Advisor magazine. Get your free subscription here.
In "The Global Fund-Leadership Playoffs: Europe vs. the United States," Robert Pozen and Theresa Hamacher have much to say in favor of Europe's UCITS fund regulation. In short, they argue that U.S. fund regulations have kept the mutual fund industry from competing as effectively globally as their European counterparts, while offerings under the UCITS regime have stolen the lead in asset growth. With that in mind, we thought it would be of interest to speak with the heads of two U.S.-based fund companies that have operations in Europe for their perspective on the challenges facing the U.S. fund industry and best practices from both sides of the Atlantic.
Greg Johnson, CEO of Franklin Templeton Investments, provides the perspective that comes with a long history of well-established operations in both markets. Franklin Templeton is a major player in Europe and Asia, with more than 252 funds domiciled in those regions, compared with 115 in the United States. Dodge & Cox Chairman Emeritus John Gunn and COO Tom Mistele bring a different point of view to the table. Their firm is well known and highly regarded in the United States, but it has only recently launched a foray into European markets with the establishment of a Dublin-domiciled UCITS range in late 2009. Although the participants differed in their responses to many of our questions, they all are fond of the collaborative nature of fund regulation in Europe and are excited by the growth prospects of new markets around the world. From London, we talked to Johnson on Feb. 24 and Gunn and Mistele on Feb. 25. The conversations have been edited for clarity and length.
Christopher Traulsen: Franklin Templeton has a long history in the United States, and the firm is a significant cross-border player. As CEO of the house, what are the key challenges that you see for the organization?
Greg Johnson: The most important issue that affects all investors globally, and maybe is even a bigger issue outside of the United States, is a focus on short-term performance. I think the cause of this short-term mind-set is the amount of information we get all day every day. Anytime you turn on an outlet, you have some reason to be concerned or to think that you need to change your investment mix. It's probably the most important role of the financial advisor, to get clients focused on the long term, and it's something we reinforce in our communications.
As we enter newer markets around the globe, we encounter the speculator versus the investor. We try to create investors. In these newer markets, that's always a challenge. We could be doing very well in a market, but if there is a short-term focus and a downturn occurs, then we could see significant redemptions.
In the United States, the big issue facing our entire industry is rebuilding investors' trust. Surveys show that investors' risk tolerance has shifted, but more importantly, it has shifted for the younger investor. Young investors used to have the highest tolerance for risk, and that's very appropriate because they can have a longer-term horizon and tolerate more volatility. But today, we've seen that the young investor actually has less risk and less equities in his or her portfolio than before.
Look at Japan, for example, which has had a very difficult period in its equity market; the younger Japanese investor has completely abandoned equities. If an investor's first exposure to mutual funds is a negative experience, whether they went through the technology bubble, the recent sell-off, and what some refer to as the "lost decade," that should be a big concern for our industry. It is for us. Obviously, we benefit from fixed- income investing, but we also have half of our assets in equities. We've been really talking about the case for equities in the decade ahead. We have our 2020 Vision campaign, which we started near the bottom of the market. We're trying to get investors' focus away from what's going to happen in three to six months and on the probability of returns over the next decade.