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The Global Fund-Leadership Playoffs: Europe vs. the U.S.

Unless the U.S. industry makes changes, the European fund model will reign supreme around the globe.

Robert Pozen and Theresa Hamacher, 04/05/2011

This article first appeared in the April/May 2011 issue of Morningstar Advisor magazine. Get your free subscription here. 

Europe has pulled ahead in the competition for leadership in the global fund industry, pushing the United States, the longtime pacesetter, into second place. While the European fund model is rapidly gaining acceptance in all parts of the world, U.S. funds remain strictly a domestic affair. As a result, European funds have been growing at a much faster pace than their U.S. counterparts--and we believe that Europe will continue to win this race unless the United States makes some significant changes to its ground rules for mutual funds.

Even with the success of the European model, the U.S. fund market remains the largest in the world, with assets topping $11.1 trillion at the end of 2009--accounting for more than half of fund assets around the globe and equal to 78% of the U.S. gross domestic product that year. Almost one fourth of U.S. household financial assets are invested in funds--the highest penetration rate in the world. The size of the European fund industry pales in comparison; it's about one third smaller, with assets of only $7.4 trillion, equivalent to just 51% of the European Union's gross domestic product.

But while the United States still leads in size, asset growth in Europe has been much stronger. From 2000 to 2009, assets in U.S. funds increased by 5% per year, a respectable pace given the considerable turmoil in the markets and economy during that decade. During that same period, however, European funds grew by a much more substantial 8.9% annually, while facing similar macroeconomic challenges.

Europe's premium growth rate isn't just a larger percentage gain off a lower base. Rather, it's the result of the region's better positioning in the global fund marketplace. Europe dominates cross-border distribution of funds and is far ahead of the rest of the world in making more complex investment strategies available to fund investors. Still, U.S. funds remain world leaders in one very important respect: They are, overall, the lowest-cost investment vehicles available to investors.

Let's take a look at how the European and U.S. fund industries compare along these three dimensions: cross-border distribution, access to sophisticated strategies, and investor costs.

Cross-Border Distribution
It was perhaps inevitable that Europe should lead the way in cross-border distribution of funds. After all, one of the earliest goals of the European Union was the promotion of free trade among member countries, and over the years, Europe has been steadily removing barriers to commerce in goods and services within its borders.

That includes the cross-border distribution of investment funds, which has become much easier thanks to the UCITS regulations--first adopted in 1985 and modified twice subsequently. This regulatory framework allows an investment manager to register a fund in one EU country and sell the fund in all EU member states. As long as the fund complies with the UCITS rules, the fund automatically receives a passport to enter all EU markets. Today, about 75% of the European fund assets are in UCITS funds. The brand has become so pervasive that many industry professionals have to think twice before they can tell you what the acronym stands for. (It's "Undertaking for Collective Investment in Transferable Securities.")

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