Morningstar Advisor - April/May 2011 - (Page 38)

Spotlight The Global Fund-Leadership Playoffs: Europe vs. the United States By Robert Pozen and Theresa Hamacher Unless the U.S. industry makes changes, the European fund model will reign supreme around the globe. 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 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.”) Like U.S. mutual funds, UCITS are subject to strict government oversight. With this scrutiny, investors have a high degree of confidence that they know what they’re getting when they put their money into a UCITS fund. Investors also have access to that money when they need it; UCITS must allow investors to withdraw cash at least twice monthly, although most permit daily redemptions, just like U.S. funds. Unlike U.S. funds, however, UCITS are not required to distribute all their income annually, giving UCITS a significant edge when it comes to taxation. Investors in a UCITS fund pay taxes on capital gains only when they sell their fund shares—even if the fund realizes capital gains on its portfolio before then. By contrast, owners of a U.S. fund may be hit with a tax bill 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 38 Morningstar Advisor April/May 2011

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2011

Morningstar Advisor - April/May 2011
Contents
Contributors
Letter From the Editor
The Debate That Matters Most
What Can the Mutual Fund Industry Do Better?
Cool Logic, Warm Intent
How to Start a Mutual Fund
Owner and Operator
Middle East Revolts Roil Oil Markets
Four Picks for the Present
Investment Briefs
How We Improve Our Odds of Picking Outperformers
Health Care Survived 2010, but Investors Want Proof
The Global Fund-Leadership Playoffs: Europe vs. the United States
U.S. Fund Investors Have It Good
U.S. Fund Firms Learn to Speak UCITS
Balancing Act
The Tamer Ride
Investors Lend a Hand
Healthy, Wealthy, and Wide
Foreign Funds That Win at Concentration
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
VAs Finish 2010 With a Solid Gain
Buying Good Funds, Poorly

Morningstar Advisor - April/May 2011