Hard reality of pan-European funds
The creation of a single market across Europe, as a single event, was a progressive step forward for the European investment climate. However, it is important to view European Economic & Monetary Union (EMU) in the context of other environmental factors to understand why the investment mood in Europe is revolutionary instead of merely evolutionary.
It would be difficult to deny that EMU was the single most important trigger to bring change to the investment industry rolling across Europe, but it is important to note that the change is picking up speed. Across the widest definition of Europe, the climate is under the influence of many changes all happening at once, and all of them impacting how and where money is invested.
First, the shift to more privatised pensions funds, necessary if we are to be in a position to support our ageing population across Europe, is changing the dynamics of who the investor is and in what products they want to invest. Money is pouring into the private sector at rising speed and a proliferation of new commingled or collective investment vehicles are making an appearance.
Of course, for Europe, this movement of funds, for the large part across the relatively newly established single market, is creating product demand for pan-European fund products. Not that a commingled, cross-border product wasn't thought about before EMU, it just wasn't really conceived of as being feasible as a reasonably effective undertaking. Organisations tried as long as 10 years ago but were unable to make it happen. Today, the same questions arise concerning tax treatments, country-by-country fund laws, and accounting consistencies or should we say inconsistencies. However the big step of EMU seems to have encouraged the general populace and perhaps most notably the cross-border corporate employers, that impossible things can and perhaps must happen and this revolutionary movement is giving this thought process some momentum to transform ideas into reality.
Second, Europe is experiencing a shift in its cultural norms, which are affecting investment decisions. Equities are losing their negative connotations and are moving into the mainstream for more people and organisations. With an eye toward the critical need for improved returns, money is shifting not only into the private sector, but into commingled equity investments. Europe is confronting not only a new market, but the need for new products as well.
As European investment managers assess their positions amid this change, it is clear that they see both exhilarating opportunities and tough challenges. Since the opportunity seems to stand out on its own, this article concentrates on what are the challenges of administering a collective investment scheme in the pan-European frontier. As I see it, the pan-European challenge comes in two packages: the intangible and the practical.
The ‘intangibles’ are basically a lot of the issues that have dogged Europe as it moved toward EMU, which are simply nationalism and culture. Now that the first stage of EMU has been reached and the world has the euro, the business of operating in every day business is being tested.
As investment managers address issues of domicile, administration, and distribution, they must take into consideration the nuances of national pride and custom that still exist. ‘Pan-European’ denotes regional instead of country, yet investors still hold onto their national interests and have their investment policies set, to a certain degree, by their country of origin. Investment managers must stay attuned to issues of national pride and cultural orientation, and understand how their back-office decisions will be interpreted as the fund is distributed to market.
So where does this leave the investment manager as they make administrative decisions? It brings them to the second set of challenges in running a cross-border fund: the practical issues.
The very word ‘administrative’ seems to make people cringe, and the reality of pan-European administrative challenges does not do much to change that reaction.
The pan-European competitive landscape is heating up, and the demand for commingled products surpasses supply. Offshore centres have certainly capitalised on this open niche, and are approaching their zenith as a solid option for cross-border funds. Even though the choice of offshore location may still be dependent on national ties, offshore centres do ‘homogenise’ the product to appeal to a wider range of investors. On top of their broad appeal, offshore vehicles may offer tax advantages, without the peculiarities of some of the other products developed to meet this unique product gap.
To be a player in the offshore, pan-European boom, investment houses are increasing their investment in product development and technology. To redefine their product offerings in the new Europe, investment managers have been spending a lot of resources to re-build their business infrastructure to support pan-European growth.
To support a true pan-European collective investment scheme, managers need to tackle the fund, accounting and tax laws of each country – not a simple undertaking.
To be profitable and realise some economies of scale, the manager really needs to build an infrastructure that efficiently supports these country-by-country differences, as well as extend their reach and marketing abilities firmly into each market. Technology is a key to this industry, but costly for the pan-European manager as they need to retain a measure of business relevance. In this case, that means going beyond being prepared for Y2k, but being ready to enter the ‘e-commerce’ phase. What better way to deliver investment choice, customer service and shareholder services across countries than via the internet with access growing exponentially.
Investment managers and other financial services providers, who truly are dedicated to the cross-border European market, are already heavily immersed in their ‘e-commerce’ strategies with some governments already introducing draft legislation. The further growth and harmonisation of EMU can only stimulate further growth and facilitate the administration of these collective fund types.
Change begets more change, and as greater opportunities and needs arise, we can expect to see the revolutionary reaction running through the investment markets of Europe today, pushing through change, overcoming old hurdles and increasing choice way past the year 2000.
Lucille Knapp is with corporate and institutional services at Northern Trust in London