On Mar. 19, Hendrik van Riel, the European asset management chief for J.P. Morgan & Co., and Jacques Delmas-Marsalet, chairman of Banques Populaires Group, a consortium of French retail banks, shook hands on a historic bargain. J.P. Morgan will create and manage mutual funds that the French lender will sell to its 4.5 million customers.
The deal, the first between a French local player and a global fund manager, is a harbinger of the enormous shakeup coming in the $5.2 trillion European asset management industry, which is expected to grow 15% annually for most of the next decade. Morgan is one of a few providers that are well-positioned to grab a slice of a fast-growing and lucrative business that has been dominated by local lenders. Morgan Stanley Dean Witter & Co. has a venture with Italian insurer La Fondiariack, and many other providers either have or are planning similar alliances.
REALITY CHECK. European institutions are welcoming these deals mostly because they are eager to deliver better returns to their investors. Fund management European- style has typically meant parking around 80% of a client's money in government bonds and other conservative securities. Protective barriers kept foreign competition out. European citizens, meanwhile, could count on generous governments to fund their retirements, so higher returns on savings really didn't matter.
That is all changing. Cash-strapped governments can no longer afford lavish pensions. European consumers now realize that they face grim retirements unless they build up their nest eggs now. As a result, Europeans are moving money out of bank accounts yielding as little as 2% and into private retirement plans and mutual funds. About $178 billion in European money flowed into stock funds in the year ended Sept. 30, 1997.
With higher returns a must, European banks risk losing their customers unless they come up with better products. Industry observers say that lenders will have to spiff up their marketing and offer their customers more choice, including rival funds. Even in Britain, where the investment management industry is light years ahead of the Continent, established local money managers performed poorly last year and are suddenly looking vulnerable. In Britain and the Continent, corporations are enrolling new employees in defined-contribution plans similar to 401(k)s, a trend likely to benefit U.S. fund managers.
The turmoil is giving American investment houses such as J.P. Morgan and Fidelity Investments a chance to make big inroads. Morgan's British pension business has grown by 35% this year alone, to about $8 billion. And Fidelity's British mutual-fund business grew by 44% last year, to about $10 billion. Marc Sylvain, managing director of Fidelity Investments in London, says Europe is similar to the U.S. in the mid-1980s. "We are looking at the same kind of runway and takeoff," he says.
COMPANY PLAN. But the Americans are unlikely to gain market share in the asset management business as quickly as they did in European investment banking, which they now dominate. European banks such as Germany's Deutsche Bank and France's Credit Agricole continue to lead mutual-fund sales in their home markets, thanks to extensive branch networks and strong name recognition. In addition, the London-based fund houses, many of which have been been purchased by foreigners, are formidable competitors to their American counterparts.
J.P. Morgan's French deal will put it on more equal footing with the locals. Morgan wants the extensive European distribution the French lender offers. And Banques Populaire will get Morgan's worldwide money management skills. So J.P. Morgan, which has $65 billion under management in Europe, will let its French partner sell the new venture's funds, mostly under the French brand. Morgan also has a deal with the German mutual-fund firm DekaBank.
The Americans think that Europe's company pension-fund market may be easier to crack. It is a lot cheaper to make pitches to companies or local governments with fat portfolios than to sell to individual investors. J.P. Morgan, Fidelity, and Morgan Stanley are all pursuing institutional clients through the defined-contribution market.
Some of these firms have managed to penetrate Britain, which has the most sophisticated pension-fund industry in Europe. Relatively poor performance last year by such dominant players as United Bank of Switzerland's subsidiary, PDFM Ltd., and National Westminster Bank's Gartmore Investment Management have provided the opening into this $1.1 trillion market. Gartmore's pension funds turned in a 12.5% performance last year, and PDFM earned about 15%. Fidelity's score was 17.6%, against an industry norm of 16.5%. J.P. Morgan's British equity pension funds came in with 23.2%, vs. the industry average of 21.9%. Fidelity recently won an $800 million chunk of the $1.6 billion that PDFM Ltd. formerly managed for railways pension provider RailPen.
"OLD-FASHIONED." Fearing a crash, some British managers have kept too much of their portfolios in cash, dragging down their performance. They have been underexposed to such British highfliers as Glaxo-Wellcome PLC and SmithKline Beecham PLC, causing the funds to underperform the U.K. market index. They also have been underweight in the booming U.S. market. All this has led the handful of pension consultants, who are enormously influential in awarding fund-management contracts, to suggest to their clients that they consider other players. "We are finding the traditional [British] approach to investment management looking increasingly old-fashioned," says Nick Fitzpatrick, a partner at consultants Bacon & Woodrow. Some British managers pay insufficient attention to asset diversification, something U.S. investment pros have been pushing for years.
Other consultants say that some of the U.S. firms bring a more disciplined approach to portfolio balancing than some of their British rivals. Big American firms are also more likely than the British players to have strong research on global industries or regions outside Britain. An increasing tendency to choose specialist managers has boosted such U.S. firms as J.P. Morgan and Los Angeles-based Capital International.
While the U.S. players are gaining ground, there is still a long way to go. They are relatively small players, with about 10% of the $2.7 trillion European pension market, according to analysts Sanford C. Bernstein & Co. in New York. James B. Broderick, J.P. Morgan's head of European mutual funds, says that while U.S.-style fund management, with its innovative marketing and many choices, will become increasingly prevalent, many U.S. firms may well find themselves bystanders while European rivals implement ideas pioneered in the U.S.
But U.S. and other top-flight managers are clearly going to benefit from changes in the offing in Europe. The launching of the euro in 1999 will punish European fund managers who have focused mainly on domestic markets and reward players with global experience. And the gradual shift to defined-contribution plans in Britain and elsewhere will play into the hands of investment firms that are good at providing client services and information, areas in which U.S. houses excel.
The intensifying competition means that investors will have access to better managers and more options. So regardless of which firms win, it's hard to see how consumers can lose.