Sunday, 11 April 2010

Why Europeans don’t like collective investments all that much?


Have you ever wondered why 1/3 of the U.S. population are mutual fund investors? According to the Investment Company Institute’s data at the end of 2008, U.S. mutual funds managed $10 trillion for 93 million U.S. investors. Putting the numbers in perspective, the entire population of Germany, the most populated European country, is just under 82 million, while France has 65.4 million living on its territories.

Are there cultural or legal impediments for a broader acceptance of collective investments in Europe? With this research question I turned to Rudolf Siebel, Managing Director of the BVI, the German Investment and Asset Management Association. BVI represents 75 members, the Kapitalanlagegesellschaften and Asset Managers, with more than €950 billion in assets under management.

According to Rudolf, securities business in Europe is not intermediated, but mostly associated with banking. Therefore, European investment managers do not have to offer a cash product to their clients along with equity or fixed-income investment options, because uninvested cash balances are kept by the sponsoring bank. Before the Glass-Steagall Act was lifted in the U.S., fund managers have had to place clients’ cash in a bank. Each time a fund investor sold shares of a bond or equity fund, the asset manager would lose money to a bank. When money market funds came about, they were embraced by asset managers as a way to keep all cash in house. Accidentally, in 1970s - 1980s, which was a period of high inflation in the U.S., interest rates on bank deposits were regulated. Money market funds offered much higher market interest rates and attracted hoards of retail investors. Money market funds introduced a few generations to mutual fund investing fueling the growth of U.S. middle class.

At our seminar on Wednesday, April 14th, I’ll talk about nailing down my research question(s) and more generally about a super-important step of putting together an MPhil/PhD Transfer application. A wise PhD Candidate strives to learn from a painful experience of others!

Find my presentation slides titled 'Financial Regulation and Development of Financial Products: a Case for Money Market Funds' at my page:
http://westminster.academia.edu/ViktoriaBaklanova/Talks

I hope to see you all on Wednesday!
Viktoria

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3 comments:

jason chuah said...

I would suggest that the US success with mutual funds might be due to:
- tax advantages (some might say as early as 1940 with the Investment Company Act 1940 although the 1975 change to the Internal revenue Code might be less of an over-dramatic assessment) [these are not replicated in the EU until much much later]
- better and more aggressive sales communication to investors by intermediaries [the US intermediary sector is far more developed - probably due to the large pyramidal brokerage commissions]
- following from the former point, in the US many middle class people rely on "financial planners" [people in the EU tend more to rely on institutions they bank with for advice]

Research Student said...

Jason,

These are all great points! Changes in tax law especially related to advantageous tax treatment of pension savings did make a difference in the wider acceptance of mutual fund investing.
Secondly, funds management companies in the U.S. do conduct an aggressive promotion of their services. And lastly, due to Glass-Steagall legacy, banks' investment services in the U.S. are weaker relative to those offered by non-bank affiliated investment management companies.
These all highlights interesting differences in the structure of the U.S. and European financial markets.

jason chuah said...

I would like to see how this is developing in emerging economies such as the BRIC countries. Any views?