|
U.K. fund industry 'in flux'
|
 |
July 17, 2000: 12:19 a.m. ET
World's fifth largest market sees change, and consumers could benefit
By Staff Writer Jeanne Sahadi
|
NEW YORK (CNNfn) - Investors in British mutual funds may soon have a greater number of low-cost options available to them thanks to Britain's move toward self-directed savings plans and the recent entry of online fund supermarkets and discount brokers.
But change will not come overnight to the world's fifth-largest fund industry, which has $410 billion in assets in retail funds alone.
"The likely trend is toward reduced front-end charges, and an unbundling of charges for advice," said Anne McMeehan, spokeswoman for the industry's trade group AUTIF (Association of Unit Trusts and Investment Funds).
But, she added, "It's a market in flux ... The U.K. fund industry is very highly fragmented."
Room to grow
That fragmentation is partly the result of the industry's growth and its move away - albeit slowly - from its heavy reliance on distribution through independent financial advisers, who still account for a majority of fund sales.
 The market for funds has grown 23 percent a year for the past five years, and fund investment is growing at a faster rate than investment in individual stocks, although the average household still holds more stocks than funds, said Ben Phillips, managing director of international practices for financial service consulting firm Cerulli Associates.
Fund companies have benefited from tax-advantaged investment plans such as Individual Savings Accounts, which are wrapped products that can contain funds - most commonly known in Britain as unit trusts and open-ended investment companies (OEICs).
Investors may contribute up to £7,000 ($10,500) a year until April 2001, and £5,000 a year thereafter. The money, which also can be invested in individual stocks or insurance or left as cash, grows largely tax-free, and may be withdrawn at any time without penalty.
Nevertheless, ISAs and their predecessor, Personal Equity Plans (PEPs), haven't weaned British investors entirely from their traditional preference for insurance products, which still garner a majority of personal assets. Unit trusts, by contrast, only accounted for about 5 percent in 1999, Phillips said.
Pension reform opens more doors
That number is likely to grow, however, as the British government seeks to offer more self-directed savings initiatives aimed at bolstering individuals' pensions.
 Greater personal investment is being encouraged since Britain's pension system, much like the U.S. Social Security system, will be difficult to sustain at current levels.
"Just as in the United States, the U.K. has a similar demographic time-bomb working," McMeehan said, noting that the number of workers for every retiree is expected to decline from three-and-a-half to two in the next several years. "That means building the savings initiative."
One proposal put forth recently is the Individual Pension Account or IPA. It is modeled in part on the 401(k) plan in the United States and will be a wrapper product built partly around funds. It is intended to make individuals' long-term investments less expensive, more transparent, more flexible and more portable when one changes jobs, McMeehan said. And it will allow the fund industry to compete directly with the life insurance industry in the pension market.
 The other initiative, known as the stakeholder system, goes into effect in April 2001.
All employers must offer access to a stakeholder pension account, which is intended to offer a choice of low-cost investment products for long-term savings. No product in the account may carry a total expense ratio higher than 1 percent.
That is likely to make index funds more popular than they've been, Phillips and McMeehan said. Currently, index funds account for less than 10 percent of all mutual fund assets. Unlike most funds, which carry a front-end charge of 5 percent, index funds are no-loads, and their expense ratios average around 1.08 percent versus 1.55 percent for an actively managed fund, according to investment-expense tracker Fitzrovia.
Even though active managers have had a very hard time beating the indexes in recent years, particularly in the large-cap growth area, financial advisers and fund companies have not sold index funds frequently because they make less money on them, McMeehan said.
Shopping at the supermarket
And making money is high on everybody's agenda.
The equation has been made trickier by the recent entry of online fund supermarkets, which provide one-stop fund shopping, often at a discount.
Two of the biggest players are: Fidelity, which is one of the country's largest fund providers; and Egg Investments, formerly of Prudential. But Schwab has plans to launch its own operation soon, Phillips said, and several other companies, including Consolidated Funds, Interactive Investor, Woolwich Building Society and TD Waterhouse, may do so as well.
But the do-it-yourself, no-load investor is not likely to overrun the market just yet. That's in part because the investment culture in Britain is still reliant on investment advisers, who may also use the supermarkets to provide products for their clients - a fact that could eventually lead to their charging an asset-based, unbundled advisory fee.
As it is now, when an adviser sells a fund he or she usually receives an annual trailer commission from the fund company based on the client's assets in the fund. That commission is based on the premise that the adviser continues to offer advice to the client. But that isn't always the case.
Discount brokers, for instance, may refund to their clients the front-end charge on a fund, and take the trailer commission without providing any advice beyond the initial sale, McMeehan said.
Whether an adviser will get as high a trailer commission by using the supermarkets is still a question. But no matter how it ends up, "The intermediaries have to get paid somehow," Phillips said.
Top performers
Of course, no one will get paid much if the fund industry doesn't provide solid-performing funds.
 Large-cap growth funds were among the investment darlings of the 1990s, and among sectors, technology and more recently biotechnology have commanded eye-popping returns.
There also appears to be a strong bias toward U.S. stocks among the best-performing funds over a five-year period, said Lipper spokesman Johnny Weir.
Henderson Global Technology and Aberdeen Technology, for instance, both counted America Online and JDS Uniphase as holdings in 1999. Henderson also had investments in Texas Instruments, Sapient and Ciena among other U.S. businesses; while Aberdeen placed bets on Cisco Systems, Sun Microsystems and Qualcomm.
If you want to throw your hat in the ring
No matter where you live or what your nationality, if you are interested in a U.K.-based fund, the word from the industry is: "Welcome."
A caveat to non-U.K. residents, however. If you wish to buy a U.K.-based fund, you should consult with a tax adviser to learn how such a purchase may be conducted legally from the standpoint of your home country and also whether it would be advantageous to you from a tax perspective.
If you live in a fund-rich investment culture such as the United States, there may be little reason to buy a U.K. fund. If, however, the products where you live are limited and heavily emphasize fixed income, Britain offers expert equity fund management in both domestic and international stocks and a wide range of investment styles.
If you're still put off by the fees, you might want to see how the pension reforms and entry of new distributors into the market play out.
Despite the somewhat fragmented state of affairs, one thing is becoming clear, McMeehan said, "The U.K. government is adamant that the consumer will get a better deal all around from the financial services industry." 
|
|
|
|
|
 |
|
