International and offshore mutual funds continue to be hot topics among bankers in the money-management sphere.
Despite concerns over poor market performance, some banks have kept adding international funds to their product lineups. Bank mutual fund chiefs say it's important to give customers more ways to diversify their assets.
Meanwhile offshore funds, which can operate under the rules of the host country, continue to draw attention.
To discuss some trends on the international front, freelance business writer Michael O'D. Moore spoke with William P. Hannon, partner in charge of the financial services practice in KPMG Peat Marwick's metro New York area. Mr. Hannon has worked for Peat since 1969 and has been responsible for its capital markets and international bank practices.
Q.: Mutual funds are a fast-growing part of the financial landscape in the U.S. Is the same true abroad?
HANNON: Absolutely. The growth varies by region, however. For instance, in the emerging markets around the world mutual funds are proving to be a good way for companies in those areas to grow capital. In more mature places, like Europe, more and more people are having to fund all or part of their own retirement. That's similar to the United States.
In many places around the world, by the way, mutual funds are known by other names, like investment trusts. By one name or another, they are good vehicles for funding your retirement.
In other places in the world, like Asia, there is a growing middle class for which mutual funds are a reasonably priced investment vehicle.
The opportunity for mutual fund growth is actually brighter in many parts of the world now than in the United States.
Q.: What are the implications of this growth for the handful of U.S. banks with extensive overseas operations?
HANNON: It creates a tremendous opportunity for banks that are operating in those growing markets - particularly in those markets where banks are not constrained by rules similar to our Glass-Steagall Act.
Without that, they are free to get into all aspects of investment vehicles for their customers. For those U.S. banks operating extensively overseas, it is a tremendous opportunity to continue to manage more and more funds that might otherwise leave them as deposits go elsewhere.
Q.: Let's talk about offshore funds. Can you explain how they work and what advantages and disadvantages they hold?
HANNON: An offshore fund is basically a fund domiciled outside the United States. It's usually done to avoid the regulatory constraints on banks when they are operating inside the United States.The investors are mostly overseas investors, and generally not U.S. investors.
To choose a base, banks pick places offering favorable regulations from one standpoint or another, like the Cayman Islands, the Netherlands Antilles, Ireland, and Luxembourg. They all have varying types of regulations but generally less than the Securities and Exchange Commission and the Internal Revenue Service put on U.S. mutual funds.
Operating offshore gives fund managers the basic advantage of having less regulation and more maneuverability.
Q.: What are the advantages for bank customers who invest in offshore funds?
HANNON: The fund has more maneuverability and is not constrained by the same diversity rules. Obviously, it is an advantage if the fund does well and not if the fund does poorly.
Q.: Why would overseas investors want their funds managed by U.S. companies operating offshore?
HANNON: They don't want their funds invested in a U.S. mutual fund, because an overseas investor, if he or she is invested in a (fund) registered under the Investment Company Act of 1940, is subject to the IRS withholding taxes. They want to avoid that.
A non-U.S.investor is not likely to invest in the U.S. right now. There is a proposed bill before Congress called the Investment Competitiveness Act that would eliminate withholding tax on a foreign investor who invests in a U.S. mutual fund.
If that law were to pass, then a U.S. mutual fund would become an attractive vehicle for a foreign investor.
Q.: How many U.S. banks are currently managing offshore mutual funds. and which are the most active?
HANNON: Not that many - only the U.S. banks that are particularly active internationally are ones that would have offshore mutual funds. Basically you are talking banks like Citicorp, Chase Manhattan, Bank of America, J.P. Morgan and a few others.
Q.: Will that field of players remain the same?
HANNON: I would guess so. U.S. banks not already active abroad don't seem to be preparing to go multinational. And, I would expect that if a bank goes multinational then it would get involved in some of these funds. And, if they don't go multinational then they are not likely to roll out offshore funds.
Q.: What are some of the other hot issues for banks that manage offshore funds?
HANNON: The big issue is where to operate. Some countries are more tightly regulated and some are less tightly regulated. Some countries have a better reputation with investors than others - those tend to be the more tightly regulated.
Q.: Are there any new offshore destinations of choice?
HANNON: More places are starting to open up. Dublin, for instance. Ireland has been pushing for the business over the past few years by creating a whole center for the activity. They've also made employment attractive.
Emerging markets are also a big issue. People looking at the attractiveness of places like Eastern Europe, Russia, the Czech Republic, and other new places.
Q.: How important will global expansion be to the success of mutual funds managed by U.S. banks?
HANNON: For banks that operate globally, it probably will be a very important factor. Banks are facing the issue whether they can continue to manage the money that is being moved out of deposits or whether they'll lose it to others.
All around the world, people are finding new ways to invest their money - mutual funds being an important vehicle - and people are less and less attracted to savings accounts. So if you are a bank operating globally, you have to provide alternatives for your customers other than savings accounts.
Mutual funds will be an important offering, and if they are not on a bank's menu, the bank is at a disadvantage.