As the mutual fund industry goes global, the United States brings something unique to the table-the world's largest stock market. John C. Bogle, the founder and senior chairman of Vanguard Group in Malvern, Pa., discussed the forces driving U.S. fund companies in a keynote speech at a seminar in Bermuda last week hosted by the International Bar Association. Here are some edited excerpts:
Despite some considerable hurdles, the globalization of the mutual fund industry is continuing and perhaps even accelerating.
It is part of-although, so far, only a very small part of-the near- explosion of the globalization of the entire investment management business.
However, it is hardly a takeover of the rest of the world's investment managers by the powerhouse firms in the United States.
To the contrary, some of the very largest acquisitions turn that idea upside down: The takeover of Bankers Trust by Deutsche Bank (a combined $380 billion of assets managed); of Wells Fargo Nikko by Barclays Global Investors ($600 billion); of Kemper/Scudder by Zurich ($280 billion); and of Brimson by Swiss Bank Corp. ($380 billion).
Total assets managed by these four merged firms alone approach $2 trillion. For better or worse, we are truly living in the age of the giant global manager.
Traditional independent U.S. mutual fund complexes are also making waves across the Atlantic pond, although the Pacific pond remains, well, peaceful.
Aggressive fund marketers - including Fidelity, Merrill Lynch, Mellon/Dreyfus, and Morgan Stanley Dean Witter - are at various stages of global development, albeit in some cases rather tentatively.
While my design for Vanguard called for our firm to be at once both leading fund innovator and lagging fund marketer, Vanguard too has entered the fray, with incipient fund operations in Australia and Europe.
I warn skeptics that Vanguard may well become a formidable opponent in international waters.
The globalization that permeates the world of commerce and finance today has clearly impacted the mutual fund industry and will continue to do so. But U.S. fund managers come to the contest with a unique perspective.
First, our stock market - presently valued at $14 trillion - has by far the largest market capitalization in the world, 50% of the total and almost five times our nearest rival, Japan, with a 10%-plus share.
Perhaps unsurprisingly in the light of our great bull market, the U.S. mutual fund industry is also the giant of the globe. At $5.5 trillion, it has no serious rival. Runners-up Germany and France account for some $700 billion each, with Japan at $360 billion and the United Kingdom at $282 billion.
All told, the mutual funds of nations other than the United States total just $2.5 trillion, less than one-half of the U.S. total.
Six forces are driving the U.S. fund industry:
The sheer demographic opportunities offered abroad are huge.
The major industrialized nations have substantially older population profiles than the U.S. and even higher ratios of retirees to workers. For each dependent in the United States there are four workers, compared to only two-and-one-half abroad, with the ratios destined to shrink at an even faster rate abroad than in the U.S.
Much public and private investing must be done if the world's citizens are to fund their retirement needs.
The massive move to defined-contribution assets that we've seen in the U.S.-now fully one-half of the $4.3 trillion of total U.S. private pension assets-is virtually nonexistent in the much smaller private pension asset base abroad.
Mutual funds, rather than the traditional separate accounts, have become preeminent in the defined-contribution arena, and our industry's skills in this field, our information, communications, and transaction technologies have been honed to a razor's edge.
Funds sold outside the U.S. generate revenues to managers that can easily run 50% or more above those on U.S. funds.
Why be satisfied with revenues of, say, 1.5% of assets when 2.5% is there for the taking?
Sales charges, too, are higher abroad, and the higher brokerage commissions that fund portfolios generate offshore, in one way or another, may also find their way back to the managers.
Foreign fund markets seem largely untapped.
Consider that mutual funds account for fully 23% of the liquid savings assets of U.S. families, but only 2.5% of the savings of Japanese families.
Again, fund assets of $20,000 per capita here compare with about $4,000 abroad.
Opportunity, or so it seems, is knocking at the industry's door.
The U.S. fund market, on the other hand, looks in many ways saturated.
Twenty-five years ago, before money market and bond funds had begun to make their mark, stock funds accounted for but six-tenths of 1% of U.S. savings flows of $180 billion.
Last year flows into stock, bond, and money market funds together accounted for an astonishing 99% of our $460 billion of national savings.
Further, competition is getting tougher in the U.S.
Index funds, which require neither an adviser nor an advisory fee and lower-cost stock and bond funds are building a dominant market share.
In the past twelve months alone, just three U.S. fund groups - each known for offering funds at prices substantially below the industry's spectacularly high general levels - have accounted for nearly 40% of net cash flows into stock and bond funds.
The remaining 50 major firms ($10 billion or more in assets) carved out an average market share of just over 1% each, with 12 of these firms, (or) one out of every four, actually in net redemption.
Surely, fund managers must reason, it will be more profitable to bring in new assets at huge fees abroad than to reduce the generous fees that they presently extract from their U.S. shareholders in order to compete in the States.