RUNNING HARD, GOING NOWHERE OVERSEAS: U.S. FUNDS GET COLD SHOULDER ABROAD; ASSETS DOUBLE BUT MARKET SHARE SLIPS

American mutual fund companies aggressively wooing overseas investors are in for a shock: As a group they’ve failed to boost market share relative to the locals.

In addition to veteran players like Fidelity Investments, the growing list of U.S. firms courting international customers includes Putnam Investments, Massachusetts Financial Services Inc. and Scudder Kemper Investments Inc., as well as smaller firms like Eaton Vance Distributors Inc. and State Street Research & Management Co.

Despite impressive asset gains — 64 U.S. firms have gathered some $120 billion in offshore funds, more than doubling 1996’s $56.6 billion total — much of the assets are Fidelity’s and the overseas market share hasn’t budged, according to unreleased figures from Boston consultant Cerulli Associates.

U.S. companies account for 3.6% of the $3.3 trillion mutual fund market abroad, vs. 3.7% of $56.6 billion two years ago.

Cerulli, which plans to release its analysis of U.S. inroads into offshore funds this spring, says it obtained more extensive data for 1997’s asset figures, so the comparison isn’t entirely apples to apples.

But the numbers suggest that American companies are finding it more difficult than thought to export Yankee-style money management to markets in Europe, Latin America and Asia.

The pressure is on. The $4.4 trillion U.S. mutual fund market is considered a maturing arena — more than $1 trillion ahead of the rest of the world.

But while American firms find prospects overseas irresistible, many have made little or no headway over the past two years, says Cerulli consultant Andrew Guillette.

“The obstacles are overwhelming,” Mr. Guillette says. “You have a situation where foreign investors are unfazed with U.S. asset managers and you have distribution systems that are completely monopolized by banks.”

What’s more, national securities and tax laws in many foreign markets can make the registration and sale of U.S. funds impractical, if not impossible.

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“Most markets, particularly Western Europe, Japan and Hong Kong, have laws and regulations that are as complicated as those in the United States but not identical to them,” says Geoffrey R.T. Kenyon, a lawyer specializing in international law at Boston’s Goodwin Procter & Hoar. “There is this whole new level of regulation that U.S. mutual fund companies have to worry about once they go offshore.”

Even if those obstacles are overcome, U.S. fund sponsors face an even bigger hurdle: building a culturally savvy distribution network.

Many Europeans, for example, are accustomed to turning to their banks for financial needs, including mutual funds, and are indifferent to direct marketing pitches by firms like Fidelity. Same story in Japan, which is attracting some of the biggest U.S. mutual fund names as it deregulates many financial services beginning April 1 (InvestmentNews, Feb. 16).

“Our colonial cousins are certainly facing an uphill battle over here,” quips Kate Gill, chief executive of the Institute of Financial Planning, which is based in Bristol, England, and represents 650 British financial planners.

But American firms remain undaunted.

“The five- to 10-year plan is that overseas is where we are going to get our next big leg up in the growth of mutual fund assets,” says Peter D. Laird, a senior managing director at Massachusetts Financial Research, which is based in Boston and peddles 18 funds offshore.

Many also are betting that foreign investors — especially those in such markets as Germany and France, where employers have scrapped old pension plans in favor of savings plans funded by workers — are bound to see the light and start pouring their savings into mutual funds.

“Investors in (Europe and Japan), as well as in many emerging markets, are realizing that the state may not be there when it comes time for them to retire,” says Peter H. Mattoon, director of international mutual funds at Scudder Kemper. “They are starting to take t
hings into their own hands.”

Scudder, bolstered by its merger in December with Swiss insurance giant Zurich Group, is dramatically stepping up the pace of its asset quest abroad.

About 5% of the firm’s $200 billion in total assets is managed for non-U.S. investors, including about $3 billion in mutual funds. The firm, which calls itself “pure no-load” in the U.S., is negotiating with dozens of commission-based brokers in such markets as Australia, Japan, Germany, Italy, Switzerland and Britain about distributing its offshore funds. Over the next six months, Scudder expects to boost the number of wholesalers who sell its funds to 50 from 10.

Fidelity finds its feet

While most U.S. firms are forging alliances with foreign institutions to offer offshore funds, Fidelity, after many missteps in its early days abroad, is one of the few growing its business from the ground up.

The company, which launched its first offshore mutual fund in 1969, has more than tripled its assets under management in four years to $40 billion. That represents about 6% of its total $614 billion. “We plan to continue growing at the same pace over the next four years,” says Paul Kafka, a spokesman for Fidelity International, based in London.

Unlike its rivals, Fidelity isn’t interested in making exclusive deals with banks, broker-dealers or other financial intermediaries overseas. Nor is it planning to purchase assets and distribution, as Merrill Lynch & Co. did with its blockbuster buy last year of Britain’s $172 billion-asset Mercury Asset Management.

“Our objective,” says Ms. Kafka, “is to distribute our funds through as many channels as we can.”

Fidelity also is breaking the rules by opening retail offices and selling funds directly to consumers. The 20th such office is about to open in Spain. Italy may be next.

Meanwhile, crosstown rival Putnam is copying its own U.S. strategy in hopes of generating at least 25% of revenue and profits from clients outside the U.S. within five
years. It is marketing funds through financial intermediaries and selling directly to institutional investors. About 4.3% of its $245 billion is in offshore funds.

In pensions, Putnam set up a joint venture last June with Nippon Life Insurance Co., Japan’s largest insurer. In mutual funds, it has a joint venture in Italy with Milan’s Gruppo Bipop. (Putnam bought 20% of Bipop in 1995 and has an option to buy 50%.) It just hired marketers in Latin America, and it has set its sights on the U.K., Germany, France, Canada, Australia and Hong Kong.

Alliance Capital Management, with more than $217 billion in assets, also is on a buying spree.

Early this year, the New York-based firm bought a 20% equity stake in Hanwha Investment Trust Management Co., a money management boutique in Seoul. The venture will allow Alliance to distribute offshore to clients as well as to co-create investment products with Hanwha.

Other big U.S. players overseas include Baltimore’s T. Rowe Price Associates, through its Rowe-Price Fleming unit, and Franklin Templeton Group. Both have been selling offshore funds for decades.

Smaller players are also getting in on the act. They include $23 billion-asset Eaton Vance Distributors, which expects to boost funds managed to 10% of assets within two years, compared to $375 million today; $95 billion-asset Federated Investors, which has $2 billion in offshore bond funds and will add equity funds this year; and $47 billion-asset State Street Research and Management Co., which will sell its first offshore mutual fund in a few months and is planning two more.

Yet one fund giant is proceeding cautiously. Vanguard Group, the No. 2 player in the United States, with $350 billion in assets, has only three offshore funds in Australia.

“It’s clearly not a ‘build it and they will come’ scenario overseas,” Goodwin Procter’s Mr. Kenyon says. “The general view among veteran U.S. fund sponsors abroad is that the low-hanging fruit is already gone.”