(August 21 – 12:15 ET) – Moody’s Investor Services sees the European Union as the next big market for mutual fund sales.

A report released today by Moody’s suggests that EU nations, “are likely to see a substantial increase in cross-border sales of mutual funds as more asset managers begin to offer a wider array of funds, as the revised 1985 UCITS directive is ratified, and as new technologies such as the Internet create investment harmonization throughout EU countries”.

Moody’s says a pan-European mutual fund market has taken a long time to develop, since 1985 when the European Parliament passed a law permitting the sale of UCITS funds (Undertakings for Collective Investments in Transferable Securities) across national borders. Currently only 30% of 12,000 registered UCITS are sold cross-border, yet they represent two-thirds of European mutual funds.

“Mutual funds aren’t yet being sold throughout the EU because of bank-dominated distribution channels, nationally-focused investors’ habits, and member countries’ regulatory hurdles,” says Moody’s London-based analyst Vania Schleef, author of the report.

However she suggests that the Euro is changing the landscape. “Since October 1999, investors are shifting assets towards international equity funds based on economic sector, rather than investing exclusively in their home markets,” Schleef says.

Other trends are also promoting a pan-European mutual fund market, Schleef says. Banks, which are still the leading sellers of mutual funds, have historically focused on domestic bond funds. “With the new emphasis on equity investments, many banks will be forced to sell third party or major brand-equity cross border funds to maintain their customer base,” Schleef says.

The Internet is also opening things up. “The main question is whether mutual fund companies want to build their market through their own Web sites or sell through third party distributors.”

The market will also be helped by further harmonization among EU countries. A new law, expected to be ratified by member countries before the end of the year, will allow fund companies to operate across the EU if it is registered and approved in one member country. “But the big remaining hurdle for pan-European funds is tax harmonization,” says Schleef. “If that doesn’t occur, many cross-border mutual funds will remain domiciled in Luxembourg and off-shore, where they receive more favorable tax treatment.”
-IE Staff