For non-European asset managers who seek international growth, Europe is an increasingly significant opportunity. With an estimated $10.8 trillion of assets under management, the European market—second in size only to that of the United States—is among the fastest growing in the world.1 From 1992 to 1997, pension funds, insurers, and mutual funds each experienced double-digit growth—of 13 percent, 10 percent, and 17 percent, respectively.
With pension reform under way, the euro launched, and individual investors recognizing the need to finance their own retirements, more growth is expected. But in the new Euroworld of 3 percent interest rates, the days of high-yield sovereign debt or gains from interest-rate convergence as a result of monetary union are a distant memory. So European investors—by tradition, domestically oriented and averse to risk—are being forced to look beyond domestic fixed-income products for more attractive returns. The result is a notable shift to equities and balanced funds, which accounted for 44 percent of mutual-fund assets in 1998, up from 24 percent in 1992.
Over the same period, the proportion of European investors’ assets invested internationally rose as well, though less dramatically, to 27 percent, from 24 percent.2 Now that the euro has been introduced and exchange rate risk eliminated, the proportion of assets allocated outside home markets should rise.
Even so, a single, seamless European market will take some time to develop. The relative importance of pensions, life insurance, and mutual funds still varies by country, reflecting different tax treatments and consumer preferences, as well as the historical role of government or industry in providing for retirement. As Exhibit 1 shows, pensions range from 37 percent of personal financial assets in the traditional, well-funded pension market of the Netherlands to less than 10 percent in France, Germany, and Spain.
The main challenge for new entrants into this fast-growing and rapidly changing market will be to develop a distribution system, for the present one is controlled by a small number of banks and insurers in each country. Indeed, thanks to dense branch networks, relatively unsophisticated and loyal consumers, and traditionally conservative attitudes toward the allocation of assets, a few domestic banks have enjoyed what in some countries amounts almost to a stranglehold on the distribution of mutual funds.
As Exhibit 2 shows, banks distribute more than 90 percent of all mutual funds in Portugal and Spain but only 10 percent in the United Kingdom, where independent financial advisers play a uniquely strong role. For new entrants, the cost of gaining access to this retail distribution network is high, and rising. They can think about acquiring asset managers (although this may be prohibitively expensive), becoming specialized product providers, joining or creating alliances of smaller pan-European asset managers, or going it alone with remote distribution. 
About the Authors
Bozidar Djelic is a principal in the Paris office, Andrew Doman is a director in the London office, and John Woerner is a consultant in the New York office.
Notes