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Will Europe become #1 in funds? Pozen and Hamacher say it’s likely.

April 7, 2011

Will Europe soon become the world leader in mutual funds, bumping the United States out of its long-held top spot? Bob Pozen and Theresa Hamacher, authors of The Fund Industry: How Your Money is Managed, think that it’s likely, unless the U.S. makes changes in how it regulates funds. They expand on their views in a Spotlight article in the April/May issue of Morningstar Advisor, available here.

Pozen and Hamacher argue that the U.S. needs to harmonize its tax treatment of funds with the approach used in the rest of world. In most other countries, investors don’t pay capital gains taxes until they sell their shares in the fund. That’s not the case in the U.S. where fund holders can get hit with a tax bill whenever the portfolio manager sells securities at a gain. They also suggest that U.S. mutual funds need more investment flexibility to compete with hedge funds — flexibility that European funds already have.

The authors point out that the Europe is lagging in one very important area: shareholder costs. European funds are generally a lot more expensive than U.S. funds, due to their smaller size and a less competitive distribution market. But they note that changes in European regulation have made it easier to merge funds. Add in the potential for more competition — which would drive down fees — and faster asset growth — which could create economies of scale — and  that gap may soon close.

Do you agree with their conclusions? Please share your thoughts with  other NICSA members.

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