SAN FRANCISCO - Charles Schwab Corp. is offering discount brokerage and easy access to hundreds of mutual funds to the world, hoping to replicate the huge success of its U.S. mutual fund supermarket.
Through offices in London, Hong Kong and the Cayman Islands, Schwab is forging partnerships with foreign banks and brokers to distribute its International FundSource offshore mutual fund supermarket. In its international efforts, Schwab will concentrate even more on developing ties with financial intermediaries than it has in the United States, although it will also market directly to investors in Asia, Latin America and Europe.
Market watchers said Charles Schwab is betting his company's future on a prediction that investors worldwide will develop the same hearty appetite for mutual funds that U.S. investors have had.
The global mutual fund industry is estimated at $7 trillion, with about $2.5 trillion of that in offshore funds. With a less than 5% household penetration for mutual fund investment (outside the United States and France), Schwab is seeing huge dollar signs and plenty of opportunity. Market estimates are from consultant Micropal Group Ltd., London.
Chris Poll, Micropal chairman and founder, said Schwab is positioning itself to be the first, and perhaps only, truly global player in cross-border mutual fund distribution.
"The global mutual fund market is very fragmented. Until now, there has been no global player and very few regional players able to distribute mutual fund investment in a meaningful way," said Mr. Poll.
"I think there is enormous potential worldwide for Schwab, especially in the realm of retirement savings," he said.
With approximately 40,000 funds managed globally, 5,800 of those set up as offshore funds, investors will be looking for some type of screen, which Schwab's supermarket provides. Investment advice, through the bank intermediaries Schwab has said it is courting, will be another critical element in developing a successful program, said Mr. Poll.
But Mr. Schwab's bet might be riskier than firm officials care to admit. Market observers point to a very slow start for Schwab's discount brokerage and mutual fund supermarket efforts in the United Kingdom, begun in the early 1990s. Schwab bought the largest European discount brokerage, ShareLink Investment Services, Birmingham, England, in 1995.
Education emphasized
Schwab faces a huge difficulty in translating American-style investment and services to neophyte investors in other nations. Schwab likely will have to start from scratch, educating investors in both developed and emerging markets.
"Despite what might seem like a wide open playing field, Schwab is trying to create demand," said Andrew Guillette, a consultant at Cerulli Associates Inc., Boston. "Unlike the United States, where there was plenty of pent-up demand for mutual fund product which Schwab was able to fulfill in a revolutionary way, I'm not sure there's that kind of pent-up demand abroad," he added.
"I think Schwab's is an interesting strategy, but I question the timing. After all, look at Fidelity Investments, which has tried for the longest time to be successful in Europe," said Geoffrey Bobroff, president of Bobroff Associates Inc., East Greenwich, Conn.
"In fact, it does look like Schwab may have taken a chapter from Fidelity. You introduce a product and if it doesn't work, you shelve it. You retool it and introduce it again and again until it works. Fidelity had to try four times before they were successful in Canada. Fidelity has only begun to see success in the U.K. and they've been there 14 years," he added.
"If they plan to do this in a major way, they will have to make a major commitment of capital for years - between $25 million and $50 million a year - which could be used more profitably in the U.S. immediately," said A. Michael Lipper, president of Lipper Analytical Services Inc., New York.
"But if Chuck Schwab wants to bet the company, as Ned Johnson (of Fidelity Investments) has done from time to time, yes, they may be able to do it," Mr. Lipper said.
Defined contribution growth
Schwab's efforts are driven by an increasingly wealthy middle class that's expanding in developing countries and a global awareness of the need to bolster retirement income, said Gloria Lau, managing director of Schwab International.
There is also a slow, but definite shift toward a defined contribution plan model by many countries and companies that will use the retail mutual fund as a primary investment vehicle, she said.
Ms. Lau said Schwab expects that just as the growth of the U.S. retail mutual fund market was fueled to great extent by defined contribution plan developments, the advance of 401(k) plan models in other countries will have a similar effect on demand.
Schwab plans to export the same high level of customer service and multiple channels of access - Internet trading and information, 24-hour voice-response systems, intermediary training and investment education. The Web site is now English, but will be expanded to include Spanish, Mandarin and Cantonese. The voice response system can accommodate Spanish, English, German, Arabic, Cantonese, Mandarin, several other Chinese dialects and several Indian dialects.
Mark D. Collier, managing director of Schwab International Inc. for Schwab's European operations, said the firm will always try to communicate with customers and intermediaries using local staff and local languages.
Ms. Lau said Schwab is focusing very heavily on recruiting banks as financial intermediaries. Most investors abroad have close relationships with their bank and likely will turn to the bank for investment advice.
Unlike the U.S. version, only a few funds will be offered on a no-load basis, but Schwab has negotiated with fund managers to drop offshore fund load fees to 2% to 4% from the typical 3% to 6%.
With 14 fund families and 200 funds now, Schwab plans to add more funds, perhaps from regional managers and bank partners. There is now $220 million managed through International FundSource.
Some of the mutual fund companies offering offshore funds in the program now are Alliance Capital Management L.P.; Eaton Vance Management; Putnam Investments; Scudder, Stevens & Clark Inc.; Guinness Flight Investment Management Ltd.; Morgan Stanley Asset Management Inc.; and INVESCO.
Eventually, said Mr. Collier, Schwab will be equipped to offer a mixture of offshore funds and local funds in each country, denominated in the local currency.
Resistance from banks
But third-party fund management might be a hard sell to many foreign banks, said observers.
Observers wonder how willing banks will be to offer the products of other managers. Cerulli's Mr. Guillette said banks have about 80% of the European mutual fund market within proprietary bank fund families.
Schwab seems to be having trouble finding non-U.S. managed mutual funds to offer through International FundSource. Foreign-based managers might be reluctant to pay what Schwab wants to get their mutual funds in Schwab's supermarkets, said Robert C. Cornick, deputy chairman of Perpetual PLC, Henley-on-Thames, England, one of the U.K.'s largest pure retail mutual fund managers.
"When Schwab began its efforts here in the U.K. in the early 1990s, it found that most investment groups were reluctant to join the supermarket because of the terms of the agreements. The initial effort was essentially stillborn, because U.K. fund managers were not comfortable about paying Schwab the fees it wanted and basically allowing Schwab to control their pricing and therefore, their revenue.," said Mr. Cornick.
In Europe, a historical reliance on fixed-income and cash funds has led to concern about the wisdom of encouraging equity investment at all, much less through U.S. managers. "It won't sit well with German banks, for example, to be encouraging clients to move not only into a new investment concept, but also to do it through American managers on U.S. pricing terms," said Mr. Cornick.
