y now nearly everyone in the fund industry is aware of the opportunities that lie overseas, especially in Japan and Europe. (Total investments in Japan equal $10.2 trillion while those in Europe amount to $13.5 trillion. Assets in the U.S. are worth $24 trillion according to Morgan Stanley Dean Witter
What few may know are the nuts and bolts of entering these markets. Robert Leach
, controller at American Century Investments
shared the lessons his firm learned on how to determine strategy and find European vendors at the ICI's Tax & Accounting Conference
in San Diego.
After determining a distribution strategy (partnering with a local vendor, buying a local vendor, building a new distributor, etc.) Leach noted that the first decision a U.S. fund company will have to make is to decide where to domicile its European fund offering.
There are two options: Luxembourg and Dublin. Luxembourg, explained Leach, is the established player while Dublin is the newcomer. Luxembourg has about three times the business of Dublin. About 5,000 funds with $575 billion in assets are domiciled in Luxembourg. It has been the leader in overseas fund domiciling since the late Eighties.
Dublin, on the other hand, is the home of only about 1,500 funds with roughly $110 billion in assets, according to Leach. It has been most popular with hedge funds which keep their home in the Cayman Islands and are serviced in Ireland.
That said, which is the best choice?
Leach shared what he learned as a part of American Century's recent foray to both cities.
The biggest drawback to Luxembourg, said Leach, is the subscription tax imposed on funds domiciled there. The tax is equal to six basis points for equity funds and one basis point for money market funds. Dublin has no similar tax. He pointed out that this tax is most harmful to money market funds.
One the plus side Luxembourg is well-established and is the most familiar domicile for Europeans and has been the top choice for European retail funds. Because of its history it has an established transfer agent infrastructure able to handle the volume needed by retail funds.
Dublin has two major advantages for U.S. fund groups -- no subscription tax, and a young, well-educated, English speaking workforce. Leach pointed out that the average age of the Irish population is under thirty, making it the youth of Europe. It is also growing more quickly than Luxembourg.
On the downside, Dublin requires that funds appoint a trustee. This creates an added layer of costs. However, it also adds a level of oversight that may assist some fund companies.
Leach recommends that fund companies visit both locations, if only to explode some commonly held myths about each.
One myth that Leach found is that Luxembourg regulators are less flexible. "We were told that there is no way to meet with regulators in Luxembourg unless you have a product in hand," Leach explained. "We had none, yet they met with us for a series of meetings."
Another widely held belief is that Europeans will not buy funds domiciled in Dublin. Leach points out that Commerz Bank
recently chose to domicile its fund group in Dublin, suggesting that this assumption is also out-of-date.
That Dublin is cheaper is another widely held belief that Leach took issue with. "We found that to set up a fund took $30 to $50 thousand in either market," he said. Luxembourg had the reputation for taking longer to register funds because of the volume that it did, according to Leach, but he found that the time has dropped. Meanwhile, the time it takes to register a fund in Dublin has lengthened as its volume has grown.
Leach admitted that the ultimate decision of which location to pick may come down to comfort. Another factor may be where your service providers of choice are, although he pointed out that many service providers have no opened offices in both locations.
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