Description
A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public.
CASE STUDIES ON MUTUAL FUNDS IN GERMANY AND SWEDEN
Performance and Fees Analysis
ii
Previous studies in mutual funds were focused mainly on the US market. The general belief is that mutual funds in average cannot outperform the market. We decided to test this theory in the less studied markets of equity funds in Sweden and Germany. Another controversial point is fees in mutual funds. Therefore we will give an overview of fees in both markets, and analyze the relation between fees and performance. This study analyzes the Swedish and the German mutual funds market. For the German market, funds with domicile in Germany and abroad are analyzed separately in order to examine possible differences between funds with a domestic domicile, and funds domiciled abroad. 1285 funds performances covering period of 2000-2008 were calculated using Jensen's Alpha measure. The results showed that all funds have on average negative alphas. Approximately 20% of funds in the German market and 12% of the funds in the Swedish market have significantly negative performance. Regarding fees, there is only a small difference between funds in the German and the Swedish market in general, while the difference between funds domiciled in Germany and Luxembourg was significantly bigger. Our analysis of the relation between fees and performance showed no significant relationship.
Key words: mutual funds, mutual funds performance, management fees, swedish mutual funds, german mutual funds, luxembourg funds, jensen's alpha
iii
iv
Acknowledgment ..................................................................................................................................i Abstract ...............................................................................................................................................iii Table of Contents .................................................................................................................................v List of Tables......................................................................................................................................vii List of Figures ....................................................................................................................................vii List of Abbreviations.........................................................................................................................viii A. Introduction..................................................................................................................................1 A.1. Background ...........................................................................................................................1 A.2. Problem and purpose of the study .........................................................................................2 A.3. Research organization ...........................................................................................................4 B. Mutual Funds in their particular markets: Europe, Sweden and Germany..................................5 B.1. Overview: Mutual Funds in Europe ......................................................................................5 B.2. The "Nationality" of a fund...................................................................................................7 B.3. Mutual Funds in Sweden.......................................................................................................7 B.4. Mutual Funds in Germany.....................................................................................................8 C. Theoretical Methodology........................................................................................................... 11 C.1. Epistemological considerations: Positivist approach .......................................................... 11 C.2. Ontological considerations: Objectivism ............................................................................ 11 C.3. Research Strategy: Quantitative vs Qualitative method......................................................12 C.4. Deductive and Inductive Theory .........................................................................................12 D. Theoretical background..............................................................................................................13 D.1. Mutual funds and modern portfolio theory (CAPM) ..........................................................13 D.2. Performance measurement of mutual funds........................................................................14 D.2.1. Basics ...........................................................................................................................14 D.2.2. Selection of a benchmark.............................................................................................15 D.2.3. Risk-free Rate ..............................................................................................................16 D.2.4. Sharpe Ratio.................................................................................................................16 D.2.5. Treynor's Index.............................................................................................................17 D.2.6. Risk-Adjusted Performance Measure (M2) .................................................................17 D.2.7. Jensen's Index...............................................................................................................18 D.3. Impact of Survivorship-bias ................................................................................................19 D.4. Fees on mutual funds and their possible impact on performance .......................................20 D.5. Persistence in mutual funds performance............................................................................22 D.6. Previous Research in the field of Mutual Funds in Sweden and Germany.........................23 E. Empirical Analysis .....................................................................................................................25 E.1. Limitations...........................................................................................................................25 E.2. Data collection.....................................................................................................................26 E.3. Estimation of fund performance..........................................................................................26 E.4. Selection of benchmarks .....................................................................................................27 E.5. Analysis on the impact of fees ............................................................................................28 F. Results........................................................................................................................................29 F.1. Performance.........................................................................................................................29 F.2. Fees......................................................................................................................................31 G. Conclusions................................................................................................................................33 H. Validity and Reliability ..............................................................................................................34 I. Further Research ........................................................................................................................35 J. References ..................................................................................................................................36 K. Appendix....................................................................................................................................39
v
vi
Table 1 Fundamental differences between quantitative and qualitative research strategies ..............12 Table 2 Persistence in mutual funds performance..............................................................................23 Table 3 Benchmarks used for each category......................................................................................28 Table 4 Summary of Alpha analysis for the period from 2000 until 2008.........................................30 Table 5 T-test results for alphas in each category ..............................................................................31 Table 6 TER analysis for Germany and Sweden ...............................................................................31 Table 7 Quintile analysis of German funds........................................................................................32
Figure 1 Research organization............................................................................................................4 Figure 2 Assets by country of domicile ...............................................................................................5 Figure 3 Net assets of European Investment Funds (EFAMA)............................................................6 Figure 4 Round-trip fund example.......................................................................................................7 Figure 5 Fund assets (SEK billion) in the Swedish investment fund market ......................................8 Figure 6 Distribution of fund types in German market........................................................................9 Figure 7 Distribution channels of mutual funds in Germany.............................................................10 Figure 8 The SML and a positive-alpha stock (source: Bodie, p.303)...............................................14 Figure 9 Recent trends in UCITS Assets by Investment Type (EUR billions), ................................24
vii
AC AuM BVI CAPM DE EFAMA EMU EU EUR FEFSI IMI ISIN JPY LU SEK T ER UCITS USD T-bills
All Countries Asset under Management The German Association for Investment and Asset Management Capital Asset Pricing Model Germany domiciled European Fund and Asset Management Association European Monetary Union European Union Euro Fédération Européenne des Fonds et Sociétés d'investissement (now called EFAMA) Investable Market Index International Securities Identification Number Japanese Yen Luxembourg domiciled Swedish Krona Total Expense Ratio Undertakings for Collective Investment in Transferable Securities United States Dollar Treasury Bills
viii
A.1. Background
Mutual funds have become a popular investment tool among individual investors. Mutual funds are open-end investment companies which allow individual investors to have diversified portfolios without involving into active management of these portfolios.1 Another benefit for investors is a reduction of costs of investments into a variety of securities. But of course investments in mutual funds incur costs, such as management fees, which are basically the price of a particular mutual fund. At the same time, these costs are the revenue for service providers in the fund market. These fees decrease the rate of return of a portfolio. Fees differ among countries, and among mutual funds.2
While the mutual fund industry in the US (United States of America) is still the biggest in the world, the European Market has become the second biggest.3 Mutual funds play a more and more important role as a vehicle for private person's savings, as well as for their retirement planning: the assets held by mutual funds have increased steadily, and while in Germany roughly 30% of all households held mutual funds in 2008,4 already more than 75% of all Swedish adults hold some mutual fund (or more than 90%, if premium pensions are included).5
As mutual funds grow, they are not only relevant for investors: they also have some importance in providing equity capital as well as credit capital to companies, for example through equity or corporate bond funds.6
Thus, we believe that further investigation in issues of mutual funds in general, as well as their performance and the role of fees in particular, might be of high interest for researchers and investors in mutual funds.
1
A.2. Problem and purpose of the study
Over the past decades, there have been many studies about mutual funds, their performances and attributes, especially for the US market. Germany and Sweden are both European markets with somehow different characteristics, as we will show later. Though it is not hard to find basic information about individual Swedish or German mutual funds, we considered it worthy to make an up-to date study on these two markets, in which we provide an overview of performance and fees of mutual funds in these two countries based on a big sample of funds. Therefore, it is one purpose of this study to calculate a performance measure of all funds in our sample, in order to give an overview on the performance in different categories and countries.
Grossmann and Stiglitz found, that informed investors are able to earn a return on the costs for their information.7 These results are generally interpreted such that informed investors should be able to just compensate for their costs for information. When these costs are passed through to investors in mutual funds, these costs therefore do not necessarily imply a return worse than the market return.8 If this is the case, we would expect funds to perform no worse than the market.
Another interesting aspect is the role of fee in the context of fund performance. As we compare fees for different markets, it is also interesting to know how these fees are related to performance, that is, if higher fees come along with better or worse performance. Depending on this, we can answer if investors should be concerned about the charged fees when selecting a fund. Furthermore, in both markets, foreign domiciled funds make out a big part of the market for mutual funds. Investors are free to choose either domestic domiciled or foreign domiciled funds. As some investors choose foreign funds for example because of different taxation rules,9 it is interesting if these funds generally have different characteristics regarding performance and fees. This might be the case, when foreign funds charge higher fees for the tax benefit they provide.10 Such differences regarding fees have been found in previous studies,11 and might have a big impact on the overall return of an investment in such a fund. Therefore, it might be of interest to analyze differences between domestic domiciled funds and funds domiciled abroad. These differences will be examined exemplarily in the German market, as we were able to find comprehensive data on the issue for Germany.
7
2
Generally, differences between different countries and markets could exist due to different laws and regulations,12 different competitiveness in different markets,13 economies of scale, experience of a countries fund industry,14 or any other differences.
Thus, the main purpose of this study will be to answer the following research questions: Is there a significant difference in performance managed in Sweden and mutual funds managed in Germany? How are expenses and performance related in each of these countries? What are the differences between LU (Luxembourg) and DE (funds in Germany? Accordingly, we state the following hypotheses which we will try to confirm or reject: - Germany) domiciled
.! .! /0 .! .!
/0 1 #
0 1 23 -+ # 4
Mutual funds of Germany and Sweden which invest only in equities will be analyzed during the period of 2000 - 2008.
3
A.3. Research organization
In the previous chapter we stated our research questions and hypotheses. Further we will continue in a deductive research style. The deductive approach will be discussed later in C.2. In the next chapter (B), we will present an overview of mutual funds markets in Europe, Sweden and Germany. In chapters C and D we will lay the methodological and theoretical background. After these parts we will show how we did the empirical analysis and present our results. In chapter G, we will conclude our research by connecting theories and our empirical findings. Later we will present further research suggestions, references used and appendix.
A. Research Questions and Hypotheses statement B. General information about mutual funds markets in Europe, Sweden and Germany C. Theoretical methodology D. Theoretical background on which the study will be based on
E. Empirical Analysis Performance Analysis Fee Analysis
F. Results GERMANY DE LU SWEDEN
G. CONCLUSIONS
Figure 1 Research organization
4
B.1. Overview: Mutual Funds in Europe
The European Union represents the second-biggest market for mutual funds after the US, with total assets under management in Investment Funds amounting to 6,939 billion Euros at the end of 2007.15 Mutual funds have seen steady growth over the last decade.16 The following graph shows the market share of the biggest countries, measured in asset under management (AuM) in investment funds by country of domicile:
Others 16% Sweden 2% Italy 5% UK9% France 19% Luxembourg 26%
Ireland 10% Germany 13%
Figure 2 Assets by country of domicile (Source: EFAMA Asset Management Report 2009, p.14; own graph)
However, the situation looks slightly different if the market share is measured by fund asset management instead of country of domicile: many funds that have their domicile in another country are managed especially by fund managers from UK, France and Germany.17
This also leads to the fact that the European market for mutual funds is not limited to (national) domestic markets, but highly internationalized with a lot of cross-border activities.18 This trend has been supported by the introduction of UCITS (Undertakings for Collective Investment in Transferable Securities) by the European Community with Directive 85/611/EEC in 1985. A fund that is registered as an UCITS in one member state can relatively easy be marketed in the whole EU.19 In 2002, FEFSI20 (Fédération Européenne des Fonds et Sociétés d'investissement) approved model prospectus for three types of funds; stock funds, bond funds and money market funds.21 With
5
this simplified and unified prospectus, European investors will be able to read and understand different investment funds. It will make easy for funds to float across the EU.
In Summer 2008, EU proposed new directive for UCITS, which will be even more efficient by eliminating regulatory difficulties.22 It is planned to be effective in 2011. This new regulation will require only 2 pages of prospectus in plain English. This new set of rules is expected to significantly decrease costs for investors, reduce administrative paperwork and enable convergence of mutual funds. UCITS is in a process of revision with the aim to further improve a single market for investment funds.23
Around 34% of European Investment Funds that are not UCITS24 consist mainly of real estate funds and special funds dedicated to institutional investors.25
In context of the recent financial crisis, assets held by European Investment Funds dropped by a total of 22.3%. In UCITS, this was to 77% due to value losses, and to 23% due to outflows of capital.26
Figure 3 Net assets of European Investment Funds (EFAMA)
6
B.2. The "Nationality" of a fund
In order to examine any differences between German and Swedish mutual funds, we must think about the nationality of mutual funds. First, every fund has a country in which it is legally domiciled, that is, the country in which it is legally organized. A fund only has one country of domicile. Second, a fund has one or several countries of sale, that is, countries in which is registered for sale.27 Besides the fact that foreign investment companies can sell their funds in several countries, this leads to the fact that subsidiaries of a national investment company can set up a fund in a foreign country, which has thus a foreign country of domicile. Then, this fund is sold in the original country. The following graph illustrates the concept of so-called "round-trip funds"28 in an example: Luxembourg Germany
Subsidiary of German investment company sets up a fund with legal domicile in Luxembourg
German investment company
Fund with domicile of Luxembourg is sold in Germany
Figure 1 Round-trip fund example 4
Among others, taxation issues might have supported the trend of round-trip funds. The German Association for Investment and Asset Management (BVI) has foreign subsidiaries of its members also included as its members,29 and seems to include them in their aggregate statistics without making a clear remark on that, at least in its Yearbook 2008. However, EFAMA clearly addresses the issue and states the country of domiciliation, e.g. in its Quarterly Statistics release.30
B.3. Mutual Funds in Sweden
In early `80's, the Swedish market had only a few mutual funds. Investor activity was low due to the lack of interest in funds. In 1984, when stock market started to increase, the interest to invest to the market also surged. This period is also essential due to the fact that the Swedish government introduced "Allemansfonder", which were tax-free mutual funds. After this period, the tax-free portion of capitalization of Allemans funds has been reduced and investments to these funds were limited. Since 1997, Allemans funds became taxed the same way as other capital asset investments.
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7
doc_758444178.docx
A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public.
CASE STUDIES ON MUTUAL FUNDS IN GERMANY AND SWEDEN
Performance and Fees Analysis
ii
Previous studies in mutual funds were focused mainly on the US market. The general belief is that mutual funds in average cannot outperform the market. We decided to test this theory in the less studied markets of equity funds in Sweden and Germany. Another controversial point is fees in mutual funds. Therefore we will give an overview of fees in both markets, and analyze the relation between fees and performance. This study analyzes the Swedish and the German mutual funds market. For the German market, funds with domicile in Germany and abroad are analyzed separately in order to examine possible differences between funds with a domestic domicile, and funds domiciled abroad. 1285 funds performances covering period of 2000-2008 were calculated using Jensen's Alpha measure. The results showed that all funds have on average negative alphas. Approximately 20% of funds in the German market and 12% of the funds in the Swedish market have significantly negative performance. Regarding fees, there is only a small difference between funds in the German and the Swedish market in general, while the difference between funds domiciled in Germany and Luxembourg was significantly bigger. Our analysis of the relation between fees and performance showed no significant relationship.
Key words: mutual funds, mutual funds performance, management fees, swedish mutual funds, german mutual funds, luxembourg funds, jensen's alpha
iii
iv
Acknowledgment ..................................................................................................................................i Abstract ...............................................................................................................................................iii Table of Contents .................................................................................................................................v List of Tables......................................................................................................................................vii List of Figures ....................................................................................................................................vii List of Abbreviations.........................................................................................................................viii A. Introduction..................................................................................................................................1 A.1. Background ...........................................................................................................................1 A.2. Problem and purpose of the study .........................................................................................2 A.3. Research organization ...........................................................................................................4 B. Mutual Funds in their particular markets: Europe, Sweden and Germany..................................5 B.1. Overview: Mutual Funds in Europe ......................................................................................5 B.2. The "Nationality" of a fund...................................................................................................7 B.3. Mutual Funds in Sweden.......................................................................................................7 B.4. Mutual Funds in Germany.....................................................................................................8 C. Theoretical Methodology........................................................................................................... 11 C.1. Epistemological considerations: Positivist approach .......................................................... 11 C.2. Ontological considerations: Objectivism ............................................................................ 11 C.3. Research Strategy: Quantitative vs Qualitative method......................................................12 C.4. Deductive and Inductive Theory .........................................................................................12 D. Theoretical background..............................................................................................................13 D.1. Mutual funds and modern portfolio theory (CAPM) ..........................................................13 D.2. Performance measurement of mutual funds........................................................................14 D.2.1. Basics ...........................................................................................................................14 D.2.2. Selection of a benchmark.............................................................................................15 D.2.3. Risk-free Rate ..............................................................................................................16 D.2.4. Sharpe Ratio.................................................................................................................16 D.2.5. Treynor's Index.............................................................................................................17 D.2.6. Risk-Adjusted Performance Measure (M2) .................................................................17 D.2.7. Jensen's Index...............................................................................................................18 D.3. Impact of Survivorship-bias ................................................................................................19 D.4. Fees on mutual funds and their possible impact on performance .......................................20 D.5. Persistence in mutual funds performance............................................................................22 D.6. Previous Research in the field of Mutual Funds in Sweden and Germany.........................23 E. Empirical Analysis .....................................................................................................................25 E.1. Limitations...........................................................................................................................25 E.2. Data collection.....................................................................................................................26 E.3. Estimation of fund performance..........................................................................................26 E.4. Selection of benchmarks .....................................................................................................27 E.5. Analysis on the impact of fees ............................................................................................28 F. Results........................................................................................................................................29 F.1. Performance.........................................................................................................................29 F.2. Fees......................................................................................................................................31 G. Conclusions................................................................................................................................33 H. Validity and Reliability ..............................................................................................................34 I. Further Research ........................................................................................................................35 J. References ..................................................................................................................................36 K. Appendix....................................................................................................................................39
v
vi
Table 1 Fundamental differences between quantitative and qualitative research strategies ..............12 Table 2 Persistence in mutual funds performance..............................................................................23 Table 3 Benchmarks used for each category......................................................................................28 Table 4 Summary of Alpha analysis for the period from 2000 until 2008.........................................30 Table 5 T-test results for alphas in each category ..............................................................................31 Table 6 TER analysis for Germany and Sweden ...............................................................................31 Table 7 Quintile analysis of German funds........................................................................................32
Figure 1 Research organization............................................................................................................4 Figure 2 Assets by country of domicile ...............................................................................................5 Figure 3 Net assets of European Investment Funds (EFAMA)............................................................6 Figure 4 Round-trip fund example.......................................................................................................7 Figure 5 Fund assets (SEK billion) in the Swedish investment fund market ......................................8 Figure 6 Distribution of fund types in German market........................................................................9 Figure 7 Distribution channels of mutual funds in Germany.............................................................10 Figure 8 The SML and a positive-alpha stock (source: Bodie, p.303)...............................................14 Figure 9 Recent trends in UCITS Assets by Investment Type (EUR billions), ................................24
vii
AC AuM BVI CAPM DE EFAMA EMU EU EUR FEFSI IMI ISIN JPY LU SEK T ER UCITS USD T-bills
All Countries Asset under Management The German Association for Investment and Asset Management Capital Asset Pricing Model Germany domiciled European Fund and Asset Management Association European Monetary Union European Union Euro Fédération Européenne des Fonds et Sociétés d'investissement (now called EFAMA) Investable Market Index International Securities Identification Number Japanese Yen Luxembourg domiciled Swedish Krona Total Expense Ratio Undertakings for Collective Investment in Transferable Securities United States Dollar Treasury Bills
viii
A.1. Background
Mutual funds have become a popular investment tool among individual investors. Mutual funds are open-end investment companies which allow individual investors to have diversified portfolios without involving into active management of these portfolios.1 Another benefit for investors is a reduction of costs of investments into a variety of securities. But of course investments in mutual funds incur costs, such as management fees, which are basically the price of a particular mutual fund. At the same time, these costs are the revenue for service providers in the fund market. These fees decrease the rate of return of a portfolio. Fees differ among countries, and among mutual funds.2
While the mutual fund industry in the US (United States of America) is still the biggest in the world, the European Market has become the second biggest.3 Mutual funds play a more and more important role as a vehicle for private person's savings, as well as for their retirement planning: the assets held by mutual funds have increased steadily, and while in Germany roughly 30% of all households held mutual funds in 2008,4 already more than 75% of all Swedish adults hold some mutual fund (or more than 90%, if premium pensions are included).5
As mutual funds grow, they are not only relevant for investors: they also have some importance in providing equity capital as well as credit capital to companies, for example through equity or corporate bond funds.6
Thus, we believe that further investigation in issues of mutual funds in general, as well as their performance and the role of fees in particular, might be of high interest for researchers and investors in mutual funds.
1
A.2. Problem and purpose of the study
Over the past decades, there have been many studies about mutual funds, their performances and attributes, especially for the US market. Germany and Sweden are both European markets with somehow different characteristics, as we will show later. Though it is not hard to find basic information about individual Swedish or German mutual funds, we considered it worthy to make an up-to date study on these two markets, in which we provide an overview of performance and fees of mutual funds in these two countries based on a big sample of funds. Therefore, it is one purpose of this study to calculate a performance measure of all funds in our sample, in order to give an overview on the performance in different categories and countries.
Grossmann and Stiglitz found, that informed investors are able to earn a return on the costs for their information.7 These results are generally interpreted such that informed investors should be able to just compensate for their costs for information. When these costs are passed through to investors in mutual funds, these costs therefore do not necessarily imply a return worse than the market return.8 If this is the case, we would expect funds to perform no worse than the market.
Another interesting aspect is the role of fee in the context of fund performance. As we compare fees for different markets, it is also interesting to know how these fees are related to performance, that is, if higher fees come along with better or worse performance. Depending on this, we can answer if investors should be concerned about the charged fees when selecting a fund. Furthermore, in both markets, foreign domiciled funds make out a big part of the market for mutual funds. Investors are free to choose either domestic domiciled or foreign domiciled funds. As some investors choose foreign funds for example because of different taxation rules,9 it is interesting if these funds generally have different characteristics regarding performance and fees. This might be the case, when foreign funds charge higher fees for the tax benefit they provide.10 Such differences regarding fees have been found in previous studies,11 and might have a big impact on the overall return of an investment in such a fund. Therefore, it might be of interest to analyze differences between domestic domiciled funds and funds domiciled abroad. These differences will be examined exemplarily in the German market, as we were able to find comprehensive data on the issue for Germany.
7
2
Generally, differences between different countries and markets could exist due to different laws and regulations,12 different competitiveness in different markets,13 economies of scale, experience of a countries fund industry,14 or any other differences.
Thus, the main purpose of this study will be to answer the following research questions: Is there a significant difference in performance managed in Sweden and mutual funds managed in Germany? How are expenses and performance related in each of these countries? What are the differences between LU (Luxembourg) and DE (funds in Germany? Accordingly, we state the following hypotheses which we will try to confirm or reject: - Germany) domiciled
.! .! /0 .! .!
/0 1 #
0 1 23 -+ # 4
Mutual funds of Germany and Sweden which invest only in equities will be analyzed during the period of 2000 - 2008.
3
A.3. Research organization
In the previous chapter we stated our research questions and hypotheses. Further we will continue in a deductive research style. The deductive approach will be discussed later in C.2. In the next chapter (B), we will present an overview of mutual funds markets in Europe, Sweden and Germany. In chapters C and D we will lay the methodological and theoretical background. After these parts we will show how we did the empirical analysis and present our results. In chapter G, we will conclude our research by connecting theories and our empirical findings. Later we will present further research suggestions, references used and appendix.
A. Research Questions and Hypotheses statement B. General information about mutual funds markets in Europe, Sweden and Germany C. Theoretical methodology D. Theoretical background on which the study will be based on
E. Empirical Analysis Performance Analysis Fee Analysis
F. Results GERMANY DE LU SWEDEN
G. CONCLUSIONS
Figure 1 Research organization
4
B.1. Overview: Mutual Funds in Europe
The European Union represents the second-biggest market for mutual funds after the US, with total assets under management in Investment Funds amounting to 6,939 billion Euros at the end of 2007.15 Mutual funds have seen steady growth over the last decade.16 The following graph shows the market share of the biggest countries, measured in asset under management (AuM) in investment funds by country of domicile:
Others 16% Sweden 2% Italy 5% UK9% France 19% Luxembourg 26%
Ireland 10% Germany 13%
Figure 2 Assets by country of domicile (Source: EFAMA Asset Management Report 2009, p.14; own graph)
However, the situation looks slightly different if the market share is measured by fund asset management instead of country of domicile: many funds that have their domicile in another country are managed especially by fund managers from UK, France and Germany.17
This also leads to the fact that the European market for mutual funds is not limited to (national) domestic markets, but highly internationalized with a lot of cross-border activities.18 This trend has been supported by the introduction of UCITS (Undertakings for Collective Investment in Transferable Securities) by the European Community with Directive 85/611/EEC in 1985. A fund that is registered as an UCITS in one member state can relatively easy be marketed in the whole EU.19 In 2002, FEFSI20 (Fédération Européenne des Fonds et Sociétés d'investissement) approved model prospectus for three types of funds; stock funds, bond funds and money market funds.21 With
5
this simplified and unified prospectus, European investors will be able to read and understand different investment funds. It will make easy for funds to float across the EU.
In Summer 2008, EU proposed new directive for UCITS, which will be even more efficient by eliminating regulatory difficulties.22 It is planned to be effective in 2011. This new regulation will require only 2 pages of prospectus in plain English. This new set of rules is expected to significantly decrease costs for investors, reduce administrative paperwork and enable convergence of mutual funds. UCITS is in a process of revision with the aim to further improve a single market for investment funds.23
Around 34% of European Investment Funds that are not UCITS24 consist mainly of real estate funds and special funds dedicated to institutional investors.25
In context of the recent financial crisis, assets held by European Investment Funds dropped by a total of 22.3%. In UCITS, this was to 77% due to value losses, and to 23% due to outflows of capital.26
Figure 3 Net assets of European Investment Funds (EFAMA)
6
B.2. The "Nationality" of a fund
In order to examine any differences between German and Swedish mutual funds, we must think about the nationality of mutual funds. First, every fund has a country in which it is legally domiciled, that is, the country in which it is legally organized. A fund only has one country of domicile. Second, a fund has one or several countries of sale, that is, countries in which is registered for sale.27 Besides the fact that foreign investment companies can sell their funds in several countries, this leads to the fact that subsidiaries of a national investment company can set up a fund in a foreign country, which has thus a foreign country of domicile. Then, this fund is sold in the original country. The following graph illustrates the concept of so-called "round-trip funds"28 in an example: Luxembourg Germany
Subsidiary of German investment company sets up a fund with legal domicile in Luxembourg
German investment company
Fund with domicile of Luxembourg is sold in Germany
Figure 1 Round-trip fund example 4
Among others, taxation issues might have supported the trend of round-trip funds. The German Association for Investment and Asset Management (BVI) has foreign subsidiaries of its members also included as its members,29 and seems to include them in their aggregate statistics without making a clear remark on that, at least in its Yearbook 2008. However, EFAMA clearly addresses the issue and states the country of domiciliation, e.g. in its Quarterly Statistics release.30
B.3. Mutual Funds in Sweden
In early `80's, the Swedish market had only a few mutual funds. Investor activity was low due to the lack of interest in funds. In 1984, when stock market started to increase, the interest to invest to the market also surged. This period is also essential due to the fact that the Swedish government introduced "Allemansfonder", which were tax-free mutual funds. After this period, the tax-free portion of capitalization of Allemans funds has been reduced and investments to these funds were limited. Since 1997, Allemans funds became taxed the same way as other capital asset investments.
4
7
doc_758444178.docx