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American wherewithal in London

Fund supermarkets have been a way of life in the US for over a decade so what are the lessons as the supermarketsfinally come to this country?

Charles Schwab pioneered the concept in 1984 with its Mutual Fund Marketplace. This prototype was the first to provide investors with direct access to a selection of funds.

After a slow take-up, Schwab sparked the start of the supermarket culture with the launch of its OneSource platform in 1992.

OneSource was the first online operation to offer no-load and no-transaction-fee funds. Despite a number of competing start-up platforms, it dominated the market from the outset, used not just by direct investors but also by financial advisers as a tool to run their clients&#39 accounts.

It was not until Fidelity launched its FundsNetwork platform in 1993 that Schwab began to feel any serious threat. It had developed a reliable platform and quickly established a solid base of fund providers and clients.

Competitors continued to surface but none made the impact of Fidelity and Schwab. With the emphasis on low-load or no-load funds, smaller supermarkets had to attract clients by charging even lower costs, which often proved unfeasible.

As US supermarkets began to thrive, less prominent fund managers found they could become extremely profitable with the exposure that online trading brought them. Investor loyalty to established investment houses was ditched in favour of fund performance, regardless of whereit came from.

New Hampshire financial adviser Sam Hull says: “Nowadays, the individual fund manager tends to be the focus out here and not the institution. There are a number of legendary star managers in the business. There are so many funds to choose from, I always look at performance and who the fund manager is, not what house it is from.”

Fidelity and Schwab now control around 90 per cent of the US online mutual fund market. The last six months have seen Fidelity overtake Schwab to become the US&#39s biggest supermarket in terms of funds under management.

Around 9 per cent of all long-term fund assets under management in the US are accounted for by fund supermarkets, with this share growing year on year.

The differences between the US and UK investment scenes today are in no small part due to the development of supermarkets in the US.

But it is by no means a foregone conclusion that the UK is set to follow in the footsteps of the US. In the early 1990s, US fund supermarkets kept all client records and dealt with fund providers through anonymous bulk transactions. Fund managers did not know who their clients were, only how much of their funds they had sold. Links between advisers and providers were broken down and although many of these details are now provided to fund managers, the damage has taken its toll.

Ten years ago, around 80 per cent of US advisers had regular direct contact with fund providers. Today, the figure is around 20 per cent.

While fund providers fought to keep their relationships with intermediaries, most found they could not afford to reject the lucrative exposure which supermarkets provided. But fund managers were also wary about taking part in supermarkets run by competing companies.

FundsNetwork senior vice-president Matt Sadler says: “Fidelity is a big competitor of some of the companies that sell through FundsNetwork and when no-transaction-fee platforms began, there was certainly some hesitancy by those rivals. One of the things Fidelity had to do was to prove its trustworthiness to those firms.

“One fund provider refused to join FundsNetwork for several years because it was sure Fidelity was out to steal its business. But after it saw the incredible flows that started to come through FundsNetwork, it became clear that is not how we work.”

Yet it is fears such as these in the UK which have led to the creation of Cofunds, the supermarket masterminded by Threadneedle, Gartmore, M&G and Jupiter. Keen to maintain links with intermediaries, Cofunds claims its management will be independent from any fund provider. It also vows to provide fund managers with comprehensive details of exactly who is buying their funds. If Cofunds is successful, it has the power to mould the UK supermarket scene into a totally different shape to the US. By retaining fund manager links with clients, investment house brands would remain crucial.

Fidelity could find itself at a serious disadvantage without funds from four of the UK&#39s major fund managers while Cofunds will miss Fidelity&#39s powerful range of funds.

Cofunds chief executive Sam Jensen believes UK supermarkets will have caught up with the US in as little as two years but thinks are they are destined to develop in a totally different fashion.

Schwab has yet to enter the UK supermarket arena because it believes it is not yet developed sufficiently.

In the long term, many still believe the UK could turn out just like the US. Cerulli Associates consultant Dennis Gallant suggests that once supermarkets turn their first small fund into a huge success, as happened with Janus in the US, investors will turn their back on brand names in favour of returns.

Ratings will become more important than reputation, with reserve replaced by a ruthless hunt for high performance. It doesn&#39t sound very British.

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