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Supermarkets sweep in

Fund supermarkets are set to change the face of mutual fund distribution

in the UK, setting new challenges and presenting new opportunities.

The concept is driven partly by costs and partly by service. The reduction

or even disappearance of several percentage points worth of front-end fees

and regular charges will change the dynamics of the UK industry.

Fidelity and Charles Schwab pioneered the fund supermarket in the US but

no one can pretend that the concept has taken the UK by storm. Indeed, the

fund supermarket has taken several years to cross the Atlantic.

The first was launched in the UK last autumn by Barclays Stockbrokers,

based on traditional technology and processes. By contrast, when the

second made its debut in March this year, it represented a new advance for

Egg, Prudential&#39s online bank.

Fund supermarkets provide investors with easier, lower-cost access to a

range of investment managers and products. They also offer advantageous

switching terms among a range of fund providers. This allows easy

management of assets and easy switching between investment management

styles as client requirements alter or market circumstances change.

The best fund supermarkets will take instructions and service clients over

the internet, eliminating contract notes, statements, annual reports and

other expensive, time-consuming paperwork.

There are other substantial benefits, too. An investor can switch from one

fund to another without the inconvenience and delay normally associated

with the sale of a stake, the delivery of proceeds and reinvestment. Money

thus remains in the market rather than trapped in settlement limbo.

Internet technology has such obvious benefits by comparison with manual

systems that they scarcely need to be enumerated. Web protocols enable the

administrator of a fund supermarket to provide a range of functions such

as the acceptance of deal instructions electronically from the website.

Deal instructions can be aggregated and forwarded to the respective fund

managers.

Technology also enables the disaggregation of allocated units and

dividends, the maintenance of registers and static client data, the

production of daily file extracts for the client&#39s data warehouse and the

reconciliation of all units/shares in issue, cash and dividends.

As well as the clear benefits in service, this offers significant savings

in admin and processing costs. The ability to secure instructions and

service clients fully over the internet from website to nominee processing

will provide considerable processing efficiencies.

Who is likely to emerge as the major players in this new market segment?

It would be invidious to name names but the long-term winners are likely to

be institutions with a track record in financial ser- vices and an

extremely loyal client base. They will need a brand of real standing,

potent distribution capabilities either in bricks or clicks (or both) and

pockets deep enough to absorb project development costs.

The ability to monitor investor attitudes to risk and investment generally

will empower companies with these strengths. In the medium term, their

newly enhanced market positions may even jeopardise the roles of

traditional intermediaries in certain areas.

Fund supermarkets can be differentiated from each other in several ways –

by breadth of fund managers covered or by concentration on the very best or

cheapest funds.

In many cases, terms will be low-cost entry, low-cost switching and,

perhaps, ultimately, free entry and free switching. This is clearly

attractive to the more sophisticated investor keen on active involvement in

managing a portfolio.

A value-adding front-end presence is also vital in differentiating one

supermarket from another. Egg&#39s website aims to increase “stickiness” by

providing a host of supporting services from statistical information on

available funds and deal data to online valuations and scenario simulation.

We believe the fund supermarket has an important part in the development

of the financial services industry but it is not a sector for the small

player or for the faint-hearted.

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