Mutual fund companies are homing in on the lucrative marketing, but so far they're barely a blip on the radar.
With massive marketing muscle, lavish advertising budgets and access to wholesale and retail distribution, mutual-fund companies are well-positioned to carve out a chunk of the managed account business. Fund companies certainly have the motivation: The mutual fund business is experiencing some signs of maturity. At $4.4 trillion (excluding money market funds) in net assets, it is too huge for rapid growth.
In fact, though, through the first 10 months of 2001, fund assets declined by about 14 percent. But the relatively puny managed account business, at about $275 billion, is considered the growth vehicle of the future. The number of U.S. households with separate accounts will increase fivefold to nearly 5 million by 2010, predicts Forrester Research. By then, investments should top $2.6 trillion. Half of that tally, Forrester predicts, “will come from fund liquidations.”
Add to that, the push by brokerage houses to get the most desirable (read high-net-worth) clients out of mutual funds and into the annuity streams provided by fee-based managed accounts, and it's easy to see why mutual fund companies are wading into the new market. What is surprising, though, is the modest success that fund giants have had — so far.
Putnam Investments, Atlantic Financial's MFS, Phoenix Investment Partners and Delaware Investments are among the fund families that have launched separately managed account programs over the last year or so, while others, such as The Oppenheimer Funds and Pioneer Investment Management, are promising to enter the managed account business this year. “You can't afford not to be in this business,” says Daniel Geraci, Pioneer CEO.
“Mutual fund companies aren't even really on the radar yet,” says Jack Rabun, an analyst at Cerulli Associates. Amvescap's AIM, which manages $141 billion in mutual fund assets, for example, says it has only gathered about $240 million in separate accounts since entering the business in April of 2000. That figure could grow faster now that AIM has inked a deal to distribute its managed accounts via Merrill Lynch brokers.
What is becoming clear, however, is the skills that have made companies top players in mutual funds don't guarantee success in managed accounts. “At first, we thought we would just need to make technological adjustments to manage IMAs [individually managed accounts],” says Bill Taylor, director of MFS's private portfolio services.
For one thing, managed accounts hold fewer shares than similar mutual funds, and often must be customized for the client's tax considerations. MFS figured it out, and has gathered $1.2 billion in managed accounts since March of 2001. Last April, MFS signed up the last major wirehouses for distribution that it did not have before.
The biggest challenge for fund companies is operational, since there is no one standard for clearing as there is in the mutual fund industry. Also, they have to learn how to provide individual attention to the clients and to the reps that put them into managed accounts.
“They will need to move from a transaction-based approach to a consultative approach,” says Rabun. “With separate accounts, it's a process not a product,” he says. Fund companies have learned that they just can't mirror a current mutual fund they offer. Managed accounts are meant to be tax efficient and, in general, hold fewer stocks.
Len Reinhardt, the CEO of Lockwood Financial, a major independent distributor of managed accounts, says the learning curve will be steep. A manager of IMAs doesn't manage a collective pool of money from various clients, but the securities of each individual, who, unlike mutual funds, maintains ownership in those securities. “Just because you can manage a mutual fund doesn't show you can manage a separate account,” he says.
As it stands now, those who have a long-established institutional asset management business are still the dominant players in managed accounts. They include Brandes Investment Partners, which is the leader with 5.4 percent of the individually managed account market. Rittenhouse Financial Services, now a unit of the John Nuveen Co., has 4.9 percent and MBIA's 1838 Investment Advisors has 4.1 percent.
No one doubts that mutual fund companies will eventually be successful. “It's going to come down to who has the marketing dollars to get the shelf space,” says Jamie Punishill, an analyst at Forrester. “The big fund companies have that, so eventually I think they're going to do quite well.”