Long-term loss of market share finally turns to actual asset loss.
After years of declining market share, wirehouse proprietary funds are now suffering negative flows, according to a report from Cerulli Associates in Boston.
The market-share picture has been a disaster for funds sponsored by Merrill Lynch, Morgan Stanley Dean Witter, PaineWebber, Prudential Securities and Salomon Smith Barney. The share of net flows captured by these proprietary fund complexes went from 21.5% in 1996 to a negative 6% in the first seven months of 2000 (see "Share of Net Flows for Wirehouse Funds," Page 36). And the drain is increasing. Cerulli Associates pegs proprietary fund net outflows at $5 billion in 1999 and $7.2 billion through July 2000.
One reason is that wirehouses have opened up to more products, says Dennis Gallant, a Cerulli consultant. "The playing field has been leveled," he says. "Given the choice, many reps go with higher-performing outside funds."
Firms have shied away from blatantly pushing proprietary products in the wake of SEC pressure and the 1995 Tully report, which recommended level payouts for all products.
Outside funds have gained market share because they are more adept at "sensing market sentiment and creating products to capture it," says Edward Rosenbaum, vice president of Lipper in Summit, N.J.
Until now, market appreciation has masked proprietary funds' problem. Negative outflows will probably accelerate sales outside the captive sales channel, fund consultants say.
The fallout will be "leaner proprietary product lines," Gallant says. "It's unlikely [proprietary complexes] will ever reach the same level of prominence that they had in the past."
Merrill Lynch Products: Merrill Lynch Funds and Mercury Funds
Managers: Merrill Lynch Investment Managers (MLIM) or Mercury Advisors. Mercury Funds is a unit of MLIM.The old Merrill Lynch Asset Management name was dropped this past April.
Distribution: Mercury Funds are sold through third parties. Merrill has set up a separate marketing unit for the funds and is targeting insurance subaccounts, RIAs and smaller brokerages.
Morgan Stanley Dean Witter Products: Morgan Stanley Dean Witter Funds and Van Kampen Funds
Managers: Morgan Stanley Dean Witter Advisors and Van Kampen Investment Advisory Corp.
Distribution: Morgan Stanley Dean Witter Funds are marketed internally, while Van Kampen Funds are marketed through other dealers, according to the firm.
PaineWebber Product: PaineWebber Funds
Manager: Mitchell Hutchins Asset Management
Distribution: The firm would not comment on any plans to sell outside of PaineWebber. Reps say the funds will transfer to other firms.
Prudential Investments Products: Prudential Funds and the Strategic Partners series of funds and variable annuities, introduced in 1999.
Managers: Prudential Investments. Strategic Partners Funds use subadvisers Jennison Associ-ates and Alliance Capital Management.
Distribution: The Strategic Partners Funds are marketed to third parties, including other wirehouses and independent broker/dealers.
Salomon Smith Barney Product: Funds within Citigroup now consolidated under the Smith Barney Mutual Funds name.
Manager: SSB Citi Fund Management
Distribution: The funds can be sold to third parties, "but not normally through other wirehouses," says an SSB spokesperson.
This past February, Smith Barney hired Steve Cone, the former head of marketing at Fidelity Investments and creator of the Peter Lynch campaign, to oversee the products.
"We had too many brands and they all had their own distribution channels," the spokesperson says.