March 22, 1999
With widespread consolidation in the mutual fund industry, many industry observers have predicted the demise of mid- to-small-sized fund companies.
Some, such as Fidelity Management & Research President Robert Pozen, have said that about 10 large mutual fund companies will dominate the landscape in the next century.
"The people who will get squeezed are the people in the middle because it's very expensive to own their own distribution system," said Pozen at a conference last month.
Is that true? Mutual Fund Market News reporter Larry Rulison asked executives at mutual fund and fund service companies to give their views on Pozen's prediction. Rulison asked them: "Can mid- to small-sized mutual fund companies survive as consolidation in the industry only makes the big bigger and the strong stronger?" Here are their thoughts:
Betsy Connolly is president and chief executive officer of Funds Distributor of Boston, a broker/dealer that specializes in sales, distribution and marketing. Her company's clients include American Century Investments, Conseco Funds and Scudder Kemper Investments.
Connolly: As consolidation trends continue, mid- to small-sized firms will be challenged to carve an identity for themselves within the marketplace. They must deliver consistent investment performance (at a minimum placing in the top one third of their relevant Lipper category) but will also need to invest in effective sales and marketing. Attractive intermediary firms will insist upon appropriate sales and marketing support (over 70 percent of sales are generated through intermediaries). Mid- and small-sized groups can leverage their resources through initiatives such as joint ventures, multi-manager platforms and taking advantage of outsourced solutions for sales and marketing services. Such solutions will allow them to take advantage of others' intermediary relationships and combined knowledge and resources, which will give them more efficient services, get them to the right channels more quickly, ensure faster growth, and provide a generally less expensive process.
Charles Haldeman, Jr. is president and chief operating officer of United Asset Management Corp. of Boston, which runs 45 independently operated money management firms with over $200 billion in assets.
Haldeman: The advantage of being smaller is better investment results from small groups. While this has not been true for the past several years, it has been true over the long term. Smaller groups lead to more creativity. Large "factory floors" divided into small segments lead to one pervasive philosophy throughout the entire organization. Many creative investment people don't like working for others - they prefer independence and autonomy. Also, large organizations tend to fire people after one or two years of under-performance. True independence produces an environment where contrarian or creative thinking is more likely to thrive.
Gary S. Saks is chief operating officer of Ironwood Capital Management of Boston, which was founded by former Pioneer portfolio manager Warren Isabelle, who now runs the ICM/Isabelle Small Cap Value Fund.
Saks: My feeling on the consolidating mutual fund industry is that the small can survive. An important factor to survival is to offer a niche product. By taking advantage of a well defined and consistent investment thesis, our no-load mutual fund, the ICM/Isabelle Small Cap Value Fund, appeals to consultants whose investment allocations must fall within stringent parameters.
I could see a higher attrition rate for fund companies that are plain vanilla and competing with 1,000 other large-cap growth funds. In the case of the small-cap, however, there is only a certain capacity for a fund before asset size adversely affects returns. With that said, many good small-cap funds are closed to new investors, creating an opportunity for companies like ours that offer a seasoned portfolio manager with a respected track record and a fund with capacity to grow. The ICM/Isabelle Small Cap Value Fund will close to new investors at $500 million.
In terms of distribution, the explosion in popularity of mutual fund supermarkets has opened up channels for small companies to reach the retail masses. By utilizing these programs, small companies can go head to head with the larger fund families.