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Direct Sellers Fall Into Three Classes

Firms that sell their funds directly to investors are breaking into three groups, a stratification of the direct sales market that is unlikely to change for the foreseeable future, according to a mutual fund marketing and distribution consultant.

The direct sales market has evolved into a three-tier market, according to Jonathan Zeschin, president of JZ Partners LLC, a consulting firm in Denver, Colo. The top tier is occupied by a handful of large firms with recognized brand names, ample resources and a devoted following of investors, Zeschin said. This group includes Fidelity Investments of Boston, the Vanguard Group of Malvern, Pa., Janus Funds of Denver, T. Rowe Price Associates of Baltimore and American Century Investments of Kansas City, Mo., Zeschin said.

The second group is comprised of mutual funds that have established strong distribution through affinity groups, Zeschin said. This category includes the AARP Investment Program run by Scudder Kemper Investments of New York and the USAA Funds of San Antonio, Texas, said Zeschin. The AARP funds are marketed through the American Association for Retired Persons of Washington, D.C. USAA funds are marketed to members of the military and their families. Both funds are offered to the general public as well as to their affinity groups.

The third tier of direct firms is marked by a constellation of comparatively smaller niche players, according to Zeschin. In this group, the firms have either outstanding performance or offer a specialty for which the firm is an acknowledged leader, Zeschin said. The fund firms in this tier characteristically have $5 billion to $10 billion in assets under management, said Zeschin.

Zeschin made his remarks Oct. 6 during a panel discussion and subsequent interview at a distribution and marketing conference in Boston that Financial Research Corp. of Boston and Graylyn Associates of Chatham, Mass. sponsored. Zeschin is a former president of Founders Funds of Denver in addition to having been an executive at other direct sales fund firms including Invesco Funds of Denver.

Investors overwhelmingly are seeking advice from intermediaries before buying funds, according to industry surveys. Last month, for example, the Investment Company Institute reported that only 16 percent of investors surveyed said they bought directly from a mutual fund firm without assistance. FRC, a fund tracking and consulting firm, estimates that intermediaries now account for 65 percent of long-term fund sales. Direct sales will decline to just 20 percent of all sales by 2005, the company predicts.

"The supreme era of the intermediary is close upon us," FRC said in a report in September.

The sales data FRC tracks suggests that, as Zeschin suggested, the direct market primarily will consist of large and small players, said T. Neil Bathon, president of FRC.

"I think those in the middle tier group are in big trouble," Bathon said.

Large firms have a broader asset base over which to spread their expenses, Bathon said. Indeed, it is the problem of expenses that will be difficult for mid-sized firms to combat, Zeschin said. Mid-sized firms will be pressed to offer a range of funds while having fewer assets to absorb those expenses than big-firm competitors, Zeschin said.

Zeschin cited the $35 billion Strong Funds of Menomonee Falls, Wis. as a mid-sized firm facing obstacles to continued independence.

A spokesperson at Strong Funds was not available for comment.