February 28, 2000
MIAMI - Slowing sales and consolidation will change the face of the once high-growth mutual fund industry, according to top fund executives.
Consolidation among mutual fund companies is imminent and portends 20 percent to 25 percent layoffs within the next five years, said Edward J. Boudreau, Jr., former chairman and chief executive officer of John Hancock Funds of Boston and now a fund industry consultant. Those layoffs will hit operations staff particularly hard, Boudreau said.
"Operations people are the first to be taken out because [they exist in] such large numbers," Boudreau said. The only mutual fund workers who will escape downsizing are successful salespeople, he said.
Boudreau, managing director of E.J. Boudreau & Associates LLC of Beverly, Mass., spoke at The National Investment Company Service Association's annual operations conference here last week.
The slowing growth in net sales of funds is one reason consolidation cannot be avoided, Boudreau and other speakers said repeatedly. Boudreau, however, pointed to another reason for consolidation.
Deregulation of the financial services industry with passage of the Financial Modernization Act of 1999 will prompt mergers and acquisitions among fund companies on a level never before seen or imagined, Boudreau said. That will bring substantial layoffs, Boudreau said
"There will be fewer people employed five years hence," said Jervis Smith, vice president of Citibank of New York.
The prices that will be paid for mutual fund companies means great news for the owners of takeover targets but those prices are not good news for other people in the industry, the speakers said.
The high prices for which mutual fund companies are going on the block will exacerbate the already considerable pressures on profitability, said Peter S. Drotch, leader of the investment management industry group at PricewaterhouseCoopers LLP of New York.
"The pressure on profitability is enormous," said Drotch." If you make an investment [in a mutual fund company at] 11 times [annual management fees], how do you achieve return?"
Japanese and European investment firms, in particular, are keen to acquire or invest in U.S. mutual fund companies, even at inflated prices, Boudreau said.
And, just as many Internet IPO valuations are far out of proportion to traditional price to earnings ratios, the coming valuations for fund firms could too seem out of whack, the speakers said.
There will be creative mergers and acquisitions in the coming years, following the repeal of Glass-Steagall, (with passage of the Financial Modernization Act) because bankers and venture capitalists are willing to consider unusual valuations and pairings of firms, Boudreau said. But, in making these acquisitions, firms should be sure to keep in mind their long term strategic values, he said.
Technological costs are only going to rise as investors come to expect personalized, on-demand service, said James S. Riepe, vice chairman of T. Rowe Price Associates of Baltimore, Md. A technological service provider might be a novel and astute acquisition for a mutual fund company to consider, Riepe said.
The talk of layoffs and industry contraction came against a soothing backdrop. Attendees enjoyed golf at the Doral Golf Resort and Spa, the site of the conference. Vendors and fund companies sponsored numerous parties - one including fireworks - under generally sunny skies.
Nevertheless, the maturing of the mutual fund industry and concerns about the long-running bull market in equities, intruded.