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Channel Selection Choice Said to be Crucial


BOSTON - Fund companies' ability to successfully market their products in specific distribution channels will determine whether they survive in an increasingly competitive marketplace characterized by mergers and acquisitions of mid-size firms, fund executives said.

"Access to distribution determines the league that a [fund company] will play in," said T. Neil Bathon, president of Financial Research Corp. of Boston. "Marketing will determine who wins or loses."

Not all channels are appropriate for all companies and a firm should market its funds taking into consideration the amount of assets it will dedicate to marketing, the type of funds it offers and overall market trends, he said.

Bathon spoke at a seminar here last week on mutual fund distribution hosted by the International Institute of Research of New York.

With net sales in the fund industry shrinking, firms will need to use creative marketing strategies to generate sales, according to Bathon. Of the companies that Financial Research Corp. tracks, 55 percent have reported net redemptions for the year, he said. Moreover, only a small minority of companies is attracting new assets, with the top 10 companies attracting 80 percent of all new sales, he said.

The direct, no-load market is expected to attract only 20 percent of new assets in the future and that channel is already dominated by large players like Fidelity Investments of Boston and Janus of Denver, so companies that are planning to sell through that channel should reconsider, Bathon said.

Funds need to develop a partnership with a key distributor if they want to survive, said Lee Martin, senior vice president of AXA Rosenberg of Orinda, Calif.

"You need to get in at the top level with the program management," he said. "Once you're in a [distribution] program, you have tremendous leverage."

Firms have a better chance of selling their funds in channels that are not as flooded, like 401(k) rollover plans, Bathon said. There were $300 billion in 401(k) assets rolled over last year and a handful of companies that tried to capture those assets did a marginal job, he said.

"Even the best programs don't capture 20 percent of 401(k) assets," Bathon said.

A major benefit in selling through the 401(k) channel is it is difficult to be fired from a plan once a company wins the business, Martin said. But, in order to compete in that channel, firms need to offer funds that are low risk and that have low fees, he said. Style consistency in 401(k) plans is important because most plans offer between eight to 10 funds and if a fund's style is changed, it can limit participants' options, he said. Offering plan sponsors flexible fees and payment options is also important in this channel, he said.

Firms that successfully sell in the 401(k) channel are probably well suited to sell to private banks and retirement services as well because both are interested in products that are low risk, Martin said. Funds should approach banks understanding that, unlike broker-dealers, they are not accustomed to sales and will therefore take longer to make decisions, he said.

Another relatively undeveloped channel is the sub-advisory business, Bathon said. Firms that hand the management of their funds over to a well-known sub-adviser can use the sub-adviser's name recognition to sell their funds, he said.

"Since 1995, sub-advised fund assets have out-paced total industry growth by six percent annually," he said. And with only 7.1 percent of industry assets, sub-advised funds have a great deal of room for growth, Bathon said.

Selling through broker-dealers is another option but may not be feasible for smaller funds because the channel requires considerable resources. For instance, firms will need to have 30 wholesalers and 200 salespeople selling funds in order to succeed through that channel, he said.

Still, much of a firm's success in selling its funds is determined by whether it offers the right products, Bathon said.

"A lot of firms are helpless," he said. "If you are a wholesaler at a fixed income fund, it's going to be tough. If you don't have the right product line ... you may have to add product and sub-advise."