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Managed Account Business Critical for Funds


BOSTON - If they have not done so already, the largest mutual fund companies must consider entering the managed account business, according to Andrew Guillette, an analyst with Cerulli Associates, a mutual fund consulting firm in Boston.

"I think that any mutual fund company that's a top-30 player needs to be looking very closely at this business," Guillette said. "If a mutual fund company doesn't have an offering there, it just restricts asset growth."

Guillette spoke here earlier this month at the Performance Institute's 2001 Summit: Beyond Mutual Funds.

One reason it may be so important to enter the managed account business now is the growth potential of managed accounts and the slowing growth of mutual fund assets, according to analysts. "What's causing some angst in the industry is that the mutual fund industry probably hit its peak in '96 or '97 and is arguably now treading water, swapping assets back and forth," said investment consultant and conference speaker Geoffrey Bobroff.

The industry needs to think longer term about product design and product delivery, he said. "It is now more about retaining assets and deepening relationships than it is helping people accumulate more assets."

At the same time, managed accounts have gained popularity and are poised to realize huge growth, Guillette said. In 2000, the managed account industry increased its assets by 20% while fund assets declined 3%, according to Financial Research Corporation. Investors are realizing the need for consulting and advice, and that is bringing assets into the managed account world, he said.

In fact, consultant wrap programs are now where mutual funds were in 1985, Guillette said. In 1985, long-term mutual fund assets grew to $256 billion, and last year assets in consultant wrap programs reached $290 billion, according to Cerulli.

While the largest fund companies should be looking closely at operating managed accounts, the expense entailed and large scale needed to start-up and operate that business make it much more difficult for smaller firms, Guillette said.

"Scale is a big question for companies other than the major wirehouses with a huge technological infrastructure," agreed Chuck Widger, CEO of Brinker Capital. "Setting up an efficient, successful back office is tremendously difficult. Scalability on the front end is very important, as is technology. Clients will suffer mediocre performance a lot more easily than they'll suffer you misspelling their name."

Large scale is also important with managed accounts because of the attention that each investor requires, said Steve Ilnitzki, senior VP of e-business at Oppenheimer Funds, another speaker. "It's a consultative sale, it's not a product that you go buy off the shelf. It's not a commodity. There's a consultation that goes with it. Those types of products and services mean you have to build something flexible for the client. You can't come off the shelf traditionally to pump out another mutual fund to do what they want."

For all those reasons, companies should consider acquiring managed account assets by actually purchasing a separate account manager, but that is probably only an option for large mutual fund complexes as well, said Ilnitzki.

It is possible for a mutual fund company to build a managed account business, but operating it successfully from a distribution standpoint can be the most difficult and costly part, he said. "Separate accounts are a different animal than running a mutual fund--lower holdings, different approaches to that," said Ilnitzki.

However, money management is money management and you can build the disciplines within a firm to do that. "The key is how you distribute it, because if you have to have a three to five year track record, you have to get into a program that has certain due diligence needs, it'll take time to do that," he said.

Not all signs point to continued managed account growth, however. Although managed accounts have gained a lot of popularity, there are some trends that are unlikely to continue, according to analysts. One of the things that has triggered the growth of managed accounts is the lowering of account minimums.