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Scandal Fallout

In the wake of the mutual fund scandal, exchange traded funds (ETFs), small niche managers and fund groups not implicated in the scandal have been raking in assets and pumping up their relative market share of the industry's $5 trillion in non-money market assets.

Right now, the three largest mutual fund companies, Vanguard Group, Fidelity and American Funds, have a collective lock on more than one-third (34.9%) of the industry's assets. Each has seen assets increase by double-digits, percentage-wise, since the scandal began, data from Financial Research Corp. shows.

Vanguard increased assets by 19% from September 2003 through March 31, taking in a whopping $105 billion. Its market share increased a notable 1.7%. Second-largest Fidelity increased assets 18%, or $97 billion, and saw its market share rise 3.8%. But the smaller American Funds group, with $115.7 billion in fresh money, a 28% increase in assets, has seen its market share soar 9.4%. Also of note among the larger fund groups, T. Rowe Price's market share spiked almost 5%, and Dodge & Cox grew its market share by a huge 26% by growing its asset base to $60 billion, a 48% rise.

Grabbing for Market Share

The king of the ETFs, Barclay's Global Investors, has made a killing, seeing its iShares mutual fund assets almost triple from $21.9 billion in September 2003 to $62.7 billion at the end of March. That translates into a market share increase of an eye-popping 143.7%.

While the industry scandal has compelled investors to place new money within the 87 index-based ETFs that Barclay's offers, new assets had been already flowing in from advisers who, after several years of being educated about the benefits of ETFs, finally see the light, explained Lee Kranefuss, CEO of Barclay's iShares intermediary business.

Barclay's has been extolling the benefits of ETFs, including intra-day pricing, diversification, transparency and tax efficiency, since it first launched iShares in 2000, he said. But it's taken time for advisers to realize they can combine a core of ETFs for exposure to different markets, and then build portfolios around them using long and short investment products like hedge funds, he added.

Mutual fund managers who desire short-term liquid positions or want some exposure to a particular market, Japan, for example, have also become loyal ETF investors. Barclay's saw net inflows of $16 billion for all of 2003, Kranefuss noted. So far in this year, the firm has already sucked in $17 billion.

Winning in Their Niches

Hotchkis & Wiley Capital Management is also garnering market share. The boutique firm, which offers four value funds with top-decile performance, saw its share of the mutual fund market spike over 89%. Assets have been flooding in through registered investment advisers (RIAs), broker/dealers and retirement plans, largely due to the firm's consistent research-intensive approach to value investing, noted Bob Dochterman, national sales manager and managing director of Hotchkis & Wiley. But mindful of capacity, the firm has already closed its small-cap fund, and on May 31 will begin limiting investments to its mid-cap fund.

Merrill Lynch purchased the firm in 1996 when it had $10 billion under management. That same year, the firm's fixed-income team spun out to start Metropolitan West Asset Management, and in 2001 the international managers left to found Causeway Capital Management. The remaining equity managers bought back the operation from Merrill in 2001.

"Survival is the secret to our success," said Mark Headley, co-CEO and portfolio manager of Matthews International Capital Management, investment advisor to seven no-load funds that invest in Asia. Matthews has grown its market share more than 72% since the scandal broke. The Asian financial crisis of 1997 crushed the three original Matthews funds. The group, now touting three additional funds, saw Asia suffer another setback with the outbreak of SARS. "Asia has been a difficult market," Headley said. But he attributes the group's overall success to one fund, Matthews Asian Growth and Income Fund, which, because of its low volatility and non-correlation to broader markets, appeals to RIAs.

"We developed a cult following," Headley said. The fund was raking in as much as $20 million per day. So Matthews instituted a soft close this past November.

But the true saving grace, Headley said, was that Matthews is well-known as an anti-timer shop, has never made any timing arrangements, has a 2% redemption fee and has had an independent board chairman since 1998.

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