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M&As to Rise, Fueled by Compliance, Soft Market, But Giants Still Raking It In

Higher compliance costs and sluggish industry growth are contributing to a recent resurgence in merger and acquisition activity among smaller mutual fund companies, according to senior members of the $8.1 trillion industry.

But despite the further shake-up that looms on the horizon, bigger fund firms are still raking in profits, fund executives told Financial Times last week.

Boston's Fidelity Investments and Vanguard Group, Valley Forge, Pa., the industry's two biggest firms, which together hold 12% of the market, each average industry profit margins of about 30%. As MME has reported before, this is on the high end; at the height of the bull market, profit margins neared 38% at some of the most successful fund complexes (see MME 5/23/05).

But smaller outfits like AmSouth Bancorp, Orlando, Fla., which earlier this month shed its $5.5 billion fund management business to Boston-based Pioneer Investments for $65 million (see MME 7/4/05), says it's become "more difficult and more expensive for small mutual fund families to compete effectively."

Only 38 in the $50B+ Range

Chip Mason, CEO of Baltimore-based Legg Mason, surmises that a fund company now needs at least $50 billion under management to be competitive. Of the 500-plus mutual fund companies in the U.S., only 38 occupy that realm.

According to Geoff Bobroff, a fund industry consultant, the minimum requirement should be even more than $50 billion. But, he added, a company could succeed as a boutique with less. He expects another six or eight sales or mergers within the next year.

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