Is the mutual fund industry under siege from the managed account business? It is possible that if the managed account business finds appropriate distribution platforms, then it could seriously affect mutual fund companies to attract the kind of growth they had in the 1990's.

A new study from Financial Research Corp. (FRC) points to the continued growth of the managed account industry. The growth is so great, in fact, that this industry might prove a "significant competitive challenge" to mutual fund providers, according to the survey.

"Managed accounts are perhaps the single biggest threat to mutual fund assets because of their well-chronicled advantages, which include tax efficiency, portfolio flexibility, fee-based pricing, and cachet," contended T. Neil Bathon, president at FRC. "Mutual fund companies need to seriously consider entering the managed account arena because the dollars flowing into mutual funds on a net basis are steadily declining and managed accounts are stealing a substantial piece of the business. It is estimated that high net worth investors, the primary target of managed account programs, currently hold as much as $2 trillion of mutual fund assets."

According to the Money Management Institute (MMI), assets in managed accounts for the first quarter of 2001 equaled $267.5 billion. This is down from $292.1 billion from the last quarter of 2000. The MMI bases its figures on the program totals of the following firms (which hold approximately 70% of the overall assets in the market): Merrill Lynch, Morgan Stanley, PaineWebber, Prudential, and Salomon Smith Barney. Executives at the MMI believe the drop in assets can be attributed to "the ongoing pressure on asset values across all markets".

"It would be easy to discount managed accounts because assets under management [AUM] are currently less than one-tenth those of the mutual fund industry, but that would be a huge mistake for investment management firms," continued Bathon. "Over the full year 2000, the managed account industry was able to increase assets by nearly 20 percent during a period when assets in the mutual fund industry were off 3 percent, the S&P 500 was down 9.1 percent and the Nasdaq declined by 39.3 percent."

So, according Bathon, the prospect for the managed account business is rosy. "Both of these findings indicate that the growth prospects of managed accounts are terrific moving forward," he stated.

But observers should not think mutual fund firms are out of the fight yet. "In spite of these challenges, mutual fund companies can be powerful entrants because of their investment management expertise," the executive concluded. 

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE