Managed Accounts Present Challenges, Opportunities for Mutual Fund Firms; FRC: Mutual Fund Companies Have Potential to Be "Powerful Entrants".

Business Editors

WASHINGTON--(BUSINESS WIRE)--May 30, 2001

The continuing strong growth of the managed account industry poses a significant competitive challenge but ultimately a growth opportunity for mutual fund providers, according to industry data recently developed by Financial Research Corp. (FRC), the nation's leading full service research and consulting firm serving the financial services industry.

"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," said T. Neil Bathon, president, 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"

Managed accounts are individual accounts offered by financial consultants utilizing a broad range of advisory services and are usually managed by professional, independent money managers using an asset-based fee structure.

Assets held in individually managed accounts at the industry's leading firms totaled about $267.5 billion at the close of 2001's first quarter, compared with $292.1 billion in assets under management at year-end 2000, according to the Money Management Institute (MMI), the national organization for the managed account industry.

MMI's quarterly assets under management figure is based on program totals reported by Merrill Lynch, Morgan Stanley, PaineWebber, Prudential, and Salomon Smith Barney, which collectively hold approximately 70 percent of the overall market.

The change in asset totals during the first quarter can be attributed primarily to the ongoing pressure on asset values across all markets, according to the MMI. During the first quarter, the Wilshire 5000 Total Market Index dropped 12.3 percent, the Nasdaq Composite was down 25.5 percent, the S&P 500 Index fell 11.9 percent, and the Dow Jones Industrial Average fell 8.4 percent.

"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," said Mr. 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."

FRC surveyed registered investment advisors (RIAs) and broker/dealers (wirehouse/regional and independent) about their use of alternative investment products, including managed accounts. The overall asset allocation of the group to all investment styles used in managed accounts was 10 percent of total AUM. RIAs were the heaviest users of managed accounts, allocating 13 percent of AUM to managed account programs.

In terms of interest in the programs, wirehouse/regional reps measured higher than both RIAs and independent broker/dealers, which would coincide with the increased focus of these firms to transition their representatives to more fee-based compensation, Mr. Bathon said.

"Both of these findings indicate that the growth prospects of managed accounts are terrific moving forward," he said.

According to FRC, the many challenges that fund companies must overcome to be successful in managed accounts include back-office processing, wholesaler training, compensation, shelf space, industry experience, and track records.

"In spite of these challenges, mutual fund companies can be powerful entrants because of their investment management expertise," Mr. Bathon said.

"The challenge is to gain access to distributor platforms and unseat existing investment managers or battle for new dollars. It will be difficult to steal market share from the leaders, but as increasing dollars flow to financial advisors working managed accounts, new entrants will be able to snare a percentage of these assets.

"If the managed account challenge is ignored, though, it is going to be difficult, if not impossible, to maintain 1990's asset growth levels in the years to come," said Mr. Bathon.

FRC and the MMI cooperate on coverage of and data analysis for the managed account industry, as part of the MMI's ongoing effort to identify and address emerging issues shaping the industry's growth and development.

Note to Editors:

The Money Management Institute (MMI) is the national organization for the managed account industry, representing portfolio manager firms and sponsors of investment consulting programs. The MMI was created in 1997 to serve as a forum for the managed account industry's leaders to address common concerns, discuss industry issues and work together to better serve investors. The Institute is the leading advocate for the industry on regulatory and legislative issues. MMI's membership comprises firms that offer comprehensive financial consulting services to individual investors, foundations, retirement plans and trusts; related professional portfolio management firms, and firms that provide long term services to both sponsor and manager firms such as computer/technology firms. www.moneyinstitute.com