Expect managed account assets to go up and mutual fund executive bonuses to go down. Those were just a few of the opinions conveyed by a panel of industry leaders who discussed the most prevalent issues facing the mutual fund industry today. The panel spoke last week at the National Investment Company Service Association's 20th Annual Operations Conference in Miami.
When asked what will be the industry's biggest growth area over the next five years, both Martin Beaulieu, president of MFS Fund Distributors, and Ronald Robison, global COO of Morgan Stanley Investment Management, pointed to IRA rollovers and separately managed accounts.
"It's clear that the growth rates are slowing in mutual funds, and that separate accounts are accelerating," Robison said. "Mutual funds are somewhat disadvantaged because of their tax treatment."
In fact, while assets held in mutual funds shrank 8.1% last year, assets in managed accounts dropped just .42%, according to Financial Research Corp.
Beaulieu predicted that IRA rollovers would grow the most in dollar amounts, but that the managed account market would see the largest percentage growth. Still, while growth can be expected in that area in the years ahead, some may be a little too optimistic with regard to the extent of that growth, he said.
"I think there's a lot of potential there for money managers, but I'm really not convinced of the huge growth numbers that the consultants have predicted."
On the prospect of asset management growth overseas there was some disagreement within the panel. Timothy Connelly, a partner with Brown Brothers Harriman & Co., believes that international management will be one of the highest growth areas over the next five years.
"I think the future is fairly bright there," said Connelly. "Maybe that's because growth doesn't look great domestically. Europe looks like the U.S. fund industry 12 to 15 years ago."
In Europe, for example, investors buy products primarily through the bank channel, which sells proprietary products. But new regulation and the emergence of the Web is changing that, Connelly said.
Robison disagrees. Europe, he says, is an especially difficult area because sales have to be handled differently from country to country. "There's no such thing as a pan-European distribution channel," he said.
Robison is not advising firms to avoid international development. But he believes that, in the near future, it will be a difficult process.
"I just think global growth is down and has to go through a period of slow growth," he said.
Regarding potential 401(k) legislation following the Enron affair, there were some differing opinions offered as well. Limiting how much company stock an investor can hold in his or her 401(k) could very well help the mutual fund industry indirectly and sending money in that direction, Beaulieu said. From an investor perspective however, Robison is leery of taking flexibility away from plan participants.
"I hope we stay sort of calm throughout this whole thing," Robison said. "I'd hate to have someone tell me where I can invest my 401(k) assets."
Although the down market has forced firms to cut costs, technology spending will probably remain roughly the same as it was last year at Brown Brothers Harriman--about 18% to 20% of revenues, Connelly said. However, the increased rate of spending in recent years will be halted.
"In the bull market it was the more the better,'" said Connelly. "That's changed."
Morgan Stanley will also see technology spending remain at the same percentage, however, the firm has had to reduce staffing in that area, according to Robison. Now, the firm is engaging in fewer, more concentrated technology projects.
"Before, all of our different groups--marketing, portfolio managers, etc.--would take on projects, and we'd tell them, Go at it,'" Robison said. "Now we're at a point where we have to be very careful about which technology projects to take on."
One area that has already been cut due to decreased revenue and will likely see more of the same next year is that of employee bonuses, according to the panel. Beaulieu predicted that the biggest surprise in the next 12 months will be that the market does not turn around, like many have stated. That does not bode well for bonuses.
Altough Morgan Stanley is anticipating a market rebound this year, Robison still expects it to be a tough year. During the downturn, a lot of assets moved from equity to fixed-income products, lowering firms' management fee revenues. The transition back to equities could prove difficult, Robison said.