When a roomful of mutual fund company executives at a recent industry conference was asked for a show of hands of those who had looked into running managed accounts as a means of growth for their respective companies, no one moved.
"My suspicion is that everyone has, just nobody wants to admit it," said Jerrold Grochow, chief technology officer at FOLIOfn of Merrifield, Va., at the National Investment Company Service Association's East Coast regional meeting in New York earlier this month. Another speaker, Drew Lapsley, a vice president at Goldman Sachs of New York, had asked for the show of hands.
Why would mutual fund companies not want to get a piece of the separately-managed account business given their popularity last year?
The top five firms offering managed accounts, which comprise approximately 70 percent of the market, reported that those accounts held $292.1 billion at the end of 2000, up nearly 20 percent from the $245 billion reported at the end of 1999, according to the Money Management Institute of Washington, D.C.
While managed account assets equal only about six percent of total mutual fund assets, $50 billion in net flows in a year is significant, and as separately-managed accounts continue to grow in popularity, mutual fund companies are starting to want to get in on that business, according to analysts. One reason is that separately-managed accounts have cost mutual fund companies some of their biggest individual clients, according to Peter Muratore, chairman of the Money Management Institute.
"Big mutual fund clients started to shift to the individually-managed money and mutual fund companies looking at this are seeing some of their largest accounts leaving them," said Muratore. "And so mutual funds, seeing that said, We don't want these best accounts moving out of here. What we really want to do is keep the money.' But the only way to do that is to offer the alternative, which is individually-managed money."
But offering the alternative may not be as easy as it sounds, according to William Turchyn, chief operating officer of ING Asset management of New York. While mutual fund companies understandably want to run managed accounts, there are operational issues that need to be addressed, he said. One of the major issues concerns account minimums and total number of accounts, he said.
"[Account minimums are high] when you're dealing with an individual portfolio customized to the owner," said Turchyn. "One reason is that while you're managing money in the same style and with the same discipline across all your accounts, each account looks different. Not because you're managing differently, but because they start on different days, and people put money in, take it out, put it in, and so you have to account for that. You might have cash in that account that you might not have in another account."
This creates a lot of work for the money manager and it is something fund companies are not used to dealing with, Turchyn said. Some fund companies make the mistake of thinking that running a managed account is just like managing a small mutual fund, said Muratore.
"To them, it looks the same because it's a portfolio manager and a portfolio," said Muratore. "True [they're] not doing a co-mingled portfolio, [they're] doing individual portfolios, but the basic step is the same. That's when they start to get themselves in trouble. It's not only individual portfolios, but the whole accounting process becomes different because you're accounting, not for one huge portfolio, you're accounting for a thousand little individual portfolios."
One of the major differences between managing mutual funds and individual accounts is how they should be sold, according to Muratore. Most mutual fund companies that have begun to take in managed accounts have tried to sell them to brokers through their mutual fund wholesalers, he said. But, brokers tend to specialize in mutual funds and mutual fund wholesalers have relationships with those brokers who sell mostly mutual funds. It can be difficult for these wholesalers to change their client base while still trying to sell mutual funds, especially since the products are so different, according to Muratore.
"[There should be a] different group of guys who are selling [separately-managed accounts] and they should sell them in a different way," said Muratore. "They really need a different kind of support structure. A mutual fund wholesaler is selling a product. He is selling the idea of: this fund should be recommended by this salesman for the following reason. A wholesaler for individually-managed accounts isn't doing that. He is really the representative of the money manager."
Those are some of the reasons that mutual fund companies should set up separate divisions for managed accounts, said Muratore. Almost all the companies which have started managed accounts are operating separate divisions, he said.
Neuberger Berman of New York, however, which manages $20 billion in mutual funds and $2 billion in managed accounts in wrap programs and has managed both for over ten years, has separate divisions, but uses an integrated approach, according to Peter Sundman, executive vice president, overseeing the institutional and mutual fund business for Neuberger Berman.
Neuberger Berman sells both mutual funds and managed accounts through the same wholesalers, said Sundman. The firm has been successful where others have encountered problems doing so because it began selling managed accounts and then expanded into mutual funds, he said.
"I would say we've had some success," said Sundman. "We started with a bond offering and branched into a balanced offering. And only recently have we offered equities. So the success is a little muted by what our product offering was, but we certainly seem to be gathering some momentum now."
Despite maintaining an integrated approach, Neuberger Berman, at least, markets its mutual funds and managed accounts separately. The company launched a new advertising campaign in February highlighting its private asset management. The company's new print ads read: "For over 60 years, we've specialized in one thing: managing money. Why is that important? It means there are no hidden agendas when we buy or sell stocks for you. It means there are no distractions, either: we spend all our time sweating every detail of your portfolio, whether it's $500,000 or $50 million."
From an operational and administrative standpoint, Neuberger Berman has not faced any major problems, according to Sundman.
"We haven't encountered any difficulties," he said. "There are certain administrative issues that have to be worked out, which seems to be the one thing that keeps the competition out. It's not an administratively inviting business."
It could be much more difficult for a company that currently is centered on mutual funds, without Neuberger Berman's private asset management experience, to implement managed accounts, according to Muratore. And those companies that are starting to manage that business need to understand the differences between managing a mutual fund portfolio and managing an individual portfolio, not just from an investment standpoint, but operationally as well, according to Muratore.
"It's a whole different process that you're undergoing, he said. "So mutual fund companies have been stumbling over it because the words are the same, but the function is different."
