Legal Concerns to Fuel Fund M&As

The mutual fund business is likely to undergo tremendous change in the years ahead, according to Don Putnam, co-founder of investment bank Putnam Lovell NBF Securities. In an interview with MarketWatch, Putnam said that in light of the changing regulatory environment and mounting conflict-of-interest concerns, the mutual fund industry is ripe for mergers and acquisitions.

"The test of the quality of the institution is going to be, 'How well we can be all things to our clients?'" Putnam said. He noted that there are two ongoing shifts that are likely to propel the fund industry towards consolidation. With regulatory scrutiny getting tighter in the U.S., Putnam said that the mutual fund business on its own is likely to become "less attractive, more expensive and dangerous."

Also, he said that today vertical integration, or being both the manufacturer and distributor of investment products, doesn't make sense because it renders investment advice subjective. "So increasingly, worldwide, people are going to get their investment advice from one source and their investment product from another," he said.

Putnam noted that top-league firms had already started to embrace this change. Merrill Lynch, for instance, is getting out of the money-management business and moving toward the sales aspect of it. "So, Merrill as a firm ends up picking the very best products for their clients and charging properly for that - without the conflict and bureaucracy that's inherent in being both a money manager and a salesman at the same time," Putnam noted.

Going in the opposite direction, he said, firms such as JP Morgan and Citigroup are concentrating more on building proprietary products and less on selling them. Then, there are other firms like Deutsche Bank, which, due to a weak portfolio, are likely to cut down their mutual fund businesses and venture into alternative products such as hedge funds, where they can maintain a proprietary edge, Putnam said.

Comparing two mutual fund companies, Amvescap PLC and Janus Capital Group, which typify the two extremes of the industry, Putnam said that both were sure-shot targets for acquisitions. Amvescap is burdened with all kinds of issues such as regulatory probes, lackluster performance in the U.S. and in Europe, and an ineffective branding strategy. This means that the company can expect "either an enlightened buyer, or a reasonably radical change in direction - something that has an outside element," Putnam said. "Maybe it's a new CEO, but something has to happen from outside."

Janus, on the other hand, has a sound business architecture but still needs "stronger capabilities globally and a much broader array of products and money-management capabilities," Putnam said. "In a funny way, the more Janus succeeds, the more attractive it may be as an acquisition target."