Ever more mutual fund companies are offering managed, customized accounts for individual investors, according to a recently published report by Cerulli Associates of Boston.

A record 25 percent of mutual fund flows through the first quarter of 2000 came through fee-based outlets, including wraps and registered investment advisors. By comparison, 20 percent came through those channels in 1999 and nine percent in 1996, according to the report.

At the end of 1999, over $1 trillion in stocks and bonds were managed in consultant wraps, rep-as-portfolio-manager programs, and by registered investment advisors. This represents about 25 percent of the long-term mutual fund industry, up from 15 percent five years ago.

"The industry is moving from mutual funds to separately-managed accounts," said Ryan Tagal, senior analyst with Cerulli Associates, in a telephone interview. "This is happening for a number of different reasons, some of them being that [separately-managed accounts] work as a tax-efficient vehicle for your investment holdings."

Another reason is that investment minimums for custom management have been coming down in the past few years.

"Previously, you needed to have $500,000 in order to invest in a separate account program," said Tagal. "Today, the amounts are as low as $50,000 for some programs."

Fee-based managed account programs had $627 billion in assets under management at the end of the second quarter of 2000, according to the report. These programs included mutual fund wraps, consultant wraps, fee-based brokerage programs, rep-as-portfolio-manager programs and offshore wraps. This is compared to $511 billion at the end of 1999, and $314 billion at the end of 1998.

Yet another appeal of separately-managed accounts is that investors have the freedom to invest in the companies they choose.

"One thing about mutual funds is that when you're investing in mutual funds your money is managed the same way for all the shareholders' net funds," said Tagal. "In a separate account you can say you don't want a certain company and it can be excluded from your holding." Mutual funds have suffered as a result as high-end customers have been attracted to customized accounts.

Some of the fund companies already offering separately-managed accounts are Invesco Funds Group of Denver, TCW Funds Management Los Angeles, Lord Abbett & Co. of Jersey City, N.J. and Neuberger Berman of New York. However, some of the largest mutual fund companies have not yet begun offering separately-managed accounts. They include Fidelity Investments of Boston, Vanguard Group of Malvern, Pa., Putnam Investments of Boston, American Fund Distributors of Los Angeles, T. Rowe Price Investment Services of Baltimore, American Century Investments of Kansas City, Mo. and Prudential Investments of Newark, N.J., according to Cerulli. But, that is expected to change imminently.

"Pretty much all the major fund companies have something in one stage of development and will be rolling something out pretty quickly," said Tagal. "They don't want to lose all their best clients."

However, there are difficult issues facing mutual fund companies contemplating separately-managed accounts.

"There are a whole bunch of issues in terms of running 10,000 accounts versus one mutual fund, in terms of executing the trades properly, compliance issues, and making sure the style drift isn't too much from account to account," Tagal said. "The distribution can also be different. It's different for a wholesaler to go to a brokerage firm and pitch the mutual funds versus pitching them on their separate account management skills."

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