While the growing popularity of managed accounts represents a challenge for mutual fund companies, it also creates an opportunity for them to gain assets by offering managed accounts themselves, according to some industry analysts.

"It would be easy to discount managed accounts because assets under management are currently less than one-tenth those of the mutual fund industry, but that would be a huge mistake for investment management firms," said T. Neil Bathon, president of Financial Research Corporation of Boston.

In 2000, the managed account industry increased its assets by 20 percent while mutual fund assets declined three percent, according to FRC. In the first quarter of this year, managed account assets held by the top five firms fell eight percent, according to the Money Management Institute of Washington, D.C. Over the same period, total mutual fund assets fell by about five percent, according to the Investment Company Institute of Washington, D.C.

While their asset base is much lower than that of mutual funds, managed accounts represent the greatest opportunity for growth in the asset management industry, said Paul Fullerton, an analyst with Cerulli Associates of Boston.

"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 Bathon. "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."

Fund firms are beginning to recognize that and enter the managed account business, said Fullerton. AIM Management Group of Houston, MFS Investment Management of Boston, and Dreyfus Investments of New York are a few examples of companies that have already done that, he said.

"Traditionally, the managed account business has been dominated by institutional money managers reaching down market," said Fullerton. "Today, you have retail mutual fund firms trying to reach up market and they are meeting in the middle in the managed account business. It's really a fast-growing segment."

The simple fact that managed account assets have grown does not necessarily mean that they have taken away from mutual funds or will in the future, according to Donald Cassidy, a senior analyst at Lipper of Summit, N.J.

"I'm not sure [separately-managed accounts] are a large threat to mutual fund assets in the long term," said Cassidy. "I think a fair number of high-net-worth investors already have a substantial portion of their assets in vehicles other than mutual funds and so I don't think we're going to see all of their money flowing out of funds."

Fund firms getting into the managed account business is part of an industry-wide trend of companies trying to offer everything to everyone, according to Cassidy. Not every company will be able to do so, but it is the general direction in which the financial industry is moving, he said.

"Today, mutual fund firms really don't want to be just a mutual fund firm," said Fullerton. "They want to be an asset management firm and have mutual funds be one of the products they offer in addition to wrap accounts, managed accounts, etc."

That opportunity exists mainly for larger fund firms, according to Cassidy. Entering the managed-account business either through the acquisition of an existing unit or by setting up an internal division is a huge expense that smaller firms would probably not be able to afford, he said. Beyond the expense, there are several other challenges for mutual fund firms in getting into the managed account business (MFMN 3/26/01). One of those is the strength of the top firms that offer separately-managed accounts. Prudential Investments of Newark, N.J. and Merrill Lynch, Morgan Stanley, Paine Webber, and Salomon Smith Barney, all of New York, hold about 70 percent of all assets in separately-managed accounts, according to the Money Management Institute.

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