Bad news for the mutual fund industry about the slowdown and concentration of net sales has just been compounded. Data shows that the market value of fund companies has declined 14 percent since 1997, while the market value of institutional asset management companies has risen 32 percent.

However, Steve Pierson, a vice president with the investment banking firm of Putnam, Lovell, de Guardiola & Thornton of San Francisco, which compiled the data, believes the value of mutual fund companies will once again rise after a "shakeout" within the next two years. And Burton Greenwald, president of B.J. Greenwald & Associates, a mutual fund consultant in Philadelphia, believes the market's unrealistically high revenue expectations for fund companies because of their stellar growth in assets in the past ten years, will eventually subside.

Putnam, Lovell, in late August, released data based on 10 mergers or acquisitions of mutual fund companies and five mergers or acquisitions of institutional firms that it had handled between Jan. 1 and June 30 of this year.

The multiples for mutual fund companies were about eight percent less than the multiples for money management firms that run institutional assets, according to the data. Institutional firms were valued at 9.3 times annual pre-tax earnings while mutual fund companies were valued at 8.6 times annual pre-tax earnings, Putnam, Lovell said. In 1997, however, mutual fund companies were valued at ten times pre-tax earnings and institutional firms were valued at seven times pre-tax earnings, the company said.

Nonetheless, there is still a great demand for companies with solid brand names, exceptional performance or products that can round out a purchaser's stable of funds, Pierson said.

"People will pay significantly above the multiples for exceptional performance," Pierson said. In a recent Putnam, Lovell-managed deal, for example, a major international bank paid 17 times pre-tax earnings for a fund company, he said.

Fund companies will continue to suffer from depressed values until institutions that have focused on the defined benefit area re-engineer to cater to the growing defined contribution market, Pierson said. Fund companies will also have to find ways to compete with self-directed brokerage accounts, he said. Finally, the industry will probably have to go through a shakeout in order for the true value of fund companies to be realized, he said.

As investments, mutual fund companies can provide more revenue than institutional firms, Greenwald said.

"Mutual fund assets tend to have a higher persistency than institutional assets. They stay on the books longer and command a higher fee. Core equity in an institutional account charges 30 to 40 basis points, but a mutual fund account charges 60 to 75 basis points," Greenwald said.

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