NEW YORK - Even if there is a zero net flow of investments in the mutual fund industry, small fund complexes should be able to win new customers, according to an industry analyst.
"The industry could have zero cash flows and there will be opportunity for small fund managers," said Avi Nachmany, co-founder and director of research for Strategic Insight of New York. "You can always take business from one of the larger companies. This cash flow schtick is totally misleading."
Nachmany discussed opportunities for small fund companies in the mutual fund market at a conference last week on strategies for small fund complexes hosted by International Business Communications of Wellesley, Mass.
Information technology and the speed information is relayed over the Internet has given small fund complexes an equal footing with larger companies, Nachmany said. Companies that are taking advantage of information technology are the ones that are taking performance information and quickly disseminating it.
Strong market performance has created a greater emphasis on single stock investments and mutual funds may have lost some appeal in comparison, but there are many ways in which small fund companies can catch new investors' interests despite current market conditions, he said. Wrap programs, index funds and variable annuities are some of the new products companies need to offer in order to match their clients' investment needs.
Wrap programs account for $20 billion in business in the mutual fund industry and could grow substantially in the future depending on the acceptance of diversification, Nachmany said.
Equity funds are another opportunity for small fund companies, he said. Equity funds make up 85 percent of long-term fund new sales and represent nearly 80 percent of long-term fund assets, Nachmany said. Investors in equity funds are more tolerant of swings in the market and are willing to endure short-term losses for long-term gains. This may explain why equity funds represent 75 percent of the fund flows and assets in retirement fund investments, he said. Short of an economic and political meltdown, equity funds will continue to be a source of opportunity for the small fund manager, he said.
Building client relationships that are based on working partnerships will minimize redemptions on market swings, Nachmany said.
Those relationships are built on investors' needs for advice, and that should come at a premium price, Nachmany said. Fees for actively managed equity funds are insufficient and fund companies that try to compete in this area are undercutting themselves, he said. Despite a 17-year bull market, only 20 to 25 percent of investors buy directly, indicating investors' willingness to spend money on advice, he said.
While competition in the fund industry has increased, a trillion dollar gain in assets this year proves there is room for continued growth in small fund complexes, he said.