Separately managed accounts continue to gather steam as industry data shows sales growth far outpacing mutual funds.

Financial Research Corp. released vital statistics on the separately managed account business at a banking conference in Chicago last week. The report revealed that assets under management have grown significantly in the last five years, in spite of the grueling bear market. Total assets reached $450 billion at the end of June 2003, up from less than $300 billion at the end of 1998. "Mutual funds and variable annuities have had stagnant or even negative asset growth over the same period," observed Michael Evans, a vice president with the Boston-based financial services research firm.

Year-over-year net sales of separate accounts have risen 181% since the beginning of 2001, according to the report. Evans expects this trend to continue and that sales growth will exceed that of mutual funds in the coming years. Breaking down the percentage change in accounts for 2002, taxable fixed-income enjoyed a robust 55% growth rate. FRC attributed that growth to a combination of market forces and individuals starting to use fixed-income separate accounts more actively.

In terms of product opportunity, large-cap equity assets dominate the separately managed account space with a 60% market share. Second place goes to balanced portfolios at 24% followed by specialty groups with 9% of the market. Small-cap and mid-cap portfolios bring up the rear with 3% and 4%, respectively. But in terms of account growth, the data shows mid-cap value disciplines coming on board and becoming one of the more sellable equity categories.

Another key data point about SMAs is management fee expectations. The average fee a manager receives for running a portfolio ranges from 31 basis points to 50 basis points. The small/mid-cap value manager garners the heftiest fee, while a fixed-income manager takes in the lowest. "Generally speaking, fixed-income is going to get lower management fees because higher minimums are needed to get into those portfolios and they're considered more of a commodity," Evans said.

Top Tier's 80% Market Share

Looking at SMA assets according to the size of a firm, FRC showed that companies in the top tier - greater than $5 billion in assets - made up 80% of the market last year, down from 85% the previous year. Essentially, smaller firms and new entrants are gaining market share and will likely keep chipping away. Tier two firms rose to a 17% market share from 14% in 2001, and tier three firms rose to 3% from 1% the previous year. What is going to happen is that fund companies that are new entrants to the business - but that have huge amounts of distribution resources, huge sales forces and good relationships - will move up to tier one.

In terms of account growth, tier two firms grew 33%, and tier three firms rose 9%, with the big dogs gaining 58%. "That reinforces the fact that the second tier and third tier picked up a good chunk of money last year," Evans said.

Lastly, distribution channels are seeing some changes as bank, regional and third-party providers are gaining market share from the major wirehouses.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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