As Wall Street's woes continue, mutual fund executives have come to think of their industry as a drawing on an Etch-A-Sketch. When it gets messed up, they can shake it up and draw it over again.

Since late summer, scores of fund companies have combined and created new departments, cut staff and rejiggered their product lines (see related lead story, this page). An informal review of the industry, conducted by MFMN, shows that at least 20 firms have undertaken such measures.

To name just a few, Denver-based Janus took control of its parent company, Stilwell Financial, Fidelity Investments cut 1,700jobs and Franklin Templeton formed a new retirement division. American Century announced plans to sell 10 of its funds, which had been available directly from the firm, only through advisers, and, most recently, Orbitex Group of Funds proposed a merger with Saratoga Capital Management (see related stories, page 5).

The spate of changes comes at a time when swooning markets and corporate scandals are draining firms' precious assets under management, upon which much of their revenues depend.

Geoffrey Bobroff, a well-known fund consultant based in East Greenwich, R.I., said that many firms are reacting to the stock market's collapse in July. He's seen the difference in his consulting practice, with fund clients calling far more frequently than during the first few months of the year.

Can't Sit on the Sidelines'

"They're saying, We can't sit on the sidelines anymore. We've got to do something about this,'" Bobroff said. "They recognize that they can't continue to run these businesses with the view that growth is eternal."

It's no secret that times are tough for the industry. The average U.S. stock fund's assets have plummeted to $280 million from $661 million as of March 31, 2000. Expenses, meanwhile, have increased from 1.26% to 1.47%, according to Chicago fund researcher Morningstar.

"You've got significantly smaller assets, which means significantly smaller fees," said Russ Kinnel, head of fund research at Morningstar. In addition, the bear market has "gotten worse," he said, and fund companies "can see that they're not going to get meaningful inflows in the next 12 months, unless there's a big rally."

More importantly, the industry's domestic growth has long been regarded as stagnant, with more than 50% of American families now owning a stake in a mutual fund. Meanwhile, equities markets and investments businesses are sprouting overseas. And while foreign financial industries may be more tightly regulated than in the U.S., American fund firms are eyeing opportunities abroad even more covetously.

"The industry, as a whole, is smarting," said George Wilbanks, managing director of the investment management practice at New York executive search firm Russell Reynolds Associates. "It's like getting a spanking."

The fund business is no stranger to rough times. But the length of this downturn, and questions about which distribution channels to exploit and which products will emerge as favorites among investors - as well as the specter of corporate scandal, terrorism and war with Iraq - have industry observers shaking their heads.

Indeed, said Matt McGinness, an analyst at the Boston research firm Cerulli Associates, there is no precedent for the challenges going on now.

In the early 1980s, many firms initiated hiring freezes. "But that was very brief," McGinness said. They lasted, more or less, just three to five months on average.

Then, during the late 1980s and early 1990s, markets were turbulent, but even with portfolios in decline, investors still favored mutual funds. "Now that [the fund business] has reached maturity, it's different than when it was in a growth phase," McGinness said.

"I just think it's unfamiliar territory for the industry," he continued. "The industry is here to stay, but without the growth underpinnings that we had in previous market cycles, [the game has become more one of] firms competing to take a piece of the pie from each other."

No Game of Survivor'

Yet, although the current situation is bleak, Wilbanks and others are quick to shoot down the idea that these recent internal changes at fund companies amount to desperate thrashing.

"I don't see any fire sales," he said. "None of these firms really jump off the page at me as scrambling for survival or doing unusual things. You don't get a sense, in talking to senior executives, that there's a crisis. The financial results of the firms reflect that."

Rather, Wilbanks said, "it's a transition time."

So, while many of the changes within complexes amount to direct reactions to declining assets and other fallout from the bear market, consultants say that many are also undergoing operational changes for other reasons.

The rash of fund complex reorganizations "fall into two buckets," said fund consultant Chip Roame, whose practice is in Tiburon, Calif. "There's a chunk of them that are related to the markets and the economy," he said.

But "others are ongoing secular trends in the industry," such as reactions to growth in the independent sales channel, continuing flows from 401(k) investors and movement to fee-based accounts.

In some cases, the restructuring of fund companies has been a combination of the two. For example, consultants said that Janus' successful bid to take the helm of its parent, Stilwell, by far one of the most significant restructurings this year, was more the result of an ongoing personality conflict between executives at the two firms than impacts from the economy. But, in the wake of the merger, the restructuring of the staff between Janus and its Stilwell sister, Berger Financial, could, indeed, be related to the economy, Roame said. More notably, Berger's investment style is now in favor, whereas the go-go aggressive growth, high-tech approach that put Janus on the map in the 1990s, is over, at least for the time being.

Melting Pot

In many cases, the logic behind changes like those at Berger and Janus, is that "you might not need to cut resources, but if you can merge some groups together, you don't need to add resources," Roame said.

But it's not just staff that are coming under the brunt of these reorganizations. Fund line-ups are affected, too. The turbulent economy is prompting firms to reconfigure their product offerings, and at a breakneck pace.

"I would think that we're probably seeing more [fund] mergers and liquidations than at any time," Morningstar's Kinnel said. He added that the rate is helped by the fact that more funds exist than ever before.

Still, by Morningstar's count, since March of 2000, 414 equity funds have been liquidated, which accounts for about half of all liquidations ever recorded in Morningstar's database. An additional 566 funds have been merged into other products, Morningstar said. The numbers do not account for multiple share classes within one product.

"Firms are trying to bring their capacity in line with market demand. It's plain and simple," McGinness said. "I think that the mood of the asset management industry is manic-depressive."

Much of the activity on this front is driven by the need to cut costs. Killing or merging funds that haven't attracted many assets but are expensive to operate, is becoming a widely adopted solution, consultants said.

"Some firms are under more pressure than others," McGinness said. "With regard to how they'll control costs, not everybody has the answers yet. Firms are looking to bring their operations in line with their volume, but, also, firms are questioning how they'll deploy and invest in the more expensive areas of their operations."

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