If one were to have the choose to invest in a mutual fund or a mutual fund company, the fund idea has certainly proved more lucrative for the last few years.
Through December 2, the S&P 500 was up 17% YTD compared to the weak 6% return that came from the Management Company Price Index, Michael Lipper, chairman and founder of Lipper said at a press conference yesterday.
The Management Company Price Index is made up of 14 publicly trades asset management companies. UAM, Neuberger and Berman and BlackRock are not included in the index.
Lipper pointed out that steady redemptions and a high turnover by investors make it increasingly harder for fund companies to turn a profit. According to the fund tracker, the average stock redemption rate is close to 23% and including switches within the family, close to 37%.
"People are buying fund companies for equal to what it would cost to build a company. They don't know how to make money on the company for the first couple of years," Lipper said.
There has also been an increase of funds with back-end loads, Lipper said. " Back-end sales charges are growing faster than front-end charges, putting pressure on cash earnings of management companies."
"A group not experimenting is at risk," Lipper said. He gave the example of no-load fund complexes not learning about the load side of the business.
"The short-term answer is cutting the sales effort which equals long-term disaster," Lipper said, when asked what form a solution might take by the MFWire.com. "From day one of making a fund sale you have to make up the money spent on bringing the new money in and then putting it on the books. You don't have that with old assets."
To avoid that long-term disaster Lipper said that fund companies must increase the productivity of its system. This would mean getting more out of employees, a hard task for many of the above companies whose outflows and management defections have to be affecting the overall corporate culture.
 
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