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Monday, May 13, 2002

Are Happy Days Ahead?

by: Tony Pennino

It has been a rough couple of years, no one can deny. Mutual fund sales have been sluggish and antacid use has been up. But there may be hope on the horizon, at least according to a new survey from Standard and Poor's.

The report is entitled "Industry Surveys: Investment Services", and it is authored by Robert McMillan, investment services analyst.

Though McMillan contends that the first quarter saw many firms beating Wall Street's estimations (due to the Street's "conservatism"), he sees reasons to be optimistic about the month's ahead. "On the positive side, we project profits will improve over the course of 2002, especially as comparisons get easier. The catalyst for the resurgence will be a rebound in the economy and corporate earnings, as well as a favorable interest rate environment. The strong fixed income business will slow to a healthy, sustainable level as companies look to re-equitize their balance sheets," he writes.

"We were preparing this report in March and April when there was a somewhat more favorable outlook than right now. Nonetheless, the economy will strengthen, and we will see an improvement in corporate earnings. As a result, we will see an improvement in mutual fund growth," McMillan told the MutualFundWire.com.

McMillan reports that fixed income offerings did well in 2001, the one "bright spot" in an otherwise difficult year. "Mutual funds with a strong foundation in money markets and fixed income did well. Traditional equities did not have a very good 2001. But as the economic outlook starts to improve, we will probably see equities begin to pick up again," he explained.

"Look for more diversification on the part of investors. Investors are not as likely to put all of their eggs in one basket. That is the lesson from the past couple of years. Also, there will be more rational investing. I don't think you will see the same kind of investing mania that you saw in the late 1990's," the analyst continued.

McMillan also noted that investors were no longer as interested in self-investing as they were three or four years ago. "You are seeing that in some of the difficulty the self-directed brokerage houses are having. People want to work with an advisor on investing," he opined.

But all is not rosy, especially when executive compensation is concerned. In the report, the analyst writes, "As always, compensation costs are an important swing factor for industry profits. The intense competition for talented employees among Wall Street firms is well documented. Given the meltdown in the technology sector, competition for talent from Silicon Valley’s 'new economy' companies has abated, so attracting and keeping employees is no longer a challenge. Thus, we think Wall Street should be able to manage employee compensation with ease. In addition, we believe growth in nonpersonnel expenses will be limited for some time until the economy and business prospects regain sufficient momentum."

McMillan further stated that the recent high-level attention and publicity on research departments -- much of it negative and concerning conflicts of interest -- might hurt mutual funds in the short-term, but not in the long term. The analyst added that the recent Enron case has highlighted the issue. Many firms are changing the means by which they issue "buy" and "sell" ratings. 

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