Funds Will Lose Share, Says FRC
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Monday, November 18, 2002

Funds Will Lose Share, Says FRC

Mutual funds will lose assets to the open architecture of the emerging managed account industry. Bisys' Financial Research Corporation made the prediction in a report it released today. The result of the competition will be a "dramatically altered landscape" for the mutual fund industry over the next three to five years, the research firm concludes.

The opinion was circulated in a FRC research study entitled The Future of the Mutual Fund Industry. Not only will mutual funds lose out to separately managed accounts (especially multi-discipline accounts), they will also lose to registered hedge funds, ETFs, and a raft of new product structures.

"We see SMAs serving as the core investment in an investor's overall portfolio of products made available through the open-architecture environment," says Charlie Bevis, FRC's editor-in-chief of research studies and author of the study. "Among the current crop of alternative products, we see SMAs encroaching the most on mutual fund assets, due to their tax efficiency, customization potential, and cachet appeal. Already, the ratio of mutual fund assets to SMA assets has dropped from 15 to 1 at year-end 1996 to 10 to 1 at year-end 2001, and was nearing 9 to 1 at mid-year 2002. We forecast that this ratio between products will tighten even further to about 5 to 1 by 2005."

To fight back, fund firms must exploit the advantages of the registered fund product, including professional management, diversification, pooling of investors, unitized accounting, and daily redemption/exchange at NAV, argues FRC.

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