Fund Firms Keep Customers by Expanding the Menu

It's been another rough year for mutual fund investors, but fund companies themselves haven't done so badly.

Despite the layoffs, acquisitions and reorganizations that made headlines in 2002, fund companies in general fared better than virtually all other aspects of the financial services industry.

"Most of the layoffs were not on the portfolio management side; they were sales staff," says Morningstar stock analyst Rachel Barnard, who covers fund companies. Indeed, when giant Fidelity Investments announced layoffs of 5.4% of its workforce in September, it spared portfolio managers and research analysts and pared administrative and operations staff.

"Its an industry that generates massive cash flows with big profit margins," says Mark Constant, a senior analyst with Lehman Brothers who follows the fund industry. "But, they are making less than usual."

Amid the sweeping industry changes, fund companies sought new avenues to slow or halt their declining profit margins. Several trends emerged that will progress further in 2003, changing how the fund industry operates as well as how individuals invest through funds.

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Typical of a maturing industry, many fund shops spent the latter part of 2002 in search of assets that will round out their product lines -- a trend that will certainly continue in 2003.

As part of its much-publicized reorganization announced in September, Janus Capital Management absorbed much of the assets from former sister firm Berger Funds. (For more on this, see Can Janus Grow Beyond Growth?) Janus, which was almost entirely an aggressive growth fund shop, coveted Berger's strong name in value and small-cap. Janus is a unit of Stilwell FinancialSV, which will be renamed Janus Capital Group and retickered JNS come Jan. 1.

And less than a month ago, Montgomery Asset Management agreed to sell most of its fixed-income, small-cap, mid-cap and emerging markets retail and institutional funds -- about $4.9 billion of its $5.7 billion in assets -- to Wells FargoWFC. The deal won't close until next year, at which point Wells Fargo intends to slap its name on the funds while retaining the current management teams. But don't view that as true consolidation, Constant says.

"Consolidation in the fund industry so far has largely been a misnomer," Constant says. "Consolidation implies removing excess capacity. What we've really seen in most cases is just a transfer in ownership. Cost savings are rarely the key driver in acquisitions of this kind."