Fund Firms Keep Customers by Expanding the Menu

One-Stop Shopping

But those "transfers of ownership" may be exactly what fund companies need to survive.

Fund shops have increasingly realized the importance of being all things to all investors. Fund companies that can provide one-stop shopping for investors looking for growth, value, sector, large- and small-cap, government and corporate bond funds have a much steadier asset base -- and that's better for the bottom line.

Ideally, fund companies want to keep their outflows to a minimum for two reasons. First, fees are generated based on assets under management. The larger the asset base, the higher the fees, the larger the revenue.

Second, there's a cost involved in wooing new investors. The fees collected on funds that are simply augmenting existing accounts have a much-higher profit margin than those from new customers. It's easier (and more profitable) to maintain an account than to acquire a new one.

So as the masses move from, say, equities to bonds, as they did this past year, fund shops that were able to offer investors choices of different asset classes minimized outflows and kept their assets under management steadier. Consequently, diversified firms such as T. Rowe Price(TROW - Cramer's Take - Stockpickr) had steadier business and a generally easier time than companies such as Janus.

"This year has been a big wake-up call for fund companies that are not diversified," Barnard says. "Janus was the poster child for that." Hence, the much-anticipated absorption of the Berger funds mentioned earlier.

While some fund companies are looking for asset class diversification, others that rely on institutional management will likely move more into the retail arena. BlackRock(BLK - Cramer's Take - Stockpickr), for instance, is a highly regarded $246 billion money manager, known largely for its institutional bond funds. Yet it was the $300 billion Pimco that garnered the lion's share of investor attention in 2002. "BlackRock certainly left a lot of money on the table by not having a big retail presence," Barnard says.