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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 Financial


, 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 Fargo

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. 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."

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

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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.


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, for instance, is a highly regarded $246 billion money manager, known largely for its institutional bond funds. Yet it was the $300 billion


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.

A Premium for Advice

The biggest key to keeping margins high and assets steady at fund companies is customer retention. But while creating a one-stop shopping market for funds certainly helps, fund companies have been actively looking for other ways of minimizing outflows and drawing in new customers.

To that end, the emergence of separately managed accounts will certainly continue to grow in 2003.

Separately managed accounts, with which individuals own a portfolio of stocks that ape a popular fund, help keep big-money customers in house. Because these accounts come with several advantages -- such as finessing the purchase or sale of stocks that best fits your tax picture, as well as the personalized advice on all portfolio management decisions -- the minimum for such accounts is generally in the vicinity of $1 million. And that's money the fund companies don't want to lose.

"Fund companies have been tracking the termination of their accounts," says Don Cassidy, a senior research analyst with Lipper, a Reuters company. "And they've noticed a lot of six-figure accounts leaving."

Moving downscale doesn't mean the need for advice wanes, though. And because more investors seem to be turning to financial planners for help with their portfolio management, fund companies have increased the number of load funds (those that come with a sales charge when purchased or sold). Financial planners generally sell only load funds, because that's how most make their fees. (So-called fee-only planners charge for their time and advice only, and they don't skim their fees from your investments.)

Fidelity Investments and T. Rowe Price, for instance, are two powerhouse fund families that used to sell almost exclusively direct to the investor. Both, though, have recently rolled out an "advisor" class that's sold through financial planners.

Look for smaller fund shops to follow suit in 2003.