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Worried Mutual Fund Leaders Ask: Are We the Auto Industry of Finance?

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The 1980s were the good old days for mutual funds, when their world was fresh and profitable and star managers celebrated their success with company parties in Disney World.

That was then. Now, in stark contrast, worried executives gather in business conference rooms to talk about how tough it is these days to run a mutual fund company.

Such was the case Tuesday, when the Mutual Fund Education Alliance (MFEA) hosted its annual Strategic and eCommerce Summit in New York, bringing industry leaders together to talk about the economic pressures they face and how to overcome the challenges that hound them on all sides.

‘Are We in Year 5 of a 20-Year Decline?’

Boston Consulting Group partner Gary Shub at the MFEA summit“Are we in year five of a 20-year decline in the mutual fund industry? Are we the General Motors of finance?,” asked Boston Consulting Group partner Gary Shub (left) during his presentation on structural versus cyclical changes in asset management.

To survive, mutual fund companies may want to view themselves as “parts providers” to advisors and wealth managers, who are the gatekeepers to client assets, Shub said. Mutual fund companies are now “in denial” about this new role, he added, but said they would do well to figure out ways to package solutions with proprietary input.

“The relationship with the advisor as opposed to the product provider has become much more important to investors,” Shub said. “Clients look to their advisors in a more meaningful way to help them sort through their investment decisions.”

John Hancock Funds President and Chief Executive Keith Hartstein, treasurer of the MFEA Executive Committee, spent a few moments reminiscing with audience members about where they were during the good times of 1986, when the John Hancock Strategic Income Fund (JHFIX) was launched.

Then Hartstein turned to the more dire landscape of today, when commission spreads have narrowed, front-loaded Class A shares have shrunk to 20% of industry sales, funds are held only three or four years on average and revenue sharing has changed to asset based from sales based.

John Hancock Funds President and CEO Keith Hartstein at the MFEA summit“The industry is evolving and demands have changed. Certainly, our revenues have gotten compressed along the way,” Hartstein (left) said, noting that Morningstar’s high rating on the popular JHFIX fund comes at a cost —because that rating is due partly to how cheap the fund’s shares are (Expenses are 0.91%, which Morningstar says is a low fee level.) “We’re losing money on the A shares, B shares and C shares.”

To be sure, the headlines are filled with news that points to the mutual fund industry’s troubles. In April alone, a Cogent Research report found that affluent investors have reduced the average number of fund families they work with from 1.90 to 1.56, and wirehouses such as UBS raised fees on mutual fund companies in the wake of new fee disclosure rules.

Hard Times for Traditional Actively Managed, Long-Only Asset Classes

Further, actively managed mutual funds are seeing increased competition from alternative products and passively managed exchange traded funds (ETFs). Cerulli reported Tuesday that flows of ETFs totaled $53.1 billion for the first quarter of 2012, the highest quarterly inflows since Q4 2009.

Shub identified a number of key trends in the asset management industry, noting that most of them are a challenge to traditional actively managed, long-only asset classes.

“The ‘winner take all’ phenomenon has intensified, with the bulk of net inflows concentrated in a few funds with strong performance and a story that addresses current concerns such as corrections in the equity markets and inflation,” he said.

Currently, Shub said, the top five managers enjoying this concentration of flows in the U.S. are:

  1. Vanguard, with 2010 net flows of $88.8 billion and a 36% cumulative E-share of net sales
  2. PIMCO, with $73.2 billion of net flows and a 66% E-share
  3. Fidelity, with $33.3 billion of net flows and an 80% E-share
  4. JPMorgan, with $22.9 billion of net flows and an 89% E-share
  5. Franklin Templeton, with $20.1 billion of net flows and a 98% E-share


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