Business | Investment
Fund industry fast changing colours
Massive outflows from equity funds, which have long been the profit mainstay of fund management companies, are accelerating a seismic shift in the $13,000 billion US fund industry.
- By Deborah Brewster, Financial Times
- Published: 00:05 May 3, 2008
Massive outflows from equity funds, which have long been the profit mainstay of fund management companies, are accelerating a seismic shift in the $13,000 billion US fund industry.
Traditional money managers, which have enjoyed double-digit growth for most of the past decade, are now struggling with low growth in actively managed mutual funds, their core product, while hedge fund managers and low-margin indexed products gain strongly.
The recent flight to cash by both retail and institutional investors, who put $140 billion into money market funds in the first quarter of this year, has exacerbated the situation. Most of the money was taken out of traditionally managed equities funds and strategies.
Kevin Parker, the president of Deutsche Bank's $800 billion money management business, said recently, "On one side, you have exchange-traded funds and, on the other, you have [private equity firm] Blackstone and the hedge funds. It leaves firms like ours, traditional long-only buy-side firms, needing to make some very tough decisions.
"You can do nothing, which is a strategy. Milk the business for as long as it goes. But some day, maybe in my lifetime, the world will be split into passive investors and into alternatives. What's left in the middle is an endangered species."
Jim McCaughan, the CEO of Principal Financial Group, believes the asset management industry has, in the past two to three years, undergone its biggest change since the 1960s, which saw the advent of performance benchmarks and specialist asset managers.
Like Parker and others, he sees the change as being investors' shift to either "beta" in the form of indexed money or "alpha" in the form of absolute returns. A recent study by McKinsey estimated that corporate pension plans would, in the next five years, invest at least half the total of the $2,300 billion they now have in equities into different strategies.
Study
Likewise, state pension funds are continuing to lift their allocation to private equity and hard assets such as commodities and timber in an attempt to increase returns. "The changes in the next three to five years are bigger than those in the past three decades," said the study called 'The coming shake-out in the defined benefit market'.
Most analysts estimate mutual fund growth will be only about two per cent in coming years, meaning that fund firms must find new sources of revenue. Many are developing new and more lucrative high-margin products such as 130/30 funds - a modified long/short fund - and "wrapping" products with insurance policies.
Others have expanded their hedge fund offerings. Pimco, which has several hedge funds, is launching an "unconstrained" fund - a term increasingly used instead of hedge fund - which will invest in fixed-income securities without being tied to a particular asset class or strategy.
Institutional managers are quietly introducing more performance fees, rather than management fees, in an effort to lift revenue.
Meanwhile, retail funds that have been closed for years have reopened to new investors in an effort to staunch asset declines. Fidelity opened its Magellan fund, which had been closed for a decade, after Harry Lange, the new manager, said he was having to sell stocks to meet the steady flow of redemptions.
The Sequoia fund, which is run according to the model of Warren Buffett, will reopen on May 1 after being closed for 26 years. The fund managers said investor outflows had pushed its assets down to below those of a decade ago.
The big outflows from managed equity funds could also have an impact on the stock market as more funds sell to meet redemptions.
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