NEW YORK - Oppenheimer Management Co., a manager of $30 billion in mutual funds, is setting its sights on potential acquisitions and embarking on a joint venture to target the 401(k) market.
The firm's goal is to grow its assets to $100 billion by 1999, according to Bridget MacAskill, chief operating officer. Oppenheimer officials believe at least $60 billion of that growth will be generated internally. The rest will be achieved through an acquisition, Ms. MacAskill said.
In addition, in the first quarter, the firm plans to launch a 401(k) marketing effort with its part-owner, Massachusetts Mutual Life Insurance Co. The effort will target small to midsized plans, with distribution and marketing provided by Mass Mutual's insurance agents and mutual funds provided by Oppenheimer, according to Jon Fossel, Oppenheimer's chairman and chief executive officer.
"Now the 401(k) market is not a big thrust for either one of us in terms of success. They (Mass Mutual officials) think it's really important, but didn't have a mutual fund link," Mr. Fossel said.
The growing presence of 401(k) plan investors in mutual funds will spur continued growth in packaged products such as wrap accounts and asset allocation funds, he said.
Although Oppenheimer is committed to its mutual fund orientation, it would not shy away from acquiring a manager that also handles institutional assets. The most important factor is how a target's products and distribution fit with Oppenheimer's, according to Mr. Fossel.
Oppenheimer funds are distributed extensively through banks and registered investment advisers, but not as widely among brokerages. What's more, the firm's product line would benefit from additional variable annuity products, Mr. Fossel said.
While market conditions are not ideal for an acquisition, "if we find an acquisition that is attractive, we might bid for it," Ms. MacAskill said.
Oppenheimer offers 31 mutual funds and plans to launch a 32nd geared to investing in an environment of higher inflation. The working name is the Real Asset Income fund.
While Mr. Fossel is not predicting a large pick-up in inflation, he said "an investor still might want 5% to 10% of (his or her assets) in a diversified portfolio." The diversified global fund will include investments from short-term instruments and fixed income to precious metal and commodity-related stocks.
Oppenheimer's growth strategy ties into Mr. Fossel's vision of the mutual funds industry in the coming decade. The newly named chairman of the Investment Co. Institute, speaking at a conference sponsored by Morningstar Inc. in Chicago, said the mutual fund industry in the 1990s will be characterized by lower investment returns; consolidation in the number of companies; increased competition; pressure on profit margins and changes in distribution.
Mr. Fossel doesn't expect asset growth to be as explosive as some predict because "95% of households with investible assets already own mutual funds."
Nevertheless, the savings rate will go up significantly as baby boomers save for their retirement.
While he believes stock and bond returns in the 1990s will be nowhere near the level of the 1980s, he doesn't think a bear market is around the corner.
But whenever there is a bear market, "it will accelerate whatever shakeout has already begun," among the more than 500 mutual fund companies in the United States, he said.
A bear market also will make relative performance more important to investors and put pressure on fees.
The industry's focus will shift to pricing from products, and firms will need to create economies of scale through mergers to withstand pressure on margins.
Revenue also will be squeezed because the cost of providing services is going up as shareholders become more demanding. "Firms need enhanced technology to keep expenses down," Mr. Fossel said. Oppenheimer approved a $9.5 million budget for spending on technology in 1995.
Another challenge for fund companies is that broker-dealers are shrinking the number of fund companies they recommend. Often, larger brokers "rent distribution" of a company's funds in exchange for a fee.
"Broker-dealers will put more hands deeper into our (fund companies') pockets as long as it works for both sides. I'm happy to pay a reasonable amount - five basis points to 20 basis points - to rent distribution," he said, although some firms ask for higher sums, as much as 50 basis points, which exceeds the management fees of some mutual funds.
Another danger for companies offering funds sold through intermediaries is the growing use of B shares, which have no front- or back-end load but a trailing commission each year.
"The best deal for investors is usually to pay a load up front," he contends.
"B shares are bad for everybody," Mr. Fossel said. That's because fund companies borrow money up front - incurring balance sheet liabilities - to pay commissions and are repaid in the subsequent years.
"We have $135 million in debt on our balance sheet," he said, adding that fortunately it is affiliated with deep-pocketed Mass Mutual. Many other fund companies don't have such a resource.
The problem with trailing commissions, also known as 12(b)1 fees, is that if net asset values of mutual funds decline significantly, the fund company is collecting a 12(b)1 fee on a much smaller fund. "How do I pay back the bank then?" he asked.
Given these trends, he said investors need to pay more attention to the financial condition of fund companies. Among the factors to look for:
Strong investment performance. If a firm has no unique strengths in terms of performance, stay away.
Avoid fund companies with less than $5 billion in assets and no particular strengths.
Avoid firms that lack a strong financial backer.
Avoid firms where senior managers are close to retirement and may want to cash out soon.
Mr. Fossel also predicted new distribution channels for mutual funds will emerge. Investors might even be able to purchase fund shares through automated teller machines.
Mercedes Cardona contributed to this story.
