NEW YORK - Direct-marketed mutual funds continue to garner market share at the expense of sales-force distributed funds, according to the Capital Markets Quarterly of Sanford C. Bernstein & Co.
But the pace should slow through 1996 as "new wave" distribution channels are challenging both load and no-load sectors.
A declining need for advice on the part of investors accompanied by rising price sensitivity at the margin caused direct-marketed funds to gain eight percentage points of market share at the expense of sales-force distributed funds in the five years through 1993. Direct-marketed fund companies also tend to do well in strong stock markets because of their traditional equity product strength.
Further growth also will be fueled by the popularity of Charles Schwab & Co.'s OneSource distribution channel and competitors' clones. In 1994 alone, direct distribution gained an unprecedented six percentage points of sales share to 45% amid a stock market boom. Bernstein expects direct-marketed funds will have a 40% to 42% market share in the next few years, a slight drop from 1994.
According to a recent study by the Investment Co. Institute, Washington, just more than half of investors surveyed use full-service brokers for fund purchases; the same percentage uses direct marketers. The percentage using each of the other channels including banks is in the low to midteens, except financial planners, used by 18% of respondents.
The bank channel, which has received much media attention, actually is losing momentum. Banks have gained some distribution share, but their involvement does not appear particularly profitable except at a few banks. And momentum in distribution is weak. Sales of mutual funds through banks peaked in 1993 with about 15% of total fund sales, falling back to 11% in 1994. Recent sales data appear to have been inflated by conversion of commingled funds to mutual funds and, prior to 1994, the conversion of certificates of deposit to bond funds, the study said.
New wave channels of distribution, such as Schwab OneSource for no loads, are still small but growing rapidly. OneSource's assets reached nearly $13 billion at the end of 1994.
In the brokerage channel, mutual fund wraps are an emerging trend. TRAK, Smith Barney Shearson's wrap program, reached sales of $1.5 billion in the first nine months of 1994 on an annualized basis.
Mutual fund companies reported strong growth in 1994, but Bernstein predicts that will slow to reflect slower than historic asset growth last year and the flat yield curve. Mutual fund assets grew less than 4% in 1994 after years of growing around 20%. Historical earnings growth rates of 20% are likely to slow to 10% to 12%. Higher marketing costs probably will be offset by greater processing and management efficiencies, but margins will still erode somewhat.