WIREHOUSES STILL FORMIDABLE, LOSING GROUND
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June 26, 1995 01:00 AM

WIREHOUSES STILL FORMIDABLE, LOSING GROUND

Marlene Givant Star
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    Wall Street's five major wirehouses hold nearly 28% of mutual fund industry assets, but are steadily losing market share.

    At a time when the stable earnings of asset management are just what many securities firms need, these firms - Merrill Lynch & Co., Prudential Securities, Dean Witter, PaineWebber Group and Smith Barney Shearson Inc. - have seen their collective market share for proprietary mutual funds shrink to 27.81% as of March 31, from 36.49% at the end of 1989, according to Strategic Insight, a mutual fund consulting and research firm in New York. Strategic Insight's figures include open- and closed-end funds but exclude variable annuities.

    "Their businesses are very volatile and transaction-oriented. Asset management is seen as a way to take some bumps out of the revenue stream," said Glen Casey, a consultant with Cerulli Associates in Boston.

    Excluding money market funds - in which wirehouses have a commanding presence - the market share figure plunges. Of the $1.469 trillion in long-term mutual fund assets tracked by Morningstar Inc., 9% or $137.6 billion is from the big five wirehouse firms.

    "As a group, the whole broker-dealer proprietary fund line has not been growing at all in the last few months," said Avi Nachmany, analyst at Strategic Insight.

    Still, more securities firms want a piece of the assets. In recent months, Wall Street securities firms that have not been mutual fund leaders - such as Bear, Stearns & Co. Inc., Salomon Brothers Inc. and Lehman Brothers - are entering or expanding their mutual fund businesses.

    In March, Bear Stearns introduced its first mutual fund family, managed by its subsidiary, Bear Stearns Asset Management. The new family includes an S&P STARS Portfolio, based on the Standard & Poor's Stock Appreciation Ranking System, which will invest in companies given five-star ratings by the rating agency and occasionally short equities rated with one star. The family also offers large-cap and small-cap value funds; a total return bond portfolio; and an emerging markets debt portfolio subadvised by BEA Associates, New York.

    Late in February, Salomon Inc. introduced a family of retail open-end funds. Previously it had offered closed end funds. Leveraging the firm's expertise in fixed income, the Salomon Brothers Investment Series of seven funds managed by Salomon Brothers Asset Management includes six bond and money market funds and one stock fund.

    Lehman is rebuilding its mutual fund business. The firm has $16 billion in 17 funds and reportedly hopes to grow that to $50 billion in as many as 25 funds in the next year and a half, possibly through an acquisition.

    Lehman also is introducing performance-based funds targeted to institutions and very wealthy families. The funds probably will be of limited duration and will engage in trading strategies such as currency arbitrage.

    But even big-name investment banks face an uphill struggle in mutual funds because they lack the large captive sales forces and access to retail investors of the wirehouses, Mr. Casey said.

    "There are already too many funds and fund complexes. It's a difficult challenge to tap into traditional broker channels," Mr. Casey said.

    Wirehouses and other broker-dealers selling proprietary load funds compete against not only the outside funds their own brokers distribute but also the explosively popular universe of no-load funds.

    In addition, "the ability of Wall Street firms to compete is constrained" by the fact the proprietary funds of the five wirehouses must compete against the 100 or so management companies selling through them, Mr. Nachmany said.

    "It's one of the issues they've been facing as a fleet. Brokers have been trying to make the right choice for customers. More often than not they find it away from their own fund line," he said.

    Another challenge for the wirehouses is to diversify into more profitable stock and bond funds and away from less profitable money market funds, which brokerage clients use for cash management accounts or CMAs.

    Even though it has a majority of its assets - 56.1% - in money market funds, Smith Barney, which recently merged with Shearson, is far more diversified than a competitor like PaineWebber, which has 90% in money market funds, according to Dalbar, a Boston financial research firm.

    Jessica Bibliowicz, executive vice president and head of Smith Barney Mutual Funds, wants to increase the percentage of equity funds, now 20.8% of the firm's $52.9 billion in mutual fund assets. Before it merged with Shearson, Smith Barney and Shearson both had - and continue to have - strong names in fixed income. "But people buy mutual funds to fund some future event. We're trying to build equity exposure over time," she said.

    But David Ford, a partner with Goldman Sachs & Co. and head of Goldman Sachs Asset Management, which has a significant money market fund business, said: "There's a big difference between low fee and low margin. From a business point of view, you can be in equity funds and lose money or be in money market funds and make money. We have a large number of assets, very good track records and it's profitable for us."

    Goldman has $27.5 billion in mutual funds, of which $19.3 billion is in institutional funds; the lion's share are money market funds.

    Nevertheless, Mr. Ford wants to expand all of Goldman's funds. While it has been in the money market fund business since 1981, its long-term funds are just reaching five-year track records.

    Goldman also offers a bundled 401(k) product using the mutual funds.

    On an individual basis, only Merrill, the market leader with $119 million in mutual fund assets, has gained market share since 1993. And even its share is down to 11.17% as of March 31 from 13.41%, at the end of 1989, according to Strategic Insight.

    "Merrill Lynch was able to grow the business substantially by focusing on Latin American funds," a strategy that hurt in recent months, Mr. Nachmany said.

    Officials of Merrill Lynch and Merrill Lynch Asset Management declined to be interviewed.

    While many firms long to sell a balance of proprietary and external funds, Dean Witter is unique - and controversial - in that it sets limits on broker sales of external funds.

    "It is unusual. Very few organizations are trying to do that, in essence creating an artificial barrier to other fund companies," Mr. Nachmany said.

    In part to deflect criticism from its own brokers, Dean Witter has begun offering proprietary funds subadvised by well-known institutional firms such as TCW, Mr. Nachmany said.

    Dean Witter officials could not be reached for comment.

    Performance is another tough issue for securities firms. Only 300 of the nearly 600 funds have been around three years, the period required for them to be rated by Morningstar on a risk-adjusted basis. (Each share class is counted as a separate fund.)

    Of those 300 funds, only 61 have four- or five-star ratings, the highest awarded by the firm: three out of 34 at PaineWebber; 14 out of 46 at Smith Barney; 14 out of 75 at Merrill; 20 out of 74 at Prudential; and four out of 36 at Dean Witter.

    The odds of picking a top-ranked fund were better at the institutionally oriented securities firms. Four out of nine funds at Morgan Stanley and two out of five funds at Goldman Sachs had four or five stars. Funds of J.P. Morgan were too new to have received Morningstar ratings as of April 18.

    Given the strong performance of so many no load funds, why should investors pay a sales charge at all?

    The challenge for wirehouses and other load fund companies is "can we make people understand again what a load is for? It's not paying to get into a fund.

    It's paying for advice," said Ms. Bibliowicz, noting front-end loads may amount to less than the 1% annual fees paid to financial planners that use no-load funds.

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