SAN FRANCISCO - The pace of consolidation in the money management industry is being overstated by some recent research, according to a report by the investment bankers Putnam Lovell & Thornton Inc.
The survey, based on the firm's forecasts for money management trends in the next five years, contradicts several dire predictions made last year by Goldman Sachs & Co. in its report on money management. Putnam Lovell argues that despite the pace of mergers and acquisitions, the money management industry has concentrated only modestly during the past five years, and several dynamics underestimated in other reports are helping the health of the industry.
The pressure to consolidate is not nearly as intense as the conventional wisdom says, according to Robert H. Smith, Putnam Lovell's director of research and one of the study's authors. Most mergers being done today are for strategic purposes, not out of concerns for survival, he said.
Mr. Smith and Mark Scalzo, a vice president of Putnam Lovell & Thornton, said the trend toward multiproduct managers has been overemphasized, and conventional wisdom overestimates the trend toward cutting manager rosters and awarding multiple mandates that is supposedly driving the consolidation. Both said they found it hard to name firms that could not compete because they had few products.
The Putnam Lovell report focused on the total demand for investment management services, rather than on demand for individual products, which Mr. Smith said will underestimate many of those growth dynamics. Overall the industry's profitability and rate of growth are healthy, he said.
The study cites numbers that show the 10 largest money managers increased their share of assets under management only slightly to 23% in 1994 from 21% in 1989, while the top 25 grew to 39% from 36%, and the top 100 to 71% from 69%. Among mutual fund companies, the concentration of assets actually decreased, with the share of top 10 firms dropping to 21% from 23% while the top 25 dropped to 68% from 81% and the top 100 dropped to 91% from 98%.
Mr. Smith noted the industry's profitability is still strong and assets are still growing at double-digit rates in areas outside the maturing defined benefit pension market. The study projects money management demand - the total amount of assets available for professional management - will grow at a compound-annual rate of 13% through 2000.
Many studies have underestimated both the growth in assets available for money management and the percentage of those assets being placed with managers, according to the study. Professionally managed funds accounted for only 43% of the total asset pool in the United States, including household and institutional assets, and will increase to 50% of assets by 2000, according to the Putnam Lovell report.
As part of the total demand, institutions will grow their assets by only 8.5% annually through 2000, but the percentage of assets professionally managed will also grow to 76% from 69% during the same time. Defined benefit plans are experiencing net withdrawals, but they only make up 30% of the institutional segment, said Mr. Smith. On the other hand, non-traditional institutions such as endowments, foundations and nuclear decommissioning trusts are helping the asset base grow.
"In traditional markets - where people have looked for growth - there isn't a lot of growth, and people know that," said Mr. Smith. Managers are looking to access other segments in the market to make up for the shortfall, he noted.
Another area of growth is in non-U.S. investment, where capital is reaching the United States from several institutional and individual sources. Besides the establishment of private pensions, personal wealth is being created by privatization, and capital is coming to the United States as a haven from political instability. Mr. Smith noted the United States is becoming an exporter of money management expertise, and Putnam Lovell's forecast calls for a 15% annual growth rate of demand in that segment.
