Mutual fund asset growth from defined contribution plan investors slowed dramatically last year.
Defined contribution plan assets invested in the mutual funds of the top 25 firms grew 20% -- to $672.8 billion -- during the year ended Dec. 31, 1998. By contrast, those assets grew about 40% -- to $561 billion -- a year earlier.
Industry observers say the slowdown is due to a maturing industry and the growing trend among large 401(k) plans to move away from mutual funds and into separate and commingled account vehicles.
Still, 22 companies gained defined contribution assets last year, while two -- Putnam Investments and Neuberger Berman -- lost assets. A third, Merrill Lynch, overreported its 1997 assets, making it appear the firm lost ground last year.
Data from a Pensions & Investments' annual survey show defined contribution assets invested in Boston-based Fidelity Investments' mutual funds increased 30.7% last year, vs. 51% a year earlier. The DC assets of The Vanguard Group of Investment Cos., Malvern, Pa., grew 27.2% in 1998, vs. 40% in 1997.
T. Rowe Price Associates Inc., Baltimore, registered growth of 28% last year, vs. 50% in 1997; while DC assets at Scudder Kemper Retirement Services, Boston, grew 6% in 1998, vs. 189% in 1997.
Putnam, Boston, reported a drop of 2% in net defined contribution plan assets managed in mutual funds, but it still remained in fifth place.
Neuberger Berman Management Inc., New York, had an 11% decrease; the firm dropped to 22 from 19.
Fidelity still first
Fidelity is still top ranked in the P&I survey -- with $248 billion in mutual fund assets for defined contribution plans as of Dec. 31. Vanguard remains second, with $105 billion. Capital Research & Management Inc., Los Angeles, climbed a notch to third place, with $43 billion.
Merrill Lynch reported $39 billion, placing it fourth. Putnam was fifth with $31 billion; T. Rowe Price, with $30 billion, sixth; American Century Investments, Kansas City, Mo., $27 billion, seventh; MFS Retirement Services Inc., Boston, with $16.5 billion, eighth (up from 12th last year); Franklin Templeton, San Mateo, Calif., $15 billion, ninth; and Janus Capital Corp., Denver, $13.8 billion, 10th.
(Morgan Stanley Dean Witter Investment Management, New York, reported $7.8 billion under management for defined contribution plans, but was unable to say how much of that is in mutual funds.)
Power of the top 10
The top 10 fund companies control about 80% of the defined contribution assets in mutual funds, with a collective $673 billion under management for defined contribution plan investors in mutual funds. The 57 mutual fund companies surveyed by P&I report a total of $703 billion.
Fidelity managed the largest share of the assets of the top 25 companies -- 36.9%. Vanguard is a distant second, with 15.5%, followed by Capital Research and Management, 6.4%; Merrill Lynch, 5.8%; Putnam, 4.7%; T. Rowe Price, 4.4%; American Century, 4%; MFS, 2.4%; Franklin Templeton; 2.2%; and Janus, 2.1%.
"The march goes on," said consultant Peter Starr of Cerulli Associates Inc., Boston.
"When 80% of the total defined contribution plan assets are managed by the top 10 companies and more than 50% is managed by the two largest companies . . . that solidifies the notion of the momentum of size -- the larger companies are clearly controlling more and more of the assets," Mr. Starr said.
Yet Mr. Starr thinks growth in defined contribution assets in mutual funds will continue its slowdown, as more big 401(k) plans switch to commingled and separate account vehicles and away from mutual funds.
"There is a sumo wrestling match going on in the industry between the use of separate accounts in the large plan arena and retail mutual funds for the small plan segment. The real struggle between separate accounts and mutual funds is happening in the middle market. Flows away from mutual funds to other vehicles will take time, but it will happen," Mr. Starr said.
But some fund companies showed spectacular growth, with Janus and MFS, for example, moving into the top 10.
"Fabulous performance is driving it (the growth)," said Martin Beaulieu, president of MFS Retirement Services. "The ultimate success of MFS in the defined contribution plan market will be predicated by performance."
MFS has made strides in the defined contribution plan market through three distribution channels; third-party intermediaries; investment management consultants; and direct sales of its bundled 401(k) plan product.
MFS has spent considerable effort, Mr. Beaulieu said, in fostering close partnerships with the 200-300 brokers and financial advisers who have specialized in providing retirement plan services to small plans. In fact, MFS more than doubled the defined contribution plan assets it attracted from the brokerage community in 1998.
Year-to-date inflows in 1999 already point to another banner year, Mr. Beaulieu said, with $1 billion in new cash expected to flow into the funds in April alone.
He predicts that MFS will receive at least $1.5 billion in new cash from defined contribution plan clients by the end of 1999.
Optimism at Janus
Russell P. Shipman, the vice president of institutional business at Janus, attributed his company's asset growth to consumer familiarity with the company and the great performance of its large-cap, growth-oriented funds.
"There are a lot of people out there, chipping away at their HR departments, asking for Janus," Mr. Shipman said.
"We have a durable, pragmatic (investment) process. We hire brilliant people and all the good ink the press is giving us helps create a demand from individual plan participants. Sophisticated individual investors are driving the selection of Janus by retirement plans," he said.
Unlike MFS, Janus never built a bundled plan product, but strong relationships with third-party alliances and brokers have made its investment-only approach work well.