BOSTON -- The next bloody battle between mutual fund families will be fought in the marketing arena, said speakers at the recent MarkeTrends conference in Boston.
Despite a proliferation of different types of funds, nearly half of U.S. mutual fund groups are not able to produce sales that keep them from net redemptions, said T. Neil Bathon, president of Financial Research Corp., Boston. FRC, a financial research and analysis firm, sponsored the event with Graylyn Associates Inc., a Chatham, Mass.-based consultant for the financial services industry.
"Many groups are not doing as well as it seems because the market is propping them up," he said. "The ability to impact sales has been taken from the producer and turned over to an independent third party or distributor. The way we looked at distribution in the past is not what it will look like in the future."
That change will lead to further changes. "We're likely to see some exclusive distribution arrangements with big manufacturers and some niche players, with others excluded," Mr. Bathon said.
Any mutual fund family that doesn't get into a strong position at this time -- especially on the Internet -- is in danger of becoming a sub-brand in a larger player's product line, said Charles O'Neill, principal of Diversified Management Resources Inc., a Boston-based marketing and executive search consulting firm.
"If you act by default now, you let competitors set the ground rules. With our funds of the month (mentality), we have been slow adopters and short-term marketers. The old model isn't working. Should you be content with a few hypertext links on a Web site and toll-free numbers in the Wall Street Journal? I don't think so," he said.
Fund cash flows are a measure of the industry's maturity, not a measure of future opportunities for the companies, said Avi Nachmany, executive vice president of Strategic Insight Mutual Fund Research and Consulting LLC, New York.
Costs, especially distribution gateway tolls, will continue to rise dramatically, he said.
Consultants believe clearly focused niche players can survive, and the largest firms are well positioned because of their deep product lines. But midsize firms will probably be squeezed in the near future, according to the speakers.
The response of investment management firms to this squeeze will be to seek increases in advisory fees wherever possible, said Geoffrey Bobroff, founder of Bobroff Consulting Inc., East Greenwich, R.I.
Mr. Nachmany cautioned managers to look for legitimate intellectual analyses when seeking a fee-for-service addition, saying, "Not anything that can be measured or averaged should be."
The wholesaling force at investment management firms is being re-engineered, said Paul Schaeffer, a partner at Investment Counseling Inc., Mill Valley, Calif. "You want to service the intermediaries, and you have to think about how that changes your business as a whole. One big opportunity for money managers is to sell their knowledge, as one way to differentiate themselves."
Branding was a subject of intense discussion.
"The only true brand is Fidelity," said Mr. Bobroff, although Vanguard may have three-quarters of the power of Fidelity.
The mutual fund industry lags other mature industries in its use of marketing, said Stephen Gresham, principal of The Gresham Co. LLC, Madison, Conn., a investment and marketing consultant to financial services companies.
"When you ask marketing people about their targets, they ramble. We'll see people exiting the business because they can't do the marketing," Mr. Gresham said.
The mutual fund industry has allowed too much attention to be placed on performance, consultants said, making the business now a "prisoner of its own culture," he said.
Still, the "comfort zone is very wide" for volatility, due to the market's "bungee movements," said Mr. Nachmany. "The industry will benefit from strong public confidence for a long time."
Mr. Bobroff expects in the near future that net flows will be in the hands of five to 10 firms, reflecting a view voiced by many consultants that investors soon will select the funds of top players -- which will control almost all inflows and outflows -- even more narrowly.
"The need for capital will be a serious challenge as we go forward. They may look to sell the firm or a minority stake, or merge with another firm. We may see an aggregation of middle firms," he said.
Regarding merger activity, consultants stressed the need for buyers to be clear about what they are purchasing.
"And know what you want to accomplish," said John Rekenthaler, research director for Morningstar Inc., Chicago.
"If you're going to do a deal, you should be able to state clearly why. And there will be pain for some people involved, so don't shield it. Get it done quickly and move on. Communicate."
