The deluge of consolidations some experts predict in the mutual fund industry may be more like a gentle wave, said Alan M. Trager, president of AMT Capital Advisors Inc., New York.
Mr. Trager, who is working with some potential sellers of mutual fund companies, said some small firms - such as managers of fixed-income funds with high sales loads or wrap fees - will be under pressure to sell in the event of a down market. But others will be able to weather the storm.
That's partly due to new distribution networks such as Charles Schwab & Co.'s OneSource, which enable firms "to be very comfortable with assets under $10 billion."
His views are contrary to those of a recent study by Goldman, Sachs & Co., New York, that concluded mutual fund companies managing less than $10 billion will have a tough time surviving as independent entities.
Goldman's analysis assumes a bear market will cause investors to redeem at least 10% of their fund shares and that management and distribution fees will drop due to industry competition. Such an environment will lead to a shakeout in the industry, particularly among smaller firms, the report said.
Mr. Trager said sellers need to perceive a win-win situation before agreeing to be acquired.
First, they want a fair price. Lately, fund companies have been selling at very attractive multiples, he said. Second, they want strategic benefits that are real; and finally, since so many mutual fund professionals are young, many want to have an ongoing role in the operating management of a firm.
"Goldman brings up a big subject, but any one of the three considerations can stop the process," Mr. Trager said.
A seller's idea of a fair price can change very quickly depending on market conditions. "If market conditions were to change for the better," a seller might either "want more money or not want to sell," Mr. Trager said.
The third factor - ensuring a continued role in the management of the company - is the trickiest. "Many strategic buyers want to consolidate operations. Not everyone's going to be a winner through that process. It's probably a difficult fit to go into a larger organization and have the kind of important role they've grown accustomed to," he said.
Mr. Trager also said that while the pace of consolidation in the industry has "absolutely picked up in the last two years... that doesn't lead to a major cycle of people selling."
In fact, many recent sales have occurred for reasons unrelated to distribution concerns. "The industry is still fairly young. People who started companies 20 to 30 years ago" were selling because they wanted to ensure that the business would be in good hands when they retired. Such a sentiment might have been one consideration in the merger of Franklin Resources and Templeton Worldwide, he said.
The Goldman study said that growth in assets is driven much more by distribution than investment performance.
The way for small companies to survive is to sell; find a partner; use aggressive marketing strategies; develop a niche and offer funds with a high management fee; or buy a distribution channel, i.e. a brokerage house, the study said.
Of course, if Goldman's scenario takes shape, there will be ample dealmaking opportunities for the investment banking firm and others to generate fees.