As asset levels drop off, funds act to cut costs

Mutual fund families are cutting expenses because asset levels have dropped, reflecting the rocky markets. They "have not totally battened down the hatches, but they've climbed back into their shell," said Geoff Bobroff, a mutual fund consultant in Greenwich, R.I. For instance, The Vanguard Group Inc. is hiring people, but at a slower rate than the firm planned, though the firm declined to provide the numbers. "We are not immune to the economy and market environment," said John Woerth, a spokesman for Vanguard. "Forecasts for our future employee growth were moderated." As a result, last month, the firm decided to delay construction of two office buildings that were planned for 245 acres of farmland that the Malvern, Pa.-based firm purchased nearly 10 years ago. When Vanguard purchased the site in 1999, it had $540 billion in assets under management and 10,000 employees; today it has $1.24 trillion in assets under management and 12,500 employees, though assets are down about $30 billion since January. To more than double the assets under management while increasing staff size by only 25%, Vanguard developed its Internet capabilities. Today, for every phone call that Vanguard receives, 12 people log on to the firm's website, through which 80% of transactions are executed, said Paul Heller, chief information officer at Vanguard. "What has allowed us to keep the number of people at a low rate of growth is technology," he said. In addition, some of the fastest-growing businesses at the firm are in areas that are less people-intensive. "The ETF business is the fastest-growing, and it tends to be sold through intermediaries, the adviser channel," Mr. Heller said. At Baltimore-based Legg Mason Inc., business travel and conference expenses are under review, and it hired a management consulting firm to review discretionary spending, said spokeswoman Mary Athridge. Assets under management dropped to $923 billion as of June 30, from $998.5 billion in January. In a similar move, Martin Flanagan, chief executive at Invesco Ltd. of Atlanta, sent an e-mail to employees that announced that expenses would be reviewed. "Certainly, travel and entertainment is one area where people have contributed to this effort," said Bill Hensel, a spokesman. Invesco managed $461.3 billion in assets as of June 30, though in January, it had around $500.2 billion in assets. The market downturn caused Ariel Investments LLC of Chicago to lay off 19 employees, representing 20% of the staff. "We felt in this environment, which was unprecedented, it made a lot of sense to tighten our belts," said Ariel president Mellody Hobson. "The first six months of this year were the toughest we had in our 25-year history." Assets under management had dropped to $8.9 billion at the end of June, down from $13.2 billion in January. However, layoffs have not been prevalent, because the asset management business remains highly profitable, said Michael Breen, fund analyst at Morningstar Inc. in Chicago. The firms "are doing belt-tightening as a business issue; it's not about survival." Another approach to reducing expenses is to alter the job responsibilities of salespeople in ways that reduce costs. In January, AFBA 5Star Funds Inc. of Alexandria, Va., decided that its wholesalers would make shorter, more targeted-sales trips every two to three weeks rather than spending most of their time on the road. In addition, the firm's employees will attend three or four conferences this year rather than eight, as in the past, said Bob Morrison Jr., president and chief investment officer. He said the strategy reduced expenses at the firm by 25% to 30%, though he declined to provide absolute numbers. Since the first of the year, assets under management fell $30 million to $240 million. Because the firm's wholesalers are spending less time with clients, AFBA began to send out e-mail alerts to advisers every two or three weeks.

RENEGOTIATING CONTRACTS

To further trim expenses, the firm has been renegotiating contracts with its vendors. "We all have to sharpen our pencils a little bit," Mr. Morrison said. "We went back to our transfer agent, fund accountant and others. We talked about fees and even creative ways of pricing." The strategy at Dunham Funds was to renegotiate agreements with outsourcers. "We've had to go back and renegotiate with administration providers and custody providers to lower fees," said Jeff Dunham, founder and chairman at Dunham & Associates Investment Counsel Inc. of San Diego. Assets under management declined around 10% to $500 million at the end of August, as compared with January. "We've all had to get used to working for less," Mr. Dunham said. "We've tightened our belt for the amount of revenue we could get from the funds." Ultimately, there could be fewer new ventures or there could be a new round of consolidations, Mr. Bobroff said. "At some point, there is no more water you can squeeze out of the turnip, and you have to look at other places. We may be approaching the 'now what do I do?' point. We may see more [mergers and acquisitions] activity, and more reductions in staff." E-mail Sue Asci at sasci@investmentnews.com.