investors will likely continue to yank assets from mutual funds, more funds will close, and fund launches will come to a crawl this year, according to analysts.
investors will likely continue to yank assets from mutual funds, more funds will close, and fund launches will come to a crawl this year, according to analysts.
"I think it probably is a bleak picture," said Don Phillips, managing director of Morningstar Inc. of Chicago.
Those are chilling words considering what the fund industry went through last year.
The combined assets of the nation's mutual funds stood at $9.6 trillion as of Oct. 31, down from more than $12 trillion at the start of 2008, according to the most recent data from the Investment Company Institute, the mutual fund industry's Washington-based trade group.
Assets in exchange traded funds also dropped to $482.32 billion, from $608.42 billion over the same period, the ICI said.
"It has been pretty dramatic," said Darlene DeRemer, a partner with Grail Partners LLC, a Boston-based merchant bank that specializes in the investment management industry.
And it's expected to get worse before it gets better.
Because funds have lost assets so quickly, it's been hard for fund companies to cut their costs fast enough to prevent revenue from sliding at an accelerated pace, Ms. DeRemer said.
As a result, fund companies will continue to lay off employees, she said.
A lot of "substandard" funds will be merged into other products, or disappear entirely, Ms. DeRemer said, noting that product development will stall.
"It's a pretty ugly scenario," she said.
Another trend may be the elimination of underperforming share classes, said Jeff Tjornehoj, a Denver-based senior analyst at Lipper Inc. of New York.
"What we found is that under these market conditions, it's extremely difficult to market funds in general, never mind trying to go after a small portion of investors via different share classes," he said. "Share class will have to be rationalized."
Because investors, during times of uncertainty, gravitate toward fund companies with which they are most familiar, those companies with strong brands will likely have a leg up on their lesser-known competition, Ms. DeRemer said.
That means Fidelity Investments Inc. of Boston, the Vanguard Group of Malvern, Pa., and The Capital Group Cos. Inc. of Los Angeles, adviser to The American Funds, will continue to consolidate their position as the three largest fund companies by assets, she added.
Pacific Investment Management Co. LLC, which advises the Pimco funds group, will also likely outperform its peers.
"I think they have been absolutely brilliant during this period," Mr. Phillips said of the Newport Beach, Calif.-based fund company.
Pimco hasn't been shy about trotting out well-respected executives, such as co-chief investment officer Bill Gross and chief executive and co-chief investment officer Mohamed A. El-Erian, to talk about the markets.
"It's a good strategy to follow at a time when other fund companies have gone into 'radio silence,' Mr. Phillips said.
E-mail David Hoffman at dhoffman@investmentnews.com.
