More mergers, joint ventures ahead for mutual funds

This year mutual fund managers will speed up searches for acquisitions or joint ventures like last month’s foray announced by Citigroup Inc. and State Street Corp., experts say.

The new joint venture, CitiStreet, is aimed at giving each company access to new defined contribution pension plan markets including 401(a), 401(k), 403(b) and 457.

“The 401(k) market is becoming a bigger driver of market share,” says Fred D. Barstein, a consultant and managing director of the research group at Insight In Formation in Lake Worth, Fla. “The reason is that 401(k) assets are growing incredibly fast.”

Mr. Barstein’s firm surveyed almost 65,000 companies and found there are service providers ripe for buyouts or joint ventures so both sides gain access to new markets. In a mature market, the main way of getting business is taking it away from someone else, Mr. Barstein explains. Also, he says, the more mature the market, the more pressure there is on fees.

“When the market consolidates, the weak get out because then it is all about distribution,” Mr. Barstein says. In the small plan market, banks and insurance companies are most likely to gain from seeking joint ventures or acquisitions. They have the money to buy their way into the large 401(k) plan market and would be the companies most likely either to buy a mutual fund company or to enter into a joint venture, he says.

Banks might not have a large market share of 401(k) business, but they do have a tremendous amount of assets on deposit, he says. Insurance companies also have the money from their other businesses to acquire a mutual fund company to gain a toehold in the large-plan market, Mr. Barstein says.

“It is more likely an insurance company will buy a mutual fund company than a mutual fund company will buy an insurance company,” Mr. Barstein says.

“There’s a nice synergy between insurance companies and mutual fund companies.”

Service providers dominant in the larger markets, meanwhile, will look to the distribution channels of vendors in the small-plan market for their proprietary funds, Mr. Barstein says.

One clue as to who might deal with whom: Mr. Barstein says to look at companies with a presence in one market, but not in another.

For example, Salomon Smith Barney — a Citigroup subsidiary — was eighth with 2% of assets in the small- plan (under $5 million) market ranking, while State Street had 0.4% of a share in the small-market, according to Insight In Formation’s data.

Among service providers to big plans, State Street is ranked third with 5.7% of large-plan market assets, just under Fidelity Investments of Boston and Vanguard Group of Malvern, Pa.

Among the possible players, Principal Financial Group of Des Moines, Iowa, has 7.7% of the small-plan market, yet hasn’t cornered any part of the business for plans with more than $100 million, Insight says.

Principal already has taken some steps. In November, it started offering a large-cap growth fund separate account managed by Duncan-Hurst Capital Management of San Diego, and a mid-cap growth fund, says Kelly Thomson, vice president of marketing and client services at Duncan-Hurst.

Sometime this year, Duncan-Hurst will roll the insurance company separate account into a mutual fund, Mr. Thomson says.

“At this point the arrangement with the Principal is a partnership of sorts,” says Mr. Thomson. “It gives us access to their distribution. We can tap into their sales and service while we do what we do best, which is manage the assets.”

Massachusetts Mutual Life Insurance Co. of Springfield, Mass., has about 2.4% of the small-plan market. Like Principal, it’s not even on the large-plan list.

big, but not big enough

Mr. Barstein says others growing fast in the small-plan market are Manulife Financial of Buffalo, N.Y., Scudder Kemper Investments Inc. of Boston and Lincoln Capital Management Co. of Chicago. But if they want to play in the large-plan market, they will have to buy a company or create a joint business, he says.

Who will they buy or join in a venture? Topping the list of large-plan service providers are Fidelity, Vanguard and State Street, followed by Putnam Investments of Boston, and Deutsche Bank Securities Inc. (formerly Bankers Trust Co.) of New York. Deutsche Bank has not made much of a dent in the small- and medium-plan market, but Putnam has garnered 1.7% of small-plan assets, ranking it ninth in that market, Insight In Formation data reveals.

“Northern Trust (Global Advisors Inc. in Stamford, Conn.) is sitting similar to where State Street was. They have nothing but the large market,” Mr. Barstein says.

Related Topics: Mutual Funds