Bears May Devour More Mutual Fund Firms

BOSTON (Reuters) - The U.S. mutual fund industry, battered by a bear market that's driven stock prices down for almost three years, may be poised for a new round of consolidation as healthier companies snap up damaged rivals, industry analysts said.

While the industry is used to a constant drumbeat of merger activity, observers said the current situation -- with investors reeling from losses, uncertainty overshadowing the economy and fund companies' shrunken assets depressing their value -- is ideal for an acquirer on the prowl.

``We'll see consolidation in the industry, yes, and there may be more people who'll be in the market soon,'' said Geoff Bobroff, who runs a fund consulting firm in Rhode Island.

So far 2002 has been relatively quiet as companies digest purchases made in 2001. For instance, Eaton Vance has been busy integrating Fox Asset Management and Atlanta Capital Management as it boosted its institutional business.

FleetBoston Financial has spent most of the year folding Liberty Fund Distributors into its renamed fund arm Columbia Management.

Executives of both companies recently said they would soon be ready for new prey.

Unlike the late 1990s, when just about any fund company could make money for its investors, market and asset declines and the resulting damper on growth in the industry has left a lot of firms exposed, said Russel Kinnel, director of fund analysis at research firm Morningstar.

``Lots of marginal fund companies survived in the 1990s because everything was growing,'' Kinnel said. ``Even the ones that weren't growing as fast as the overall business felt the trend was still good and had the potential to take off.''

One prominent example that recently paid the price of failing to distinguish itself is Berger, which will essentially cease to exist by early next year as its corporate parent rebrands some of its funds under the Janus name and seeks new managers for others.

``Both on a fund company basis and on an individual fund basis, where a firm has been unsuccessful, it is very difficult to subsidize a weak company or weak fund in this kind of market,'' Kinnel said.

Fund performance has been so bad recently that it has erased all gains seen by investors over the last five years. So far this year the average diversified stock fund has lost 22.5 percent, despite a gain of 5.9 percent in October.

While some fund companies are retrenching, others who have fended off the worst of the bear market are looking to capitalize on the weakness of other firms.

``With a number of our competitors in disarray, there might be something to do in an opportunistic sense to strengthen our mutual fund capabilities and I'd be surprised if something doesn't come out of the woodwork,'' Eaton Vance Chief Executive James Hawkes told a conference call in August, when the company announced its third-quarter earnings.

Eaton Vance has said publicly that it is interested in acquiring an international fund specialist and a firm with expertise in hedge funds and other alternative investments, Eaton Vance spokeswoman Meg Pier said.

Brian Moynihan, the FleetBoston Financial executive vice president who runs the bank's mutual fund business, has said the financial services company would be interested in possibly making other acquisitions next year -- once it completes the complex task of integrating Liberty.

``We're nearly done with the changes caused by Liberty,'' Moynihan told the Boston Globe. ``Give us a month or two to catch our breath and we'll be in the market for another opportunity.''

Don't worry, your money is safe with us. The market has never been down 3 years in a row -- ah, I mean 4 years in a row.

Richard W.

There is a game that gets played by mutual fund companies. You merge the ones with the poorer records into the ones with the better records, then you pretend that the combined fund always had that good of a record.

If you have, say, 100 different funds in your "family", a few of them will inevitably have good performance records. You merge the others into those, then you start new funds to replaces those that have been merged out.

It's very clever, and it looks good in the rating books.

Couple of simple questions. Only small time investors who need to have someone do all the work go into funds, right ?

Doesn't "the next opportunity" mean vacuuming up the next out pouring of public investors dollars meant to be invested in order to have a large enough clientele so that .675% servincing fees run into the millions and therefore the fund is solvent, it can pay for expenses like staff & marketing in order to vacuum up more dollars before they ever get to the stock & equity markets.

Give us your money, we know how to invest it for a small fee and that means "now you are an investor"..."you now own stock in US corporations"

These guys really are a bunch of the lowliest bunch of vultures there are. They entice their prey in for the kill.

It's very clever, and it looks good in the rating books.

Yes, kind of like the S&P index does. Drops the ones that don't do well, and picks up a few that are doing better.

Richard W.

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