Boomers will be changing the game once again

MUTUAL FUNDS

June 07, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

Mutual fund companies and their fund investors have enjoyed a booming stock market together with the historic shift toward individual investing.

At least one of those two trends is headed inexorably toward a major change that will alter the face of fund investing and might disrupt investing relationships that have developed in recent years.

Whether the current bull market in stocks ever ends, the clock is ticking on the ability and willingness of baby boomers to invest at the levels they are today.

Although studies indicate that younger adults are more dedicated investors than their parents were at the same age -- thanks, no doubt, to the bull market that was nowhere to be seen 25 years ago -- the coming passage of baby boomers beyond their peak savings years means the end of the current extraordinary growth rates in mutual funds and other managed-asset products.

"We know that demographics are very important and the aging of the baby boomers has had a lot to do with flows of money into the mutual fund business," said John Moon, co-author of a Goldman Sachs study on coming asset management trends.

Moon's analysis predicts that the asset management business will shift from achieving profitability through overall growth in the business to profitability through market share dominance -- obtaining a bigger piece of the pie.

Pretax profit margins for money managers of more than 30 percent, plus an average 14 percent annual growth rate in assets under management, will be hard to sustain in a market share battle once boomers retire.

Racking up above-average investment performance will always be important to an asset-management business. But the critical and far more controllable factors in winning market share will be costly marketing and distribution strategies, Moon predicts.

"Even good performance does not necessarily guarantee large sales, and indeed there are many instances of excellent companies with above-average performance whose coffers are not getting filled despite robust market conditions," the Goldman Sachs report noted.

It will be increasingly difficult for investment managers who value their independence and midsize investment management firms to compete with global brand-name financial-services firms for the attention of investors and employers offering retirement plans such as a 401(k).

The growth of the Internet as a third principal means of distributing mutual funds -- in addition to financial advisers and toll-free telephone sales -- will favor some asset managers and hurt others. Access to all three sales pipelines will be expensive and require even more attention from mutual fund advisory companies.

Your favorite fund manager could easily slip between the cracks between expensive advertising campaigns and costly fund-distribution strategies.

RTC An equally powerful trend soon to be under way is a shift by baby boomers toward safer and income-oriented investments and away from growth stocks, Moon said. As boomers exchange their desire for high investment returns for a dependable retirement income stream, asset managers will have to alter their sales pitch.

Insurance companies and asset-management firms will find common ground in reaching older Americans, through annuities and other products.

"Fixed-income and insurance products will receive greater interest, as more funds flow into later-stage retirement vehicles from investors seeking a consistent or guaranteed income stream," the Goldman Sachs report concluded.

Indeed, some high-profile money managers now handling popular mutual funds sold directly to investors may find themselves returning to a more traditional role: managing an investment portfolio behind the scenes for an insurance company or bank that, in turn, sells branded income-producing financial products to older investors.

Note that none of these big changes depends on trends in stock and bond prices.

Pub Date: 6/07/98

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