Hundreds of smaller U.S. mutual fund companies are looking for a sale or merger because of slowing industry growth and higher regulatory and compliance costs, according to members of the $8,000 billion industry.
The squeeze points to a coming shake-up in the sector, which is highly fragmented but — for the bigger funds especially — still highly profitable.
The two biggest firms, Fidelity and Vanguard, together hold only 12 percent of the market. But industry profit margins average about 30 percent.
"There are tons out there for sale," said Chip Mason, chief executive of Legg Mason and a leading figure in the industry. "If only there were more buyers out there, there would be tons of transactions."
AmSouth Bancorp, an Alabama bank, last week sold its fund management arm, comprising 23 funds with $5.5 billion under management, to Pioneer Investments for $65 million, saying it had become "more difficult and more expensive for small mutual fund families to compete effectively."
Regulatory pressure was behind Legg Mason's recently announced deal to double its assets under management, to $830 billion, by swapping its brokerage business for Citigroup's asset management business. Regulators have been stepping up their scrutiny of perceived conflicts of interest at banks that own both a brokerage network and a fund management company.
Mason, in an interview with the Financial Times, estimated that a fund company now needed at least $50 billion under management to compete. Of the 500-plus mutual fund companies in the U.S., only 38 are of such scale.
But Geoff Bobroff, an industry consultant, put the minimum requirement at more than $50 billion, although a company could succeed as a boutique with less. He expected another six or eight sales or mergers in the next year.
"Many of the smaller fund companies are attempting a full product offering, and that is a mistake," he said.
"The rate of industry growth is half what it was in the 1990s, and maintaining a viable distribution business is very expensive."
Mason also warned that excessive compliance costs, following the new requirements of Sarbanes-Oxley and the mutual fund trading scandal, was putting smaller companies under pressure. Larger companies were better able to absorb these costs, he said.
"It is insane," he said of the growing numbers of lawyers needed to keep track of compliance. "The cost is just dramatic. We keep going over the same things five times."
"It is such a disservice to the public. They need a prospectus in simple English of about three or four pages. Instead they get hundreds of pages that no one can read, or wants to."
Despite the fund trading scandal, he said the industry had been "exemplary" for 40 years, and was already highly regulated before the new rules came in.