Mergers among investment management companies are likely to pick up in 2000, with cross-border deals in the United Kingdom and Europe setting the pace, a leading mutual fund expert said Tuesday.
A. Michael Lipper, chairman of Lipper Inc., told reporters that the enactment of financial modernization legislation in the United States and the coming expiration of pooling-of-interests accounting treatment could also help to stimulate a new round of dealmaking. The need for fund companies to downsize to gain efficiency could play a role, he said at the Reuters subsidiary's annual outlook conference for reporters.
Mr. Lipper noted that valuations of mutual fund companies, which had risen briskly in recent years, have grown "a marginal 6%" in 1999. One reason for the sluggish growth is that the investment management business is entering a more mature phase as investors begin to draw on their assets.
"What we're seeing now is a steady increase in redemptions," he said. In all, 23% of fund assets were redeemed outright in 1999, and 37% were transferred within fund families.
The result: Assets are staying on fund books an average of three to four years. "This is a significant number because when we look at most fund acquisitions, the price is three to four times annual revenues," Mr. Lipper said.
In other words, buyers of fund companies don't stand to make money on their purchases for the first three to four years.
Citing another noteworthy trend for investment management companies, Mr. Lipper said their cash positions have come under some pressure this year. That's because funds with back-end sales charges are growing faster than funds with front-end fees. Fund companies have to dip into their cash hoards to compensate brokers who sell funds with back-end loads, because brokers get paid at the time of a sale, whereas commissions are not collected until shares are redeemed.
In separate news, Lipper announced Tuesday that WingspanBank.com is integrating Lipper's data into a service for finding, comparing, and purchasing mutual funds.
Wingspan Mutual FundProfiler provides investors with "an easy-to-use, unbiased on-line search tool and shopping service for approximately 5,500 mutual funds," said Stephen Baine, chairman of Wingspan Investment Services. WingspanBank.com is a unit of Bank One Corp., Chicago.