Who are the players in the managed account business and what are they up to?
Analysts at Boston-based Cerulli Associates are the experts at asking those questions - and researching the answers. In Cerulli's recent Managed Accounts 2003: Asset Managers, the
firm published updated findings of the quarterly surveys it conducts electronically
with more than 50 managed account program sponsors and more than 150 asset managers that offer separate accounts on brokerage consultant programs. Among the report's highlights:
-- SMA assets continued to be highly concentrated. Smith Barney, Merrill Lynch, Morgan Stanley, UBS and Wachovia Securities control more than 75 percent of the industry's assets.
-- Wirehouses are expected to lose managed account market share, falling from their current 68 percent share to a 60 percent share by 2006. Gaining share will be independent broker-dealers (increasing from an 8 percent share to 12 percent) and third-party vendors such as Lockwood/BNY and London Pacific/SunGard that are expected to increase their market share from 9 percent to 12 percent.
-- Asset management also is concentrated. The top 25 asset management organizations account for 64 percent of industry assets. Managers number 51 through 100 control only 3 percent of assets in third-party manager programs.
-- The size of an average separately managed account has slipped from $234,667 in the fourth quarter of 2001 to $190,125 in the first quarter of this year. The average total of all separately managed accounts the typical client has with money managers (Cerulli estimates this at 2.3 managers per client) also has fallen -- from $511,207 in the second quarter of 2001 to $437,000 in this year's first quarter.
-- The largest SMA asset managers continue to be institutional money managers, not mutual fund managers. Only 9 percent of the managers in the Cerulli database draw more than half their firm assets from mutual funds.
-- Larger sponsors generally offer the lowest fees. The "leading low edge" is around 0.38 percent for equity accounts.
Among what it calls managed "retail" assets -- long-term mutual funds, short-term mutual funds, annuities, brokerage separate account consultant programs, hedge funds and exchange-traded funds -- Cerulli found that assets declined in 2002, except for hedge funds and ETFs. Hedge fund assets grew from $315 billion in 2001 to $340 billion in 2002, while ETF assets increased from $82.3 billion to $101.8 billion. Year to year, assets in separate account consultant programs declined from $421.7 billion to $384.1 billion, reflecting equity prices during the period. This year's market recovery is likely to reverse that trend.
Analysis of the separate account numbers reveals how just a handful of wirehouses dominate the business. Smith Barney, with $128 million in assets under management in separate accounts (33.5 percent of the industry's total), and Merrill Lynch, with almost $94 million (24.5 percent), account for more than half of the entire industry by themselves. Add Morgan Stanley, a distant third with 7.7 percent, UBS at 6.8 percent and the combined Prudential/Wachovia at 5.9 percent, and the total comes to 78.4 percent, leaving each participant in tenth place and lower with less than 2 percent of market share.
Within those programs, however, some interesting developments are taking place, particularly regarding proprietary programs. At Smith Barney and Merrill Lynch, for instance, assets under proprietary management fell by 14.5 percent and 15.9 percent, respectively, on a year-to-year basis through the first quarter of 2003. At Raymond James, however, in-house Eagle Asset Management increased assets under management by 88.3 percent, to $5.7 billion.
The greatest growth in propriety programs came at UBS Financial Services, however, where UBS Global Asset Management increased assets under management by 820 percent, to $844 million.
Just as among sponsors, concentration is a fact of asset manager life. While Cerulli estimates that more than 250 managers currently manage assets in separate account consultant programs, the market share of the top 10 is 43 percent, and the top 25 account for 64 percent of industry assets. (See accompanying table for the 20 largest separate account managers.)
Cerulli found that the fastest growing asset managers over the period from the fourth quarter of 2001 through the first quarter of this year were: MFS Investment Management (73,400 percent), AIM Private Asset Management (21,008 percent), Turner Investment Partners (3,500 percent), Fayez Sarofim (1,359 percent), Lotsoff Capital Management (573 percent) and Allegiance Capital (413 percent).
"The astronomical growth rates shown by these firms are impressive in and of themselves," Cerulli noted, "especially for the larger managers in this group. Firms like MFS, Fayez Sarofim and Allegiance Capital, all with more than $2 billion currently under separate account management and all having grown assets more than 400 percent over the past 15 months, have enjoyed significant asset and revenue growth."
Among asset managers, Cerulli observed that many entered the separately managed accounts business from a traditional institutional or high-net-worth client background. More recent entrants have come from the mutual fund world. For both, operational issues represent some of the biggest challenges to profitability. Over the past 18 months, however, Cerulli has discerned an improvement in operational efficiency throughout the industry. And while it has yet to see widespread adoption of outsourced solutions among asset managers, Cerulli said these offerings seem to be valid.
Negatively impacting the profitability of asset managers has been the steadily eroding fee structure of separately managed accounts. Increased competition among sponsors, declining equity markets and more lenient broker-dealer policies on discounting by registered reps all have contributed to the decline. Since 1999, when average annual client fees in separately managed consultant programs stood at 212 basis points, fees have fallen to an average of 175 basis points - a 17.5 percent decline.
Using an example of a wirehouse broker who charges an annual client fee of 178 basis points, Cerulli found that 48 basis points (or 27 percent of the fee) went to the advisor, while the manager and sponsor split the remaining 130 basis points (73 percent of the fee).
Once they are on the books at sponsors, do separately managed account assets stick? Maybe not as much as everyone believes. Cerulli found that while the current average redemption rate for equity funds is 26.8 percent, asset manager data points to a separate account redemption rate of 32.8 percent.
