The mutual fund industry is poised for solid growth even as it faces challenges and consolidation after a downturn caused by the steep bear market of the last three years.
That’s the bottom line of a report released yesterday by the University of Massachusetts at a seminar in Boston on the future of the financial-services industry.
Meanwhile, Federal Reserve Vice Chairman Roger Ferguson offered his insights on consolidations among banks, essentially assuring the seminar audience that the industry will stay competitive despite its mergers.
The UMass report painted a largely upbeat picture of the future of the asset-management industry – with several caveats.
“What pleasantly surprised me was, when talking to the industry experts, everybody was so upbeat about the prospects,” said Arindam Bandopadhyaya, lead author of the study.
But the UMass report doesn’t offer a completely rosy picture. It suggests that continued mergers will squeeze midsized mutual fund firms, allowing the largest to prosper while small, boutique firms also win business.
Advances in technology could lead many mutual fund companies to outsource back-office jobs, possibly to overseas firms. And a potential rise in the popularity of hedge funds could take customers’ dollars away from mutual funds, the report said.
Other industry experts said mutual fund firms face another key hurdle: restoring investors’ faith after a painful bear market and recent industry scandals.
“The biggest challenge is regaining the confidence of retail investors,” said Dennis Ferro, chief executive of Evergreen Investments.
Ferro said midsized fund firms will still have a place in the industry, as long as they focus what they offer and not try to “be all things to all people.”
The fund industry will probably enjoy moderate employment growth in the next several years, Ferro said.
Edward D’Alelio, executive-in-residence at UMass and a former Putnam Investments manager, said he doesn’t expect a boom in jobs in the near future despite the recent stock market rally. Most fund firms, he said, will initially be cautious about adding positions.
The Fed’s Ferguson said he sees consolidation also continuing in the banking industry. But he said the industry has seen a relatively slow rate of change after Congress knocked down legal barriers that prevented banks from entering other financial businesses in 1999.
“The `financial supermarket’ . . . is in fact much more difficult to implement than many have thought,” Ferguson said.
Ferguson said it’s important for antitrust authorities to keep a close eye on future mergers.
But Ferguson said customers still have a variety of banking choices, and noted that more than 1,000 banks opened in the past decade: “I am optimistic that this dynamic competitiveness . . . will continue.”
Caption: CHEER: Federal Reserve Vice Chairman Roger Ferguson talks yesterday at the Federal Reserve Bank of Boston. Staff photo by Faith Ninivaggi
