While mutual funds continue to garner the lion's share of investment assets, their growth is trailing that of exchange traded assets and separately managed accounts.
The mutual fund industry is such a behemoth, however, that it is hardly in jeopardy, according to most observers.
Mutual fund assets had more than doubled to about $8.2 trillion as of Oct. 31, from $3.6 trillion in 2002, according to Financial Research Corp. of Boston. Net flows year-to-date through Oct. 31 were $233.2 billion, up 27.7% from a year earlier.
Although those figures are impressive, ETF assets grew nearly fivefold during the same period to about $590 billion, from $101 billion. Year-to-date flows of $94 billion represent a 73.8% increase over the level as of Oct. 31, 2006. The number of ETFs had grown to 653 as of Nov. 30, from 106 in 2002, according to Morningstar Inc. of Chicago.
But analysts point out that it is easier for ETFs to have meteoric growth coming off a smaller base, compared with mutual funds.
"As ETFs start to achieve some modicum of critical mass — and some would argue that we have reached that now — the growth rate will taper off," according to Morningstar ETF analyst Jeff Ptak.
"Mutual funds are now so large. When you get so vast, it gets difficult to keep retaining those double-digit growth rates because of product maturity," said Steve Deutsch, director of separate accounts and collective trusts at Morningstar.
Meanwhile, assets in separately managed accounts more than doubled to $1 trillion as of June 30, from $392 billion in 2002, according to data from FRC and the Washington-based Money Management Institute.
The growth of such strategies has been more about convergence, Mr. Deutsch said. "More alternative-investment strategies are becoming available in traditional investment vehicles," he said.
FULL SPEED AHEAD
FRC projects a 10.5% compound annual growth rate for mutual fund assets for the next four years, to be outpaced by ETFs at 22.5% and managed accounts at 16.5%.
There is evidence that financial advisers are warming more to ETFs and SMAs.
More than 1,200 advisers surveyed recently by Cogent Research LLC of Cambridge, Mass., planned to reduce the portion of overall client assets managed in mutual funds to an average of 31% by 2009, from the present 35%, said Bruce Harrington, Cogent managing director.And 41% of advisers surveyed said that they would continue to use ETFs, and of that, 62% said they would increase their usage. In addition, 40% said they would continue to use SMAs, with 70% of that group saying that they planned to increase their usage.
In the 2007 Industry Attitudes survey
(InvestmentNews, Oct. 22), 53.2% of the 283 respondents ranked mutual funds as the most important vehicle in client investing, compared with 58.7% last year.
Nearly 16% of the respondents ranked ETFs as the most important vehicle, compared with 11.5% last year.
Nevertheless, few are writing off mutual funds.
"The death knell of the mutual fund industry is highly exaggerated," said Geoff Bobroff, a mutual fund consultant in Greenwich, R.I.
"The majority of the mutual fund flows are coming from retirement plans. ETFs and SMAs don't play there. They are bit players at the moment. Could they become more meaningful in the future? Maybe," Mr. Bobroff said.
Sue Asci can be reached at [email protected].
