CONFERENCE CALL: THEORY OF FUND MULTIPLICATION: IF YOU LIKED THE OLD ONE, YOU’LL LOVE THE NEW

Although investors and advisers are already up to their eyeballs in solicitations from money managers, the rapid spread of financial offerings isn’t expected to taper off anytime soon.

Active money managers — facing strong competition from index fund shops — are rolling out new mutual funds at a dizzying pace in an effort squeeze more money out of existing customers by boosting their odds of beating the broad market, said Richard M. Ennis, a principal at Chicago-based Ennis Knupp & Associates. Mr. Ennis was among the speakers at a Philadelphia conference on the future of the investment management profession sponsored by the Charlottesville, Va.-based Association for Investment Management and Research late last month.

“It’s a crying shame not to have another product to sell” satisfied investors, said Bluford H. Putnam, president of CDC Investment Management Corp., a New York hedge fund company. An estimated 60% to 70% of new sales at any given firm can come from existing clients, he added.

Hedge funds, which were few and far between not long ago, now number about 4,700.

“With the passage of time, many management firms came to realize that consistently beating the market is hard to do — and risky in terms of longevity — with only one product to carry the firm,” Mr. Ennis told the more than 100 in attendance.

The proliferation of new funds, he added, has given rise to large, diversified firms that devote a lot of resources to marketing and new launches. In addition, the drive to broaden offerings has contributed to the pace of mergers and acquisitions.

“It has led some firms to merge with another (specialized) firm, a diversified financial institution, or a large combine of investment-management firms, such as United Asset Management,” said Mr. Ennis.

In an effort to compete in such a rapidly changing industry, an increasing number of investment advisory firms are going public either by holding IPOs or merging with public companies, said John B. Neff, a retired managing partner and portfolio manager at Boston-based Wellington Management Co. He pointed to the recent purchase of a 45% stake in American Century Co. by J.P. Morgan & Co.

money and control

The deal, in which the founding family of American Century retained the majority of voting stock, has caught the eye of owners of other mutual fund shops — including Strong Capital Management Inc. founder Richard Strong — that have remained independent, despite a barrage of suitors.

“Dick Strong said, ‘That’s not so bad if you can have a majority stake,’ ” noted Mr. Neff.

Another big player in the mutual fund industry, Federated Investors Inc., has filed a request with the Securities and Exchange Commission to issue stock in the company, a move that might help the Pittsburgh-based mutual fund company acquire other fund complexes.

Still, Mr. Neff — who helped Wellington buy back all its public shares in 1979 — said public ownership can be a double-edged sword, forcing executives to spend too much time catering to shareholders, which can be especially distracting during a bear market.

“Public ownership wasn’t a benefit to Wellington,” he said.

Several industry veterans also called for greater use of performance-based fees, rather than fixed fees. The latter provide managers with an incentive to increase assets under management, resulting in higher transaction costs, which in turn are passed on to investors.

“It’s easy to spend more on transacting than you get out of (investment) strategy,” said Langdon B. Wheeler, president of Numeric Investors LP in Cambridge, Mass. As assets under management balloon, “you get to a point where running money is total folly. That’s called a fiduciary conflict, folks.”

Mr. Putnam said 98% of CDC’s clients pay performance fees “because we want our interests aligned with our clients’.”

managers should invest, too

But, he added, unless certain steps are taken, performance fees can induce managers whose returns are floundering to take on more risk. The potential problem can be avoided if companies and portfolio managers invest their own money along with that of clients. “That’s a powerful risk-control device,” said Mr. Putnam.

Indeed, cost control and risk management techniques will come under increasing scrutiny when the current bull market ends, which Mr. Putnam half-jokingly predicted would happen on the last Tuesday of February 1999. That’s when he said the Federal Reserve — which meets monthly — is likely to tighten interest rates, having waited until after the Congressional elections and the holidays. The Asian crisis is likely to hold down inflation for another year, but after that the Fed will step in and tighten credit.

Said Mr. Putnam: “If your costs aren’t under control and your portfolios aren’t well risk-controlled, you are going to be dead.”