"THE MIDDLE GUYS WILL HAVE THE TOUGHEST GO OF IT"

The biggest development in the capital markets over the first 15 years of the new millennium will be the emergence of global stocks of global companies, without theoretical nationalities, and trading freely on all world exchanges.

That’s the opinion of Charles W. Brady, chairman of Amvescap PLC, the $241 billion institutional and mutual fund management company that is the parent of the Aim and Invesco funds.

His outfit may be a prototype of such a company. While it also has large operations in Houston, Denver and Atlanta — where Mr. Brady and much of top management work — Amvescap is registered in London, is the 86th-largest company in Britain and its stock is listed in the Financial Times 100 index.

The company also has its bases covered when it comes to reaching investors, from 401(k)s and pension funds through its institutional sales force, to wirehouses through Aim and direct retail investors and fee-based financial advisers through the no-load Invesco funds.

Q How do you see capital markets developing over the next 15 years?

A I suspect the big story for the next 10 or 15 years could well be the rethinking of what a stock is, what its domicile is, what global investing is.

Our own company is in the Footsie (Financial Times Stock Exchange) 100 (index). But 80% of our business is in the U.S., so should we rightly even be listed there? And yet we can’t get included in U.S. indexes because our charter is sitting in London.

So I think you are going to see a rethinking of this. You will have global companies that don’t necessarily have a theoretical domicile. Why should securities not be fungible? Why shouldn’t you be able to buy shares in London and sell them in New York? And then you will have emerging global companies that don’t have nationalities and are not necessarily controlled by any one market. That’s a huge change.

Q What about the future shape of the money management business? How do you see that evolving?

A Globalization is a big part of everything. In order to be a major player you are going to have to have global capability. I think the number of global investment businesses is pretty well defined already. I think there are 25 or 30. And I don’t think there are going to be any more. There are probably 10 banks and 10 brokers and insurance companies, and not more than five or 10 independent money managers. That’s one end of the business.

Then you have the middle size. They will be squeezed a little bit, but if they stick to their own market — that is, a U.S. fund management company operating only in the fund management market, even if they invest in other parts of the world — I think they still have a future. They still have a big profit margin.

And there are as many start-up firms today as there ever were. The big players are going to get bigger — they’ll take a bigger piece of the pie. The middle guys will have the toughest go of it.

Q There are more mutual funds than stocks. Is there going to be a shakeout?

A In the U.K., a market which is not as large as ours, there are more unit trusts than stocks and always have been. The thing about the 7,000 mutual funds, there are only about 600 mutual fund firms. All of us have just gone crazy introducing products.

What that has done is make the educational aspect far more important because the average person walking down the street doesn’t know heads or tails about these 7,000 funds. They don’t realize that underlying them there are probably 600 fund companies, and they don’t realize that probably 60% of the industry is in the hands of 10 of them, 15 at the most.

Q With 60% of the industry in the hands of 15 companies, how can the other companies survive?

A They probably won’t. There could be a shakeout. With mutual funds there is a certain critical mass you’ve got to be at to be an effective brand. We used to think we had to have $25 million in a fund to even make it worth the effort. The number now is much larger. There will be a number of funds that are not economical, and I suspect they’ll get picked off one at a time. But the big houses are going to keep starting funds because the marketplace always wants a new look. So the number of funds, I don’t see it going down.

Q How do you view the quality of financial planners, and the quality of advice people are getting?

A I think it has moved from a peripheral business of 20 years ago to the mainstream. It’s much more professional. The most successful brokers have left the firms and gone into business for themselves. I think that’s had a huge uplifting effect on the industry. I suspect the industry will grow.

There used not to be a financial planning industry in France. So selling mutual funds in France was very difficult. Most of the banks sold money market funds and that’s where the money went. Now the interest rates have come down and the people have discovered equity funds, and the banks don’t know much about equity funds. So a financial planning community has sprung up.

We are now the second-largest seller of equity funds in France, and they’re being sold by financial planners, who didn’t even exist three years ago.

Q So you think the financial planning area is a growth area?

A Yes. You have to have some means of having that one-on-one explanation of what’s going on.

The need for advice is so great that the world is moving toward an advice-driven business. In past years that would be interpreted as the load mutual fund business because there you effectively pay a commission and the reason you pay a commission is for advice.

But I don’t think that’s true now. What you find is that people are buying mutual funds at net asset value, but they’re willing to pay for advice. And they do it through wrap programs, through financial planners where there’s a fee of some sort, through B shares (which carry a back-end load). So the need for advice is there and people are willing to pay for it.

Q Are you seeing pressure on fees for mutual funds?

A You are not seeing pressure from the clients. You are seeing continued pressure from the distribution channels. The people who own the distribution channels are demanding more — the Schwabs, the Merrill Lynches, the Smith Barneys. Anybody who sells your product wants more of the residual, if you will. That continually puts them in the position of being a direct competitor of ours.

Q The margins in the investment management business in general have been extraordinary by any standard. Are they going to remain that high?

A You are certainly being asked to deliver more services and product for the same fee. So I think the margins will drift down simply because the cost side of the equation will rise. One of the advantages of being a big company is that you can negotiate on a worldwide basis and that gives you economies of scale that small companies don’t have.

But we are providing more services all the time. The education services are part of it. Another part is the distribution channels demanding a bigger part of the fee.

Will our profit margins go down? In the next five years I do not think they will go down. But it won’t be because we won’t have cost pressure. We will have expense pressure on one side, but we’ll have leverage on the other side. But margins will probably go down for the industry because for the middle-sized companies they will go down. Small companies that keep themselves very thin will be OK.

Q What impact do you think a prolonged bear market such as we had in 1973-74 would have on the whole defined contribution pension movement?

A I think that would be the kind of catalyst it would take to rethink the whole defined benefit issue. The corporations and fund managers as a group can take the long view because they know history is on their side. They can say: “Yes it’s down, but it will come back. We can stay with it.”

It seems to me that type of thing might make people go back and say: “Maybe we’ve gone too far in one direction. Maybe some combination of these two systems (defined benefit and defined contribution) is the way to go.”

Where will we be in 15 years? I think you will see both types of plans out there. They may be used in different ways than they are now. But it’s not 100% “Everybody out of the pool. Let’s go to defined contribution.”

Q What about advice? Should we make it possible for employers to advise employees in defined contribution plans?

A I think you have to give employees some rough type of advice. I think it’s immoral not to give some leadership in this area. It may be no more than “Check these blanks: If it comes out this way, you should do the following.”

But you’ve got to give some sort of advice, and I think it would be wonderful if the laws were eased a bit so you could, in effect, do that without jeopardizing yourself. And I think that’s the real challenge for people like us in the industry to provide for this in a way we can withstand the risk. It’s sorely needed.

Q Does the lack of education, combined with the 17-year bull market and the high equity positions, scare you at all?

A For a very long time the equity allocation was too low. Inappropriately low. People, when they were given a choice, put all of their money into GICs (guaranteed investment contracts). What we’ve seen recently is that people, because they have been given some education, put more and more into equities. Even if they never put more than 30% or 40% into the equity market, the growth of the market has taken it to 60% or 70%.

The question is, given where we are, have they overshot the mark? I think that’s where you need ongoing advice. You need someone to say: `OK, you’ve reached 60%. That’s probably where you should have been all along, but maybe at this point you ought to put excess capital now into the more stable side.’

Or, you look at their circumstances, age, how long are they likely to be here? What’s the status of the plan? You just can’t talk to them in a vacuum. You can’t really answer the question until you know who they are and what their circumstances are.

Q You are 63 years old. What plans have you made for succession?

A I am putting together a management team over the next three years that can operate for five years beyond that. I’m trying to identify the best people from all parts of the company to be part of that team, and I expect to be part of that team. At some point I will probably have at least a chief operating officer, and probably a chief executive officer. I think it’s my job to get as many candidates as possible to replace me when I retire and let the board decide.

Vitae

Charles W. Brady, 63, founder and executive chairman, Amvescap PLC.

Assets under management: $241 billion

Assets in retail mutual funds: $91 billion

Largest fund: Aim Value Fund, $19 billion

Number of shareholder accounts (Invesco and Aim): 6.6 million

Personal: Started first investment counseling subsidiary of a trust bank; avid skier and golfer.