Institutions to own majority of mutual fund assets by 2012, report predicts

The current pace of growth in the defined contribution arena could tilt the majority of mutual fund ownership to institutional investors by 2012, according to a report released late yesterday by Cerulli Associates Inc. The ultimate impact, according to Cerulli analyst Jake Hartnett, would be increased scrutiny of the mutual fund industry, particularly with regard to fees and performance. Cerulli of Boston estimated that institutional investments coming through various company-sponsored retirement plans such as 401(k) plans represented more than 47% of the roughly $9 trillion worth of mutual fund and closed-end-fund assets at the end of 2008. This was up from 43% in 2007, when total mutual fund and closed-end-fund assets totaled more $11 trillion. “Mutual fund managers will have to get used to dealing with more institutions because their assets are becoming more institutionalized,” Mr. Hartnett said. “The managers are going to be confronted on issues such as price sensitivity and their ability to generate alpha, which are things managers occasionally get a pass on from retail investors.” The shift, whether it ultimately represents a majority of all assets or not, should be on the minds of all asset managers because it means changes to the fundamentals of the business model, Mr. Hartnett said. “Institutions are typically more sophisticated and fee-sensitive than retail investors,” he said. “They expect more from their mutual fund managers, and they demand to pay less, and they can be less tolerant of underperformance.” Even though the investments in most defined contribution retirement plans are directed by individual investors, the assets in company-sponsored plans are counted by Cerulli as being institutional because of the added layer of scrutiny involved in linking a company plan to a particular fund or fund complex. In addition to company-sponsored-retirement-plan assets, the institutional assets also include defined benefit plans and some insurance products. Retail assets are made up mostly of direct retail investments and assets in individual retirement accounts.