Institutions Could Pass Individuals as Mutual Fund Owners

July 28, 2009 ( - A new Cerulli report says institutional ownership of mutual funds totaled $4.3 trillion at year-end 2008, a decline of 12.3% from prior year totals.

However, institutional ownership of mutual funds has exhibited an 8.1% compound annual growth rate (CAGR) over the past five years, compared to 3.3% CAGR for retail ownership. Cerulli says if these growth rates persist, institutional investors will be bigger holders of mutual funds by 2011.

“The implications of this shift in the structure of the total mutual fund market should be foremost in the mind of asset managers competing in this space, as more sophisticated and fee-sensitive institutional buyers will expect more from their mutual fund managers but demand to pay less. That they will have less tolerance for underperformance by active managers than past retail investors will likely further intensify the competition by managers to capture alpha, thereby making it even more elusive,” the report says.

Institutional client assets accounted for $14.8 trillion of total assets under professional management, and retail client assets totaled $8.5 trillion.

Third-party distribution of institutional client assets posted a 6.1% five-year CAGR. According to Cerulli, this method of distribution of institutional client assets has grown steadily in recent years with the rise of the consultant-intermediated sale in DC plans. Open architecture in DC and in insurance general account markets has also been a significant driver of this growth.

Private defined benefit was ranked the most profitable institutional segment by managers, followed by public DB. “While net flows will continue to worsen, the DB plan will remain the largest institutional segment for some time to come and the lifeblood of investment managers in this space,” the report says.

Changing asset allocation – as plan beneficiaries age and/or as more plans transition to liability-driven investment strategies – will create above-average turnover in the DB segment, which could open doors for asset managers, especially of long-duration fixed income and alternatives.

The report isCerulli Quantitative Update: State of U.S. Retail and Institutional Asset Management 2009.