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By Jason Stipp | 07-27-2010 03:59 PM

Fund Firms: How Big Is Too Big?

When fund shops reach $300 to $400 billion in assets, effective stock-picking can be hindered, says MFS chairman emeritus and senior Harvard lecturer Bob Pozen.

Jason Stipp: I'm Jason Stipp from Morningstar. I have the pleasure today of speaking with Bob Pozen. He is chairman emeritus of MFS and also a senior lecturer at the Harvard Business School. He was in Morningstar today, speaking to us a little bit about some of the M&A trends he had seen in the fund management industry. He is going to tell us a little bit about what he's found and some insights from that research. Thanks for joining me, Bob.

Robert C. Pozen: Glad to be here.

Stipp: The first question for you: you spoke a little bit about some of the growth strategies that you'd seed in the asset management industry, some of them you identified as pretty smart strategies that had succeeded, some of them not so much. From a business perspective, for asset managers, what has worked when they've looked to grow their operations through M&A?

Pozen: What's worked is basically two strategies; one is where an existing manager that's in one line of funds, say in fixed-income has bought somebody who's in another line of funds, like international equities. The best example here would be Franklin buying the international house.

So, that works because it's complementary. They are not really trying to integrate; they're really gaining a whole line of products. The other thing that works is, if you buy assets and you take those assets, mainly fixed-income assets and money market fund assets, but you don't take the people, then you can gain certain economies of scale.

What doesn't work is trying to buy lots of funds to create a financial supermarket where you as a broker-dealer or as an insurance company or a bank have a group of affiliated funds. It doesn't work for two reasons: one is, the high net worth investor is very discriminating. They want open architecture. They are not going to go and buy a fund just because it's affiliated. In fact, that may be a negative. And second of all, the regulatory scrutiny of that sort of affiliated sale has now become much more intense.

Stipp: A broader question for you on growth in general, so whether it's organic growth at the asset manager level or growth through M&A, is there a point at which they become too big. When do they decide that they need to grow and really expand and when have they really reached a point where it's just unmanageable, the size of the business.

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