A quarter of a century ago, the lion was on top. Dreyfus was the biggest mutual fund complex in the world, having built its empire on its legendary flagship portfolio, stripped-down business model and a then-novel product called a "money market fund."
The Dreyfus story is instructive for any upstart money manager hoping to become the next household name — or for any advisor who wants a better sense of the big ebb-and-flow cycles of how the investment industry has matured. Born as a brokerage shop, the company got into the fund management business back in 1951 and effectively invented modern financial services branding by coming up with that lion and making it synonymous with mutual funds.
Over the next few decades, that iconic brand gave Dreyfus the market muscle to keep its fund family fresh and its AUM rising. Then, as stock funds soured in the 1970s, investors who were already familiar with the company from the lion ads leapt into Dreyfus money funds, which bloomed into a massive fixed-income franchise (not to mention insurance, banking and a credit card operation) throughout the early '80s. However, the resurgence of stocks eventually left money fund returns in the dust and asset flows flattened out. The lesson: It's cozy at the top, but don't let it get too cozy.
"There are distinct advantages to leadership; there's no two ways around that," says Jay Nagdeman, principal of financial marketing firm Suasion Resources. "One thing that's happening is that you have broken down a good bit of sales resistance to your offerings and that will give you a greater margin to reinvest in what you're doing in order to maintain that advantage. There are some who are wise enough to use it for that purpose — those who don't do not retain their leadership."
For example, Dreyfus established itself as an innovator early on, pioneering products like socially responsible funds, tax-free municipal bond funds, extended-strategy funds and foreign money funds, as well as their bread-and-butter money market portfolios in its day. These have now become standard elements of any world-class shelf, but they were all once game-changing developments. Throw in the company's strong brand and retail investors looking for fresh ideas were pushing Dreyfus on their advisors instead of the other way around.
Or in Nagdeman's terms, decades of lion ads had broken down sales resistance and when the market shifted away from equities, Dreyfus got the advantages of leadership. But by the time the cycle turned again, the pace of innovation had slowed. Inflows tapered off, pushing the now-tired lion back down the list of the world's top fund families.
Distributing Innovation: American FundsAccording to data prepared for Research by Lipper, Dreyfus was No. 6 in the industry in 1993 when Mellon Bank bought it out. Today, the company is part of the BNY Mellon empire, but people still remember the ads.
Meanwhile, another one-time upstart was taking a very different path into the mutual fund stratosphere. American Funds, notorious for avoiding any direct contact with retail investors at all, almost quintupled its AUM from 1988 to 1993 by pitching its products directly to advisors and other intermediaries, becoming the top advisor-sold fund family and No. 3 fund family overall in the process.
"Advisors see wholesalers all the time," Nagdeman says. "Less effective wholesalers talk about their fund group and that fund group's story. American Funds understood the distribution channels and the tools they use, then worked to tell the story of how their funds could be used to help the advisors' clients."
Think for a moment about American Funds marketing materials — or just google "Louie the Loser," the retail investor who always does everything wrong. By providing useful, relevant help to the people who actually recommend mutual funds to the retail market, characters like Louie don't really sell the American Funds brand in the way the lion sells Dreyfus; but they get the job done.
"Advisors came to rely on American Funds as a helpmate in distributing products, and so those funds were naturally there at hand when there was a spot in a client's portfolio," Nagdeman explains. "It's fair to say that the modern advisory channel and American Funds grew together."
Of course, there are other distribution models out there: Vanguard's low-cost direct sales approach has turned it into a $1.3 trillion behemoth and the first company to have a real shot at dethroning Fidelity since Dreyfus fell from grace. But are advisors and advisor-sold funds really in direct competition with the Vanguards of the world?
"Different vendors do different things," says Nagdeman. "But whatever distribution channel you use, you want to know and be able to explain what you do and what you don't do — what differentiates you in a relevant way from your competitors."
Becoming the Next Big ThingSo far this century, Fidelity, Vanguard and American remain firmly at the top of the industry as the only members of the trillion-dollar club. Further down the list, direct and advisor-sold families — the usual suspects, basically — jockey for position and rise and fall as market fads and branding strategies change. The end of the growth boom crimped Janus' style, but the 2003 market-timing flap seems to have done little to impair implicated companies' entrenched spots in the bulge bracket.
But does this mean that the mutual fund world has frozen over? Benjamin Poor, director of asset management research at Cerulli Associates, thinks the time is right for smaller players to change the game. "Right now, there's potential for a changing of the guard," he says. "But it requires getting a series of issues right."
