The Rise Of The MDA Among Managed Accounts

Consider the difficult dilemma faced by significant mutual fund investment managers. Firms have the choice of (a) losing fund assets they are managing for 70 to 80 basis points annually to MDAs or (b) participating in an MDA with the opportunity to keep assets that would otherwise be lost, but incurring greater expenses and generating lower fees in the 35- to 38-basis point range.

Although the MDA's future is unclear, we would suggest that distributors (and advisors) have the most to gain from this product's success, followed by individual investors. Last on the list of stakeholders to benefit would seem to be investment-management firms.

Kevin Keefe is a chartered financial analyst with Boston-based Financial Research Corp. A financial services research and consulting firm, FRC specializes in competitive intelligence and analytical services for industry professionals.

Using multiple-discipline accounts (MDAs) as a legitimate tool in the consulting process-rather than a "one-fell-swoop" generic answer to all individual investors' managed account needs-can help solidify relationships.

According to Mike Hogan, executive vice president, managed accounts for PIMCO/Allianz Investments (PAI), "The multi-discipline concept has been around for years, especially in the form of global balanced managers," he says. "So it's really not a new thing, but the industry today has brought whole portfolios under one roof so the client has one snapshot portfolio."

PAI calls its version a Multi-Discipline Portfolio (MDP). This product offers access to its institutional investment firms of Allianz AG-including PIMCO, Nicholas Applegate, Oppenheimer Capital, Dresdner RCM, PIMCO Equity Advisors and NFJ-and is available in more than 35 customized portfolios. "There are companies out there who will say they can do an MDA and give you a growth manager and a value manager, but both managers will be from the same company," says Hogan. "The advantage of multi-discipline is its proper diversification and objectivity. If you only combine a growth and value style of a manager from the same company and your large-cap growth manager blows up, how can the advisor fire one side of the same company?" asks Hogan.

"One thing the industry has discovered is that a lot of new consultants may hand clients a profile and tell them, 'I'm advising you what to do, you pick the manager you feel comfortable with, and I'll build the asset allocation,'" Hogan adds. Most clients, however, he says, will tend to pick the managers with the best performance for the recent year-after which that manager's performance cycle might ebb and other style managers whose performance had been poor might improve. "For example," says Hogan, "growth managers delivered hot numbers in '97, '98 and '99. Individual investors followed them into 2000 and 2001 because they were looking in the rearview mirror. After '99, the growth market fell out of bed, and fixed income and value came alive." Sponsors recognize this problem and feel that multiple-discipline products can help push advisors and clients in the right direction.

Here's a snapshot of what the future may hold for the industry.