Why Morgan Stanley Bought A Case Of The Blahs
What's a top-drawer investment bank doing buying a decidedly second-tier mutual-fund firm? That's a question many people in the fund business are asking about Morgan Stanley Group Inc.'s June 24 agreement to purchase Van Kampen/American Capital Inc. for $1.1 billion. Morgan Stanley has a ready answer: "We see an opportunity to build on a solid investment performance record and make that a top-notch record across all asset categories," says Philip N. Duff, Morgan Stanley's chief financial officer. The McGraw-Hill Companies, publisher of BUSINESS WEEK, also bid for Van Kampen.
Yet, with $57 billion in mainly mutual-fund assets under management, Van Kampen has an undistinguished record when it comes to its stock and bond funds. "Van Kampen/American Capital is not a stellar performer," says Jim Raker, an analyst at Morningstar Inc. "Morgan Stanley's challenge is to turn mediocre funds into good funds." Adds Dennis Dolego, a partner at Financial Research Corp., a Chicago mutual-fund research firm: "It remains to be seen whether Morgan Stanley can compete with AIM, Fidelity Advisor, Putnam, American, and the Franklin funds."
RAPID CONSOLIDATION. Franklin, which already owns Templeton Funds, is set to become an even tougher competitor. On June 25, in another move that reflects the rapid consolidation of the mutual-fund business, Franklin agreed to buy Heine Securities Corp., parent of Michael F. Price's Mutual Series Funds. Franklin will pay $610 million for $17 billion in four equity funds. Price says Franklin gives his firm and his shareholders a boost. "If Franklin was good enough for John Templeton, it's good enough for me," says Price. All of his funds earned five stars, Morningstar's highest accolade.
Van Kampen, in contrast, has only one five-star fund. And only one of its five largest equity funds rates better than average (table). Of the five largest bond funds, just one merits a better-than-average rating. Redemptions exceed new investments in a number of its funds, according to Financial Research Corp. Two of Van Kampen's flagship equity funds, Pace and Comstock, have seen $10 million to $25 million per quarter in cash outflows for the past few quarters at a time when equity fund sales industrywide have been booming.
Morgan Stanley believes it can beef up Van Kampen's performance with its own top-notch money-management team, headed by investment guru Barton M. Biggs. Most important, Van Kampen gives Morgan entree to the individual investor. "We are marrying our retail distribution and service skills with Morgan Stanley's product capability," says Don G. Powell, Van Kampen's CEO. "Together we will be a stronger firm than apart." Van Kampen has agreements with 2,500 organizations, including brokers and banks, which assures Morgan Stanley shelf space for new funds and even for insurance products it wants to create. And Van Kampen has consistently won awards for its customer service.
Service is important, but what sells mutual funds is performance. Mike Price has it. To make Van Kampen pay off, Morgan Stanley's got to get it.