Purity is the watchword in mutual funds nowadays.
Purity? In the money business? To be a little more precise, the prized quality in question is "purity of purpose" -- which means a specialized focus that minimizes conflicts and emphasizes doing one thing well.
Forget trying to be all things to all people. If running investment portfolios is your vocation, concentrate on that. And show your customers a clean-hands presence untainted by the conflicts that can arise from being in all parts of the money business at once.
"Transparency and purity of purpose are now dominant forces," says Grail Partners LLC, a Boston firm that advises money managers on mergers and acquisitions.
Such thoughts attained the instant status of a trend in June when Legg Mason Inc. and Citigroup Inc. announced a landmark deal. Citigroup is to swap most of its asset-management business for Legg Mason's brokerage operations.
Legg Mason, which also is buying the hedge-fund company Permal Group in a separate transaction, "becomes a singularly focused, more profitable and certainly more influential" money manager, said chief executive Raymond A. Mason.
This marks a dramatic departure from much of the past 25 years, in which big operators moved into every financial business in sight as they set about creating "one-stop shops." Alas, the synergy in such setups often proved elusive.
"Conflicts of interest, consumer skepticism and organizational misalignment are hampering the value of asset management within conglomerate firms," the Grail Partners report says.
Money flows in the mutual fund business have been running heavily of late to managers of an independent stripe. The top-selling groups of long-term funds in the first half of 2005, according to Financial Research Corp. in Boston, were Capital Group Cos.' American Funds, with net inflows of $45.3 billion, and the Vanguard Group, with $24.8 billion.
Among the few full-service brokerage firms still represented on FRC's list of the 25 largest fund groups, the consulting firm reported that Merrill Lynch Investment Managers had a net first-half outflow of $1.2 billion and American Express Financial Advisors an outflow of $5.2 billion. (The latter is being spun off as Ameriprise.)
There is a lot to be said for keeping the distributor (the broker or other financial adviser) at arm's length from the manufacturer (the fund manager) in the money-management business. It's a bit like health care, in which we just naturally want the person who sells us our medicine to be independent of the one who prescribes it.
Separation by itself is no guarantee that investors will always get the best possible fund for their needs. Regulatory scrutiny has been directed lately at all sorts of dealings between fund managers and sellers of fund shares, whether the two operate under the same roof or not.
It's also easy to make more of the purity-of-purpose trend than the facts will support. FMR Corp. in Boston, whose Fidelity fund group ranks as the third-largest manager of stock and bond funds in the United States, remains big in the discount-brokerage game.
There is also, one suspects, a strong element of cyclicality in all this. Though separate-and-independent may be ascendant right now, the empire-building impulse dies hard.
That said, when a business goes in pursuit of purity in any form, it ought to be encouraged. By all means, let's have fund managers keep working on this for a while, and see where it leads.