Mutual Funds Have a Lot to Prove

This is going to be a big week for the mutual fund industry.

Several of its meatiest public players will be stepping up for their quarterly reports. Analysts see fund operators posting improved bottom-line results, but there are challenges along the way.

The popularity of exchange-traded funds (ETFs) with cut-rate expense ratios are rocking an industry that is driven by management fees and sales charges. Few investors may be complaining these days, but it's going to be a problem down the road.

Let's take a look at the five mutual fund giants reporting this week.

Company

Latest Quarter's

EPS (Estimated)

Year-Ago

Quarter's EPS

Change

Legg Mason (NYSE: LM  )

$0.43

$0.28

54%

Franklin Resources (NYSE: BEN  )

$1.91

$1.54

24%

Invesco (NYSE: IVZ  )

$0.40

$0.25

60%

Janus Capital (NYSE: JNS  )

$0.21

$0.20

5%

T. Rowe Price (Nasdaq: TROW  )

$0.68

$0.57

19%

Source: Yahoo! Finance.

Earnings growth is obviously welcome news, but it's not a surprise. Generally, buoyant equity markets have helped pump up asset bases. Investors are also more likely to invest new money during market runs than request redemptions.

My bigger concern is how old school funds will be able to compete against ETFs. Index-based ETFs may not appeal to fans of actively managed funds, but the low costs and the ability to trade throughout the day set ETFs apart from costlier funds that typically reset their prices at the end of the trading day.

There's also the more problematic trend of discount brokers offering a select number of affiliated ETFs without any commissions to buy or sell. TD AMERITRADE (Nasdaq: AMTD  ) recently joined Charles Schwab (Nasdaq: SCHW  ) and Fidelity in offering commission-free ETFs.

Some of the funds have serious skin in the ETF space. Invesco owns the popular PowerShares family of ETFs. However, the winners are few and far between during a price war. With ETFs hacking away at their management fees and brokers encouraging investors to move from open-ended mutual funds to ETFs, it could get hairy for investors banking on investments in the fund operators themselves.

This week's busy slate of reports should be upbeat, but watch out if a few of the companies are hesitant in providing near-term guidance.

Do you see the rise in popularity for ETFs as a positive or negative for the mutual fund industry? Share them in the comment box below.

Charles Schwab is a Motley Fool Stock Advisor pick. The Fool owns shares of Legg Mason and T. Rowe Price Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz invests mostly in stocks but always has a mutual fund or two in his portfolio. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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