Plunging stocks lead to start of layoffs at mutual funds

The long knives are coming out in the mutual fund industry.

Faced with a soul-searing bear market and record outflows, funds are starting to lay off workers. And, although few have been sent packing lately, many mutual fund managers will be scanning the want ads soon, too.

The Dow Jones industrial average has plunged 36% this year, and staggering losses have sent investors fleeing the funds. The American Funds Growth Fund of America, for example, saw assets tumble to $128 billion on Oct. 31, down from $202 billion a year ago, thanks to market losses and investor redemptions.

Funds make their money by charging a percentage of assets, so the less money they manage, the less the management company earns. Already, some fund companies are announcing layoffs:

•American Century said this month that it would be laying off about 270 employees, or 17% of its workforce.

•Fidelity Investments, the nation's largest fund company, laid off 1,300 workers Wednesday and plans to lay off an additional 1,700 in the first three months of 2009, the company said. Total layoffs would be about 7% of Fidelity's employees.

•Legg Mason said it plans to cut 40 to 50 people from its workforce of 147.

Legg Mason's star manager, Bill Miller, hit an ugly patch of performance this year. This month, he was relieved of managing about 20% of Masters' Select Equity, a $468 million fund.

"Everyone is tightening belts," says fund consultant Burt Greenwald. "The big firms have seen assets fall 30% to 35%. There just has to be a cutback."

The drop in assets may mean that some funds disappear entirely — and that will send fund managers looking for new jobs. For example, money fund yields are now an average 1.26%, according to iMoneyNet, which tracks the funds. Another rate cut by the Federal Reserve would send many money fund yields below 1%, and some smaller fund companies can't run a money fund for less than 1%.

"A number of funds are below realistic break-even numbers," says fund expert Michael Lipper. "The funds will be merged into other funds or liquidated, and the manager will have to find something else to do."

Knives will also come out for managers who have significantly underperformed their benchmarks. "The next round of layoffs will be the painful round," says fund consultant Geoff Bobroff. "Most fund companies have avoided laying off fund managers; that won't be the case."