Investors eye safer funds, firms must adjust-survey

* Fund firms face lower profits again

* Investors clamor for safer portfolios

* ETFs, index funds likely more popular than stock funds

By Svea Herbst-Bayliss

BOSTON, July 6 (Reuters) - Money managers must offer new portfolios and keep cutting costs to survive in an era where frightened investors prefer safer fixed-income funds to stock and hedge funds, a report released on Monday showed.

Badly bruised by last year's financial crisis when tumbling markets and investor redemptions shrank global assets 18 percent to $48.6 trillion, asset managers face more tough times in 2009 and the years ahead, The Boston Consulting Group wrote in its seventh annual asset management industry survey.

Profits will shrivel again, likely falling to 30 percent or less this year from 34 percent at the end of 2008 and 38 percent at the end of 2007, the consultants forecast.

Even though the Dow Jones industrial average .DJI just finished its best quarter since the fourth quarter of 2003, BCG consultants warned firms against becoming too confident or thinking the worst is over.

"Asset managers cannot be tricked by green shoots and must make sure they are ready if the crisis gets worse again, where firms see more massive outflows or another drop in the market," Kai Kramer, who heads BCG's global asset management practice, said in a telephone interview.

In what the consultants called an "Armageddon scenario" where the recession deepens and asset prices drop even more, industry assets could decline between 30 percent and 35 percent by 2012.

In a "Recovery scenario" where the economy recovers gradually, assets could still drop between 5 percent and 10 percent by 2012.

And in a "Happier Day scenario," where the economy rebounds next year, the industry could pull in between 10 percent and 20 percent in new assets, the report said.

TIME TO DO THE UNTHINKABLE

In any case, fund firms should specialize in certain areas, review how they pay their managers and possibly consider merging with others to gain market share, the survey said. The industry is already seeing mergers such as the sale of BGI to BlackRock(BLK.N) by Barclays (BARC.L)(BCS.N) and the proposed divestiture of Columbia Asset Management by Bank of America (BAC.N).

"Fund firms have to do the things they didn't dare think about," Kramer said. "You simply can't serve every investor in every way anymore."