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Phillips Sees Big Changes Ahead for Funds


Morningstar Managing Director Don Phillips has been a visible industry figure since the scandal broke, calling for investors to avoid certain shops entangled in the scandal as well as urging the industry to adopt several reforms. MME Associate Editor Chris Frankie sat down with Phillips just before the Morningstar Investment Conference to get his views on the ICI's new president, Congress and investors.

MME: Paul Schott Stevens is the new ICI president. Do you expect anything different from him and his tenure than from that of Matt Fink?

Phillips: I'm guardedly optimistic about Paul Stevens. He is a smart guy, and I think he was the right choice. He knows the territory. Matt Fink was a smart guy and knew the territory, too, but Matt just got so ingrained or so defensive that I don't think he was doing his job particularly well in the later years.

I've talked to several journalists over the last three or four months who have relayed stories of Matt Fink slamming down the phone because he got so angry at their questions. If you are the chief lobbyist for the fund industry, you should be able to handle a tough call from a reporter, and Matt at the end wasn't able to do that.

I think that Matt had gotten the industry to a point where the press and the public didn't trust the industry. I think he got very focused on defending the short-term desires of the fund industry rather than raising the debate to focus everyone on the long term. In the long term, fund companies win if and only if investors win.

Matt got bogged down in some of the minutia--things like the industry's opposition to proxy votes. That was just so wrongheaded, and in the wake of the Enron and WorldCom scandals, for the industry to pick that point to fight against was absurd. It took an industry, which up to that point had been considered pretty clean, and all of a sudden put it right front and center in front of the public saying, We've got something we prefer to hide from investors.' It was just the absolute wrong time to take that stance.

And what's more, the ICI overplayed its hand, insisting all these terrible things would happen if funds were forced to disclose how they voted their proxies. They sent big huge things of paper the size of two phone books out to all of these different journalists, saying, Here's all the paperwork we'd have to file.' They talked about picketers who'd be protesting Fidelity at 82 Devonshire and they painted this doomsday scenario of how funds would be completely inundated with all this extra work and hassles. The things that the industry said would happen didn't happen. So, it's just one more thing that undermined the ICI's credibility and the industry's credibility.

I just don't think it would take that much to improve the industry's relationship with the press and the public. Mutual funds have a good story to tell. This is a vehicle that has empowered a lot of people to meet their financial goals. I don't think it takes an extraordinarily skilled person to tell that. But the industry had gotten to a point where it had become very ineffective at telling that story. I think Paul Stevens will be able to improve upon that dramatically. At the end of the day, funds are a terrific vehicle for investors, but if you pretend they are perfect, you set yourself up for the fall the industry has experienced the last year and a half.

MME: The Baker Bill passed in the House, and there are numerous proposals in the Senate. While the SEC is currently handling industry reforms, does the mutual fund industry need Congress to be involved?

Phillips: I'm not sure that it does. I think the threat of Congressional involvement is an awfully powerful force in and of itself. My gut tells me that the fund industry dodged a bullet here. I think if all of this had happened 12 months earlier and you had all of these stories of serious abuses coming out during a bear market, you would have seen asset flows in the fund industry dry up. In fact, I think you would have seen negative flows. I think that would have lit a fire under a lot of Congressmen.

It could have been a very convenient issue for Congressmen to rally around. But since all of this happened in the wake of terrific investment returns as we saw in calendar 2003, the asset flows were positive, so no one could make the case that Americans have given up on mutual funds.