Week in Review
November 5, 2007
ICI Warns Against 401(k) Fee Disclosure Overload
Bush Administration officials, pension plans and financial services firms joined the Investment Company Institute last week in testifying before Congress on how breaking out the various fees in 401(k) plans separately not only would be costly but would confuse investors.
"We recommend that a service provider that offers a number of services in a package be required to identify each of the services and the total cost, but not to break out separately the fee for each of the components of the package," ICI President Paul Schott Stevens told the U.S. House Ways and Means Committee.
Department of the Treasury Benefits Tax Counsel Thomas Reeder testified, "Overly detailed, lengthy disclosures on plan fees and costs may impair, rather than enhance, participants' ability to make informed decisions."
Investors in Failed Bear Hedge Funds Seek Inquiry
Institutional and private investors in the two failed Bear Stearns hedge funds have joined forces to press for an inquiry and the replacement of the funds' directors and general partner with broker/dealer FTI Capital Advisers.
Two separate proxy votes are scheduled, the first on Nov. 7 for the U.S. fund and the second on Nov. 14 for the Cayman-based fund. The investors are seeking to amass the necessary representation of 50.1% of holdings in each of the funds.
The funds, which once had a value of $650 million, have been decimated and appear to be worthless.
U.K. to Probe Hedge Funds
The U.K.'s Financial Services Authority is concerned that hedge funds are remiss in their duty to stamp out market abuse, and as a result, plans to examine a wider range of funds. While some hedge funds have controls in place, they take a "complacent attitude" toward possible infractions, the FSA said. The FSA published a report earlier this year indicating that there was potential insider trading in nearly 25% of the mergers in 2005.
The FSA also said that hedge funds do a poor job of monitoring their relationships with banks and other companies that could provide insider information to some of their managers.
Some Money Market Funds Illegally Held Subprime
Although money market funds are required to only hold short-term paper with "minimal credit risks," a number of large funds have exposure to subprime loans through offshore structured investment vehicles (SIVs), Fortune reports.
SIVs work by issuing short-term loans and taking the money and putting it into long-term debt expected to pay higher interest rates.
The funds thought they were safe in making these investments, as the credit ratings agencies had highly rated these SIVs, but that, in fact, turns out to be in error, since so many held subprime paper. One money market fund at Bank of America, for instance, had $640 million invested in an SIV that just folded, and filings indicate that other fund companies with SIV exposure include Fidelity, JPMorgan and Federated.
At issue is whether the fund managers and their compliance teams did their job properly by investing in SIVs with such exposure. Surely, they wouldn't have done so if they examined the SIVs for credit risks.
Vanguard, Fidelity Could Trounce Competitors
Based on its assessment of fund companies' customer loyalty, ownership, revenue and equity of brand, Cogent Research has released a ranking of those poised for the greatest future growth, with Vanguard taking the lead position and Fidelity coming in at No. 2.
In fact, Vanguard and Fidelity ranked far higher than other companies and were the only companies to get the highest rating in Cogent's analysis; Vanguard got the top ratings in all four measurement areas.
"Vanguard has serious momentum behind its mutual fund business, which is strong and getting stronger," said Bruce Harrington, managing director of Cogent Research. "The only weak spot for the second-place firm, Fidelity, is customer loyalty relative to the firm's strengths in other areas."
By comparison, fewer than 7% of investors said they associate any other firm with a specific investment style or attribute, such as low fees, strong customer service and online tools.
"Financial services firms have good intelligence about where they stand today, but it is where their business will be in the future that keeps asset managers up at night," Harrington said. "If a company has strong brand equity and wallet share among clientele, yet has low customer loyalty, it may look strong today, but it is likely to lose market share in the years ahead."
Surprisingly, Cogent found that 71% of fund companies have negative customer loyalty scores, meaning that firms have more detractors than supporters, and may even have difficulty maintaining current clients.
Fund companies with affiliated brokerage divisions generate high scores due to increased market share, greater penetration across investment accounts and stronger customer loyalty.