Week In Review
December 1, 2008
Fund Fees Expected to Tumble By $38 Billion by 2012
Fees on actively managed mutual funds in the U.S. could fall as much as 26%, or $38 billion, by 2012 due to investors' renewed preference for fixed income and passive investments, Bloomberg reports, citing a report from Boston Consulting Group. This year alone, actively managed fund assets in all classes around the world will decline from $58.9 trillion to $50 trillion, representing a 15% decline, according to Boston Consulting. Worldwide, the declines through 2012 could reduce the proportion of mutual funds revenue out of the total asset management pie to 36%, down from its current 49%. Last year, active mutual funds took in $147 billion in fees, about the same amount as hedge funds, private equity funds and real estate funds-combined.
The popularity of alternative investments is expected to shoot up to 61% of total fees, and index funds' share could reach between 3% and 4%.
"Investors have wised up to the fact that the performance of classic active funds has failed to live up to benchmarks," said Boston Consulting Partner Michael Spellacy. "There's a shift by consumers to allocate to more passive, lower-fee products, and to the pursuit of alpha, or market-beating performance," Spellacy said.
What is mainly prompting the seismic shift are market losses and investor withdrawals. The average U.S. diversified mutual fund was down 40% through Oct. 31, while the Standard & Poor's 500 Index was down 37% and the MSCI AC World Index had slumped 43%.
Wall Street Layoffs in '08 Could Top 200,000
More than 110,000 people working in finance in the U.S. have lost their jobs so far this year, but that could nearly double to more than 200,000 in the final weeks of the year, the Anniston Star reports.
"Wall Street the way we know it is, frankly, gone," said Touro College Graduate School of Business Dean Dr. Michael Williams.
Williams estimates 90,000 more financial services executives could lose their jobs by the end of the year, and another 50,000 in the first half of next year.
Last year, 153,105 positions at financial services firms were eliminated, according to Challenger, Gray & Christmas.
Only 4% Have Stopped Contributions to 401(k)s
First the good news. The average 401(k) plan balance is down only 14% this year to $68,000 from $79,000 in 2007, according to Hewitt Associates. And since the precipitous decline in the stock market of the past few months, only 4% of participants have decided to stop contributing.
As well, although investors have reduced the proportion of their allocations from 58% to stocks a year ago, such holdings still account for 53.8% of portfolios. Earlier this year, however, 75% of portfolios were in stocks.
Now the bad news. Since the credit crunch has made borrowing through traditional channels more difficult, more employees are tapping into their 401(k)s for cash, in spite of the penalties and additional taxes for early withdrawals. Six percent have pulled money out, up from 5.4% a year ago. And hardship withdrawals are up 16%.
Mutual Funds on Course To Lose $70B in November
With redemptions reaching exceptionally high levels, mutual funds are hoarding cash like never before, BusinessWeek reports. Funds lost $68 billion in October and appeared to be on track to top those losses last month. By comparison, in October 2007, mutual funds lost $11.3 billion and $9.94 billion the following month.
Year-to-date, funds have lost 3.3% of assets, a bit more than the 4.3% loss in the bear market of 2002-2003, according to TrimTabs Chief Operating Officer Conrad Gann. If today's redemptions reached that level, another $38 billion would easily leave mutual funds by the end of this month.
The volatility of the market is fueling much of those redemptions, forcing mutual fund portfolio managers to hold as much as 25% of their assets in cash, rather than the typical 3% to 6%. Not only does the high level of cash mean lost trading opportunities, but the high volume of selling to meet those redemptions is pushing up trading costs.
ReFlow Management-which loans funds cash for shares being redeemed for a fee of 15 to 17 basis points, in exchange for a 28-day period in which the fund can seek to redeem the shares in a daily Dutch auction-is seeing a large increase in business.
Year-to-date, the company has provided $800 million in capital to funds. To put that in context, between its launch in 2003 and the beginning of this year, ReFlow had provided $1.2 billion.
"This environment is going to be much tougher, and people are going to look for every edge they can get," noted ReFlow President Paul Schaeffer.
Funds that are primarily sold through advisers who can allay investors' fears, or to high-net-worth investors who are not in need of immediate cash, are reporting far lower redemption levels.
Smart Financial Firms Focus On Long-Term Prospects