Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

ICI Chair Underscores Fund Merits, Seeks Better 401(k) Education Efforts

Mutual funds have been able to thrive for the past 85 years thanks to their ability to adapt to changing markets and help investors stay diversified during good times and bad.

By sticking to these core values and continuing to find new ways to help Americans save for retirement, the chairman of the mutual fund industry's trade association thinks these products should be able to remain relevant and useful for the foreseeable future.

John V. Murphy, chairman of OppenheimerFunds and chairman of the Investment Company Institute, recently sat down with Money Management Executive's John Morgan to talk about the aftershocks of the financial meltdown, investor confidence, and the future of 401(k)s, money market funds and guaranteed income products.

MME: How will the 401(k) have to change to account for a more volatile stock market?

Murphy: You'll see more fund-of-funds type of investments in the 401(k) lineup, rather than funds that have specific investment objectives, and the packaging of those investment objectives will be left up to the participant. There will be more packaged products available for the worker to achieve their investment objectives in the 401(k).

MME: Do you think investors' confidence in mutual funds has been permanently shaken by this economic crisis?

Murphy: I'm not sure they've had their trust and confidence in mutual funds as a vehicle shaken; I think they've had their trust and confidence in the financial system shaken. I think a huge message was sent to Washington in the last election that we want change, and we want it soon. That doesn't necessarily mean you need to change the nature of the role of mutual funds, but we need to restore confidence in the American economy.

MME: What major regulatory changes do you anticipate in the next couple of years regarding mutual funds?

Murphy: One of the great things about mutual funds is that they've been around 85 years. The Massachusetts Investors Trust was created 85 years ago. Mutual funds have stood the test of time for investors.

One of the best measures of the effectiveness of the Investment Company Institute is what doesn't get done in Washington as opposed to what does get done in Washington. We don't think there's a tremendous amount of new legislation that's necessary to regulate mutual funds. We think we can do an even better job at transparency and disclosure, but we don't need regulation to do that. The industry is very capable of taking that on itself.

The summary prospectus is done. 12b-1 fees continue to be an issue that the Securities and Exchange Commission is looking at. I think some of the traditional issues that the SEC has been kicking around for a while have taken a back burner to the economic crisis.

MME: Do you think that money market funds are getting too big?

Murphy: I'm concerned that money market funds represent 40% of the mutual fund industry. That doesn't necessarily mean that money market funds are too big; it means that the other side, that stocks and bonds, have gotten too small. I think that some institutional money market funds are very big, and there's a tremendous amount of risk in those large, institutional money market funds. I think the bread-and-butter money market fund for retail customers and retail investors is an excellent product, and I'm not concerned that there's any problem with the size of those. It's the large, institutional money funds that can cause you a problem, when you've got one big customer in that fund. What the money fund represents is an unconditional put at a dollar. At any time, I can put this back to you at a dollar. When you've got large investors in there, it's a risky situation.

MME: What happens if a large institutional investor has all their money in cash and they want it now?

Murphy: This is the situation you had with a Putnam institutional fund, which happened after the Reserve Fund. The Putnam institutional fund had no asset issues. The money was invested well, the asset holdings were no issue, but on the investor side, there became a panic among large, institutional investors that wanted out, and Putnam was not in a position to sell the assets and realize the $1 net asset value (NAV). If they had to sell those assets, it would have caused a problem with the pricing. That fund got merged into a Federated fund, where there were more assets available to the investor. The Putnam board suspended redemptions on that fund and told investors, 'We can't give you an unconditional put at a dollar in one day.' That's the risk that you've got in those funds.

MME: How do you feel about the implied $1 NAV?