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

Back To Basics: Breathing New Life Into An Old Concept


For mutual fund firms, 2013 could be a particularly challenging year.

They will continue to be mired in responses to Dodd-Frank Wall Street Reform Act requirements, including the potential designation of systemically important financial institutions. There is no immediate end in sight for money market reform proposals, and certain global and tax initiatives threaten to further strain their operations. The Foreign Account Tax Compliance Act also is shaping up to be a considerable compliance burden for funds.

While the industry will face challenges, there is also a ripe opportunity for them to regain and even strengthen the investor's trust and confidence in the funds. This might be the time to send a message that the core values of mutual funds have not been forgotten or thrown aside.

Yes, some fund firms are facing the consuming process of having to register-for the first time ever-with the Commodity Futures Trading Commission after losing an initial court battle to oppose the requirement. Securities and Exchange Commission examiners have also singled out their priorities for the year, citing, among other targets, mutual funds that might be using their assets to pay for distribution payments. The Division of Enforcement's dogged asset management unit also has had the contract renewal process in its sights. And, if that regulatory charge wasn't enough, the new whistleblower program with its tipster bounties is opening new doors for law enforcers, as is a stronger dependence on wiretaps to pursue insider trading cases.

There have been multiyear outflows in stock mutual funds and exchange-traded funds continue to be formidable competition for mutual funds. So, it does seem an appropriate time to ask whether the funds' perceived value might be diminishing. And, if they are becoming more defined by costly lobbying efforts, legal battles, and waning economic appeal, is there something the industry can do to upgrade its public image?

We have, of course, been seeing a trend of mutual funds adopting hedge-like strategies to grow assets and enlarge client bases. But these haven't always proved successful, and examiners are looking closely at funds that embrace these strategies, considering whether they are minding daily valuation and liquidity requirements.

Maybe the answer lies not in fund flash or innovative strategies, but with an old concept that continues to make appearances in mutual fund discourse: Getting back to basics. For this, it might be helpful to look at the transcript of an old speech delivered by Andrew "Buddy" Donohue, who for years served as the head of the SEC's Division of Investment Management. This 2006 speech predates the financial crisis, the cataclysmic developments of the Reserve Primary Fund's "breaking the buck" and the engulfing reforms we've all come to know so well. But, his concepts are most certainly evergreen.

In that speech, delivered after another upheaval-the late trading and market timing scandals that rocked the mutual fund industry-Donohue tells an Investment Company Institute audience that fund managers need to get back to basics and "embrace core fiduciary values."

That fiduciary obligation requires fund managers to re-assess whether they are continuing to maximize investor interests as their businesses change, Donohue said.

While the mutual fund industry naturally seeks out new ways to serve investors, and innovation and creativity should be encouraged, he said, that ingenuity should never be severed from the fiduciary obligation or accompanying compliance requirements.

"In my opinion, no new product should be brought to market, no new service agreement should be entered into and no new fee arrangement should be brokered without senior management, representing the business, legal and compliance areas, giving careful and thorough consideration to whether the new product, service or arrangement will benefit investors and whether the material management conflicts have been identified and appropriately resolved," he states.

What Donohue drives home is the idea that the industry has a golden opportunity to prove to America's investors that it deserves their trust and confidence and that it is up to fund managers to assert their dedication in this area.

But it is a concept that requires demonstrable actions and a return to the values on which the industry is based, he said. Specifically, he refers to the "primacy of investor interests, the importance of resolving conflicts in the interest of investors rather than management, and the old-fashioned idea that investors in mutual funds deserve a fair deal and straight talk from the fund managers."

How this translates today is somewhat subjective. But the idea of embracing a message of simple, consistent growth and a return to less risky transactions-less profitability and more dependability-feels boldly refreshing. That is, let's consider the vibe of a plainspoken, well-managed portfolio, delivered with the calming disclosure of restraint and consistency, and cradled in timeless principles without the wandering eye to aggressive funds.

It's true that mutual fund firms have considerably more regulatory liability in this post-Dodd-Frank world, and their new burdens require attention in multiple directions. The enforcement cases, whistleblower bounties, new examination targets and potential regulatory clashes will continue to catch investors' eyes.

But getting back to basics, while modest in nature, could have public appeal that leads to renewed trust and enthusiasm and maybe even profitability.

And, like Donohue says, if fund managers are not striving to further their investors' interests, then maybe they shouldn't have the privilege of serving them at all.

Jennifer Connelly is CEO of Jennifer Connelly Public Relations.


For more information on related topics, visit the following: