Mutual Funds: Born Here, Moving Where?
March 23, 2012
Mutual funds may have been an American innovation. But asset managers will now go to China, Brazil, India or wherever returns can be found, according to Alan Reid, founder Forward Fund Management, at the Investment Company Institute's Mutual Funds and Investment Management Conference.
This movement will continue as U.S. regulators continue to put up "walls and cages, around the operation of mutual funds, he said. "There may be reasons to look outside of traditional mutual funds, which serve as the whipping boy of regulators."
Forward Fund, for instance, pursues alternative investments such as futures and commodities as part of its mix. These, he notes, were once viewed as too "sophisticated" for the average investor.
But they are now available in a wide variety of forms including commodities, market neutral and even managed futures products. These are the kinds of investments that hedge funds charge 2% a year and 20% of gains for. But in these funds, investors "are not paying 2/20 but a third of that," he offered.
He also added that the word "alternative" will become commonplace among investors with smaller managers becoming a growing force in the industry because "You can't run $50 billion in a long/short strategy."
Alternative mutual funds experienced net flows of $354 billion from 2008 January 2012 bringing the asset class' assets under management to $781 billion at the end of January, according to data from Strategic Insight. Global asset allocation funds took in the bulk of the inflows ($108 billion) within the last four years with current assets totaling $404 billion. Commodities and precious metals funds came in a distant second bringing in $102 billion during the same period in assets.
Total mutual fund assets topped $12 trillion in January, according to data from the ICI.
This comes as investors move heavily into bond funds and less so into equity funds, the long-time market leader Avi Nachmany, director of research at research shop Strategic Insight, said bond funds now have $3 trillion under management.
Nachmany, who has been studying the space for more than 25 years, said today is the worst time to look back at the performance of bind funds and project that out going forward. "What type flexibility will bonds have and what's going to happen to wealth in an environment of rising interest rates?" he asks.
He also acknowledged that there is an "insatiable" desire for alternative products in the market and said that advisors are looking for ways to address their clients' concerns for risk and discretionary management.
Reid said 10 years ago, there weren't any target-date funds where investors are currently putting assets into equity funds. But he added investors will be hard-pressed to put more money into fixed income funds during their 20 or more years of retirement. Reid, who said he just finished reading about the late Apple founder Steve Jobs, likened investment products to Apple hardware and software.
"People just want products that work," he proclaimed.
Marie Chandoha, president and CEO at Charles Schwab Investment Management, said investors' appetites for risk has declined since 2008, the year the credit crisis erupted.
This created room for products such as fixed-income offerings that gave investors protection from downward market movements.
Investors also wanted the ability to move in and out of funds, rapidly. "The increase in exchange-traded funds says something about investors. They bring transparency, low-cost and greater access to markets," she said.
ICI data revealed that there are currently 1,134 ETFs managing more than $1 trillion last year.
Nachmany added that the demand for ETFs will remain "very strong." He also said that retirees need wealth creation and that's not going to happen with "index-hugging bond instruments."
Chandoha said that products coming to market within the next 10 years will look drastically different from their current-day predecessors, but she could not predict in what way or way.
She did offer that her firm, which built its business on self-directed investors, recently launched an index fund product with advice provided by GuidedChoice, an investment advisory shop, for 401(k) plans.
"Most investors don't make changes to their 401(k)s, which is why we're embedding dding advice and rebalancing in our product," she said.
But there will be rapid innovation, she said, which could play back to the strength of the birthplace of mutual funds.
"The first time I heard about mutual funds was when I was in mid-30's," said Nachmany. "The transparency and global view make mutual funds such an America product and hopefully we can see it as a continuing American innovation.