WASHINGTON - Self-regulation, self-restraint and continued integrity were stressed at the Investment Company Institute annual conference last month.
Don Powell, chairman of the ICI and chairman and chief executive officer of Van Kampen American Capital Inc., Oak Brook, Ill., told attendees of the mutual fund industry trade group conference that the previous year would be recalled as a "good year, but not an exceptional year."
Mr. Powell summarized what ICI members must do to continue providing quality shareholder services and investment management.
Mr. Powell said "plain talk" shareholder communications, focusing on the importance of personal retirement planning and teaching shareholders how to maintain realistic expectations of investment management performance, were critical to the continued success of the industry. Investors also need help in developing a longer-term investment horizon to avoid the current trend of chasing star managers and hot performance. Mr. Powell particularly emphasized the need to educate mutual fund consumers about the concept of risk and reward and to disclose fee structures fairly and openly.
Based on more than 50 years of industry research, Mr. Powell was sure a market downturn would not send mutual fund investors racing for the exits. Rather, he said investors would be likely to stay on course with their investments.
In the realm of cyberspace
Nicholas Negroponte, one of the world's foremost technology gurus and founder and director of the Media Lab at the Massachusetts Institute of Technology, spoke of a future in which even the sovereignty of the home is breached by the Internet.
Within five years, Mr. Negroponte said, more than $1 trillion of electronic commerce would flow over the Internet from 1 billion people worldwide. Within the same time span, he said, Internet service will move from a customer-paid subscription system to a system where access is either free, or Internet users are actually paid through revenue from advertisers to use particular Internet gateways.
Advances in data switching have created a decentralized environment in which almost anyone anywhere has access to more information than ever before. Nothing is local in an environment in which the world is available at a keystroke.
With regard to financial services, Mr. Negroponte said the Internet will take over delivery of investment management vehicles like mutual funds, rendering the intermediary, such as a broker or financial planner, obsolete. He said such a distribution system is much cheaper for the mutual fund vendor, who will figure out some way on the Internet to provide investment advice on retirement and financial planning and fund selection.
With hundreds of financial information outlets available on the Internet, Mr. Negroponte predicted many mutual fund investors will eschew traditional third-party intermediaries and buy whatever funds and services they need directly on the Web.
'800' number for the 21st century
John J. Brennan, chief executive officer and president of the Vanguard Group of Investment Cos., Malvern, Pa., agreed with Mr. Negroponte's assessment of the importance of the Internet in the direct marketing of mutual funds.
"The Internet is like the 800 number of the 21st century," Mr. Brennan said, adding this channel will become as important to Vanguard's direct marketing of funds as the phone is now. Internet distribution is cheap and efficient, making it the perfect medium for most mutual fund transactions.
Mr. Brennan made his comments as part of a panel discussion on "Investor Expectations in the Current Market." Mr. Brennan was joined by Arthur Zeikel, president and chief executive officer of Merrill Lynch Asset Management, New York, and Lawrence J. Lasser, president and chief executive officer of Putnam Investments, Boston.
All three were united in their criticism of the financial press, with Mr. Brennan even suggesting financial reporters should be required to become registered investment advisers before recommending any mutual fund investments.
Mr. Lasser reminded Mr. Brennan of the unconstitutionality of the suggestion, but agreed the press has fostered a culture of star managers and hot performance, rather than steady, long-term investment goals.
Mr. Zeikel agreed there is too much focus on short-term returns by the press and investors, and that while optimism is not surprising, given the recent outstanding stock market performance, performance should be dealt with on a relative basis.
While he does not expect a severe market downturn soon, Mr. Zeikel suggested mutual fund investors need to be taught to expect more normal market returns than the 20% to 25% annual returns the market has produced in the last few years.
Mr. Brennan said Vanguard has been focusing its shareholder communications on instilling caution in investors.
Vanguard has tried to provide honest market assessments, which have seemed contrarian in the face of a raging market, but Mr. Brennan stressed that a consistent, credible message was provided to investors. He also suggested investors should be taught that individual fund performance should only be considered in the context of an individual's whole portfolio.
Mr. Lasser said that with so much competition in the mutual fund market, it might seem surprising that pricing still has not become a hot issue with investors. But he said that like many other service industries, the mutual fund industry provides a wide range of pricing choices.
Mr. Lasser said for the level of professional service provided now, mutual fund fees of even 40 basis points are an "incredible bargain, relative to lawyers, air shuttles, college tuition and consultants."
All three panelists agreed mutual fund supermarkets are beginning to make mutual funds a commodity, with investing in mutual funds more like investing in individual stocks.
The differences between mutual fund investors and stock investors are disappearing, said Mr. Lasser, in the context of a supermarket where fund switching is so easy. Mr. Lasser said the transaction costs associated with trading mutual funds as though they were stocks is hurting longer term investors who are sticking to their investment guns.
Caution from the SEC
Barry P. Barbash, director of the Division of Investment Management for the Securities and Exchange Commission, used a breakfast-time pulpit to throw down several gauntlets to the mutual fund industry.
Mr. Barbash described why a new breed of mutual fund investors, with so many more sources of information at their fingertips, might still not be as capable or informed about what their mutual fund choices contain. Mr. Barbash defended some of his past comments about the desirability of providing customized account information and performance data to mutual fund shareholders by suggesting technology advances will make delivery of personalized information easier and cheaper.
Technology also will make more detailed and frequent disclosure of a fund's portfolio holdings much easier to provide.
Investor education would be the most compelling issue for the mutual fund industry and its regulators in the next century, Mr. Barbash said. He warned if the industry does not itself regulate its educational efforts and provide more disclosure, and regulators are unable to persuade vendors to provide more information, Congress will be forced to deal with investor education, particularly as it relates to retirement planning.
Two new issues greatly concerned Mr. Barbash. He was very concerned consumers are getting the impression from vendors that have "bailed out" troubled money market funds that such funds are "guaranteed." Mr. Barbash said the industry must cease giving such an impression or face censure.
Secondly, Mr. Barbash was worried that some mutual fund firms have interpreted too widely the SEC's no-action letter regarding the use by managers of performance records. Mr. Barbash cited the example of one manager who tried to portray a track record as being his or her own solo effort, when in fact, the fund was managed by a team of three managers. Mr. Barbash warned fund managers strongly that the SEC might begin to ban some marketing practices that "overstate, oversell or overdo" the performance of a fund.
Mr. Barbash was clear that if the mutual fund industry can't or won't self-regulate its advertising claims, the SEC will do it.