Volatility, the fear of a second worldwide recession, continued aversion to equity funds and uncertainty over Dodd-Frank regulatory fallout—all headlined 2011.

Even though the year ended with economists pointing to a potential recovery for the U.S. economy, 2011 could be summed up as “The Year of Living Cautiously.” Here are the industry’s top 10 stories of the year.

1.)  No End to Equity Exodus

Year-to-date through Dec. 14, investors have pulled $120.3 billion out of equity mutual funds—and that exodus isn’t likely to abate.

“What is facing equities is something that is quite extraordinary,” Ron O’Hanley, president of asset management and corporate services at Fidelity Investments, told Fund Forum USA’s Global Funds Distribution Summit in November. “Up until 2007, flows always followed performance. Flows are not currently following performance. For the careers of most of us, that decoupling is something none of us has seen.”

Instead, investors have become intensely focused on headline risk. Read: S&P’s downgrade of U.S. bonds, the Eurozone’s credit crisis and wild market volatility.

As a result of the ensuing outflows and investors fear, assets in mutual funds declined to $11.6 trillion at the end of October, down from a record $12 trillion in 2007.

This stagnant growth over the past four years—and more costly regulations and ever-increasing pressures on yields—have lowered industry margins by 15%, according to McKinsey.

“With the market proving unreliable in 2011 and 2012, asset managers will need to tackle the business model issues at the center of rising costs, lower prices and high variability of margins in the years ahead,” McKinsey said. “Growth has proven more elusive than profitability, with only one in five asset managers sustaining above-average growth rates over the past decade.”

2.)  U.S. Downgraded

It was the end of an era for the United States in August when Standard & Poor’s revoked its AAA rating—and sent the markets into a tailspin. The ensuing lack of clarity has sent investors flocking into taxable bond funds, which YTD through Dec. 14 have taken in $143 billion.

3.)  401(k) Balances at $71K ‘High’

Retirement plan balances reached an all-time “high” of $71,000—and retirement confidence fell to an all-time low of less than 50%. More than half of Americans are “not at all confident” or “not too confident” they’ll be able to afford the retirement they want.

Most alarmingly, 50% of workers have less than $10,000 saved for their retirement—and four in 10 Americans never expect to retire.

But Penny Alexander, senior vice president of Franklin Templeton Investments, turned those figures around, telling NICSA’s General Membership Meeting in October: “How are they going to stretch those 70 G’s until they are 90 years old? This is a tremendous opportunity for us to help people plan for retirement and their longevity.” 

4.)  Limit Up/Limit Down

With the shock of the Flash Crash still emblazoned on investors’ minds, the nation’s stock exchanges, SEC and FINRA began pilot testing limit up/limit down to modify stock price swings during periods of extreme volatility. 

5.)  401(k) Sticker Shock

As the 401(k) fund administration and defined contribution investment only industry gears up for DOL’s April 1, 2012 requirement to fully disclose 401(k) fees, some plan sponsors are already paring down their fund lineups and looking for less-expensive funds.

“The collective gasps, screams and confusion likely to ensue, as plan sponsors and participants see the true cost of their retirement investments—will echo throughout industry,” predicts Tom Gonnella, senior vice president of corporate development at Lincoln Trust.

6.)  Money Fund Reform Still in Limbo

The Securities and Exchange Commission directed most of its focus in 2011 on the Dodd-Frank bill, putting money market reforms on the back burner. The industry still doesn’t know whether the entire premise of money funds will be decimated by a floating net asset value or a requirement to create a private liquidity facility. With interest rates at historic lows, money funds are absorbing their fees to prevent negative returns for investors and can ill afford such a backstop. 

7.)  Dodd Frank Drama

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is still a work in progress. It contains more than 90 provisions that require SEC rulemaking—but the two provisions of greatest concern to fund companies are the discretionary oversight of systemically important entities and the Volcker Rule’s impact on market liquidity

8.)  Funds Get Technologically Savvy

Social media caught on in a big way for mutual fund complexes in 2011, with Vanguard attracting 44,000 followers on Twitter, and Fidelity 38,000.

Fidelity isn’t just embracing social media, but mobile devices, wikis, HTML 5, video, virtual agents and cloud computing, too. At the Fidelity Center for Applied Technology, the fund giant looks out three years to discover what new forms of technology will take hold in the future.

“You can imagine a world where you have people across the globe in multiple rooms with relatively large-scale 3D monitors. I don’t think that’s ‘Star Wars’ anymore,” said Sean Belka, SVP and director of the center. 

9.)  50% of Fund Execs Earn $100K-$200K

Money Management Executive’s first annual Compensation Survey found that executives’ pay has increased since 2007, despite the recession, with 50% earning between $100,000 and $200,000, up from 41% four years ago.

More than half, 52%, of the managerial and staff respondents are satisfied or very satisfied with their pay.

10.)  Meet the ‘Schmeeks’

As fund companies embrace absolute-return, tactical allocation and other types of complex new offerings, they are now seeking out “schmeek” wholesalers—people who are part geeks and schmoozers.

Fund companies have also become smarter about using internal wholesalers and sales intermediary databases. They are more focused than ever on broker-dealer gatekeepers.

All told, job hopping picked up considerably in 2011 and is likely to continue into the New Year.

Lee Barney writes for Money Management Executive.



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