Money market reform. Operations. Competition from and opportunity in exchange-traded funds.
These are the three issues that dominated the $12.7 trillion mutual fund industry in 2012-and will continue to vie for attention in 2013, according to the annual outlook from Deloitte, the auditors and financial consultants.
Mutual funds may have emerged from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act relatively unscathed, but a firestorm emerged last year over whether floating the net asset value or other reforms should be imposed on the money market fund industry under the direction of former Securities and Exchange Commission Chairman Mary Schapiro. Her recent departure did nothing to deter the Financial Stability Oversight Committee, headed by Treasury Secretary Timothy Geithner, from taking it upon itself to return formal recommendations for reform to the SEC.
Money Fund Reform
The FSOC's alternatives sound eerily similar to those that Schapiro dropped in August, including:
* Requiring a floating net asset value
* Instituting a capital buffer
* Having a minimum balance at risk for fund investors
* Putting in place a temporary gate on redemptions and/or redemption fees
Its timetable for reforms include:
* January 28: Institutional investors, individual investors, fund industry executives and other parties have until this date to submit their opinions, analyses and recommendations.
* April 30: A formal set of proposals for money fund reform likely will be issued by the stability panel by the end of April.
* TBD: How long the SEC will have to define and implement rules that adhere to the mandate it gets from the FSOC.
The incoming chairman of the SEC, Elisse Walter, sees options other than floating the net asset value from its bedrock $1 a share as potentially viable reforms. At the 2012 Mutual Funds and Investment Management Conference of the Investment Company Institute in Phoenix, last March, Walter said: "A simple list includes mandatory redemptions in kind; insurance; private emergency liquidity facilities; funds as special purpose banks; enhanced restraints on unregulated substitutes; revisiting and enhancing the parameters adjusted in our 2010 rules; and, added investor transparency.''
Deloitte expects fund families to put more focus into the operations side of their businesses in 2013.
"Leading up to 2008, many firms generated multiple new fund offerings and paid less attention to operational improvements as they rushed to attract assets,'' Deloiotte, said in its outlook. "With the onset of the financial downturn, cost-cutting took center stage, and operations and technology investments took a backseat."
"Now, the industry is shifting again, as fund companies are reevaluating the importance of risk, cost, scale, and flexibility. Firms are taking up some of the discretionary process and technology investments they previously put off to further reduce costs and bring greater sophistication to their risk management programs," it contends.
Indeed, findings of the 2012 Money Management Executive survey on the fund industry's regulatory outlook reveal that 36% of fund firm executives expect their organizations' spending on hardware, software, education, training, consulting, staff and other expenses associated with regulatory compliance to increase by more than 10% in 2013. Another 41% expect their firm's spending to increase between 6% and 10% and another 20% expect it to exceed 2%.
But it's not only in regulatory compliance where the impact will be felt. There will be a ripple effect across business units to make sure that portfolio management and other parts of a fund firm follow through on and stick with establishment investment policies.
Thirty-three percent of executives polled by MME in fact expect to see spending on technology, training, staff and other expenses that go toward maintaining compliance with investment policies to increase by more than 10%. Another 36% put the increase at 6% to 10% and another 20% put it at more than 2%.
The New Year will also offer mutual fund families growth opportunities in the form of exchange-traded funds, which are estimated to reach $2 trillion in assets in the United States alone by 2015, according to a Strategic Insight-BNY Mellon report. Indeed, ETFs have had a banner year, reaching a new peak of $1.9 trillion in global assets held, at the end of November, according to data from ETFGI, the London consulting firm.
That, globally, is a gain of 24.5%, from last year. And a doubling from four years ago.
"We are likely to end 2012 with a record level of assets'' in exchange-traded funds and other exchange-traded products, said Deborah Fuhr, Managing Partner at ETFGI. This should also reflect "a record level of net new assets invested into the products during the year.''
Worldwide, Vanguard gathered the largest net ETF and exchange-traded product inflows in November with $7.7 billion, followed by BlackRock's iShares business with $7.2 billion and State Street's SPDR ETFs with $5.4 billion.
However, other mutual fund giants such as PIMCO and Fidelity Investments are looking to cash in on the ETF craze. PIMCO's Total Return ETF (BOND) an exchange-traded offspring of its Total Return mutual fund, raised $3.9 billion by Dec. 31, according to Morningstar.
And Fidelity recently sought permission from the SEC for its own brand of active ETF offerings, including a corporate bond fund. The firm in September 2012 also unveiled a new ETF unit, dubbed SelectCo, headed by former State Street Global Advisors senior managing director Anthony Rochte, who specialized in ETF products at State Street.
According to Deloitte, even though there are currently more than 1,400 U.S. exchange-traded products, there is still a backlog of ETF registrations awaiting approval by the SEC.
"The SEC staff's decision to process exemptions for actively managed ETFs that use derivatives will alleviate some of this backlog and open the door to even greater ETF market penetration," according to the firm.