WASHINGTON - Mutual funds remain a sound investment choice, and will, once again, grow through the perseverance of American ingenuity. Investment firms must stress this to investors to restore their faith.

Nonetheless, fund advisors must still search for new investment solutions, disclose risks and performance more clearly and strengthen 401(k)s through automatic enrollment and additional tax advantages.

Those were the resounding messages of the opening sessions of the Investment Company Institute's General Membership Meeting, titled "Extraordinary Times-Steadfast Commitment."

Although unemployment is likely to still grow worse, and will be the last economic factor to improve, the recession will begin to wane by the end of the year, and the U.S. equity market could end the year up 20%, 30% or potentially higher.

"Until the labor situation moves to a more comfortable level, it will be a protracted recovery period," warned Abby Joseph Cohen, senior investment strategist and president of the global markets institute at Goldman Sachs. A key component of this recovery is the restoration of consumer confidence, in which Cohen sees mild improvement. "Consumers now understand the drivers of the market and will begin to feel much better," she said.

The stock market, however, is another situation, and will recover before the overall economy, agreed Cohen and famed stockpicker Bill Miller. The S&P 500 Index, which bottomed out at 667 on March 9 and ended Wednesday at 920, will close the year between 1,000 and 1,050, she said. Miller, chairman and CIO of Legg Mason, was even more optimistic; he expects the index to be fully valued between 1,100 and 1,200 by year-end.

"Everything is on sale except for Treasuries and gold," Miller said. "I like everything from the quality end of the market, those stocks with good yields, strong dividends and 12 times earnings, and bargains on the other end." Emerging markets, particularly, present opportunities, Miller said, having already risen between 15% and 40% so far this year. "And credit presents great opportunities across the spectrum, broadly," he added.

Over the next two years, Cohen's favorite pick is U.S. equities. For Miller, it's U.S. financials, and for James Anderson, chief investment officer of Bailie Gifford, it's alternative energy.

But for now, with investors', and more generally, American consumers', confidence so badly shaken, mutual fund executives must remind them of the principles that have successfully guided the fund industry throughout its entire history to restore their confidence.

"Having lost $2.4 trillion in mutual funds, people are now questioning mutual funds," said F. William McNabb, president and CEO of Vanguard. "With the average balanced fund down 27% in 2008, people are now questioning balanced funds. Because the Reserve Primary Fund broke the buck, people are questioning money market funds."

All equity categories plummeted last year, with the market capitalization of American financial icons dropping between minus 48%, the winner, and minus 95%, the worst, said John V. Murphy, chairman of both OppenheimerFunds and the ICI.

"In 2008, the American dream became a nightmare," he said.

As it has repeatedly been noted, 2008 was the worst year for the stock market since the crash that led to the Great Depression, "but if it wasn't for the rally at the end of the year, it would have been worse than 1929," Murphy said.

Given dire situation the stock market has left retirees and near-retirees in, the OppenheimerFunds CEO noted, some legislators have called for 401(k)s to be scrapped. But with the plans serving 46 million households, "401(k) plans should not be scrapped," Murphy argued, pointing to an ICI survey of 3,000 investors conducted last fall, in which 75% rejected the idea.

"We provide a long list of services that go beyond professional investment management, including websites, education and call centers," Murphy said. "Yet we need better disclosure on risk, performance, investment objective and policies. In addition, we want to make it easier for employers to offer 401(k)s as well as auto enrollment and education."

Most importantly, Murphy stresed, the government must put Social Security on a sound footing, because 401(k)s are a supplement to Social Security.

Asked what he would advise a 55-year-old middle manager whose retirement portfolio was depleted 45% in the past year, Miller said that many investors realize they will simply have to work longer and have become averse to investing in the stock market, but that a 55-year-old with at least a 10-year investing horizon should "think sensibly about asset allocation. The movement of money out of money market funds will have to return," Miller said.

An overabundance of "conservatism is in the general consciousness," Miller said.

Cohen said she was more worried about heathcare for the aged. "The Medicare liability is four to seven times larger than Social Security," she said.

Beyond that, "the real problem is state and local pension systems that are underfunded even worse because they weren't held to ERISA standards. This will affect municipal bonds," Cohen warned.

401(k) Reforms

At a separate summit on 401(k) reform Wednesday, Putnam Investments CEO Robert L. Reynolds called for sweeping retirement reform, beginning with mandatory automatic enrollment in qualified default options, savings escalation, the inclusion of retirement income options and full advice on asset allocation and retirement planning.

Further, Reynolds believes the government should provide tax credits to employers who voluntarily match worker savings contributions since these employers are helping to meet a national savings challenge. Further, Reynolds is asking the government to provide additional tax incentives to employees who invest in protected lifetime income products, reasoning that the decision to give up some control of assets should be rewarded.

"If we draw the right lessons from the tough markets we've been passing through," Reynolds said, "we can create a 21st century workplace savings system that will improve participants' results, lower volatility and reliably deliver a major share of income for life.

"The multi-trillion dollar wave of wealth destruction that struck America's markets in 2008 inflicted serious losses for retirement savings," the Putnam chief executive officer said.

"We need to act now to reboot the system and boost retirement savings substantially. If we don't, millions of future retirees could face shortfalls in the income they need for everyday essentials such as food, medicine and housing."

As far as the failure of target-date funds is concerned, Reynolds believes the percentage of stocks these funds hold should be restricted, particularly as target-date funds near retirement expiration.

Reynolds also suggested the creation of a national insurance regulator to guarantee annuity products, much as the Federal Deposit Insurance Corp. protects bank accounts.

While Putnam currently does not sell annuities, it is working with parent Great West Life to develop some.

(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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