WASHINGTON - Maintaining more realistic expectations about mutual fund returns will be a critical step toward rejuvenating investor confidence.

That was the message resonating from the Investment Company Institute's general membership meeting in Washington last week as mutual fund executives gathered to discuss the obstacles that lay ahead for the industry.

Mutual funds have been under siege from federal regulators and investor advocacy groups over the last year as a series of corporate scandals and lousy performance have left tears in the eyes of middle-income Americans. While the ICI fully supports reform that will be beneficial to investors, it has vehemently denied that more stringent regulation will restore their faith. Rather it believes that adopting a more realistic outlook on potential gains and taking concrete steps to identify trouble spots are the keys to sustaining growth.

In the five years that preceded the current bear market, stocks rose more than 20% annually as measured by the S&P 500 index. "These unprecedented gains undoubtedly gave some investors the impression that the only direction the stock markets travel is up," said Paul Haaga Jr., chairman of the board of governors of the Investment Company Institute and executive vice president of Capital Research and Management Company. Haaga noted that ICI has repeatedly cautioned investors that extraordinarily high returns were not sustainable. But he conceded that the industry must be more diligent in conveying that message.

"The world has changed," said Bill Thompson, managing director and chief executive at Pacific Investment Management, and investors will have to realize that equity market returns of 5% to 8% are more realistic.

Clearly, the ICI's feathers were ruffled by regulatory proposals, particularly proxy-voting disclosure. But Haaga stressed the importance of standing up against unfair treatment regardless of the odds of gaining concessions.

Matthew Fink, president of the ICI, told attendees that regulation is only necessary when it will advance the interests of investors. Fink said that the ICI supports 90% of the regulatory provisions that have been set forth but that it must pick its battles when regulation impedes its goal of protecting investors.

The fund industry must continue to cooperate with the SEC "to embrace new ideas about more effective oversight," Haaga said. For example, he said, the industry worked with the SEC to create plain English prospectuses and agreed to list a fund's top 50 holdings in shareholder reports.

However, the industry will stand up to unnecessary regulations while still fighting for laws that will help investors. The industry is vehemently opposed to creating a self-regulatory body and will lobby hard against taxation of reinvested capital gains dividends, Haaga said.

"And we will continue to stand up for reform in the governance of corporate America, reform of the securities markets on which we depend, and broad reform of the financial services industry in which we operate," Haaga added.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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