2010 was a year of many challenges. The May 6 Flash Crash and the fallout of the December 2009 arrest of Ponzi schemer Bernard Madoff kept investors away from stock funds. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed. Mutual funds and their sales intermediaries were charged with more accurately calculating the cost-basis of original investments in securities, and funds prepared for the Jan. 1, 2011 XBRL deadline.
1. Huge Stock Fund Outflows
The Standard & Poor's 500 Index returned 26.5% in 2009 and is up 12.73% year-to-date through Dec. 28. Evidently, that's complete news to investors. Investors have remained averse to risk ever since the S&P 500 plummeted 37% in 2008.
They continued to run for the hills from U.S. equity funds in 2010, redeeming $68.7 billion from U.S. stock funds year-to-date through November, according to Morningstar. International stock funds, however, remained popular, taking in $33.39 billion in that period. As a combined category, equity funds have bled $35.31 billion so far this year.
By comparison, the perceived safety of bonds has brought $244.96 billion into bond funds, with $219.62 billion going to taxable bond funds and $25.34 billion going to municipal bond funds. Likewise, balanced funds remained popular, taking in $10.09 billion in the first 11 months of the year.
And because there was a high correlation between all asset classes in 2008, alternative and commodity funds have become popular, with alternatives taking in $22.71 billion year-to-date and commodities taking in $10.92 billion. All told, flows into mutual funds have been $27.96 billion, since the $253.35 billion that has moved into long-term funds of all types has been practically cancelled out by the $225.39 billion that investors have redeemed from money market funds.
2. Flash Crash Sends Dow Plummeting 1,000 Points
On May 6, the Dow dropped 1,000 points between 2:40 p.m. and 3 p.m. The SEC later determined that the trigger was a Waddell & Reed sell order for 75,000 E-Mini contracts valued at $4.1 billion, executed through an automated execution algorithm. The trade was set at an execution rate of 9% of the trading volume calculated over the previous minute, the largest net change in the daily position of any E-Mini trader since the beginning of 2010.
3. SEC Imposes Circuit Breakers
On June 30, the SEC imposed circuit breakers for S&P 500 stocks and later extended them to the Russell 1000 Index and selected exchange-traded funds in September. The program, which currently covers 1,000 stocks and 344 ETFs, halts trading in a single stock for five minutes if it falls or rises 10% or more in the previous five minutes. In December, the SEC extended the program to April 11.
4. ETFs Reduce Volatility
Financial advisers blame a dependence on computer systems, high-frequency trading, exchange-routing rules and stop-loss orders as the causes of the Flash Crash and expect a similar shock to the market to happen again, a survey by iShares finds. Advisers say they believe exchange-traded funds are the safest investments for staying afloat in volatile markets.
5. SEC Bans Naked Access
On Nov. 3, the SEC voted unanimously 5-0 to ban "naked access" to stock markets by unregistered entities borrowing a broker's market participation identification code. The ban is designed to prevent "fat finger" or other mistaken orders generated by humans or mathematically driven systems that could disrupt markets, as happened with the Flash Crash.
6. Funds Prepare for Cost-Basis Reporting
The SEC is requiring taxpayers, brokers and financial advisers to calculate the actual cost of a security for income tax purposes. The law applies to equities acquired on or after Jan. 1, 2011, to mutual funds on Jan. 1, 2012, and to debt securities, options and private placements on Jan. 1, 2013.
7. XBRL Comes to Fund Reporting
Beginning Dec. 7, 2010, money market funds, and, starting Jan. 1, 2011, all other mutual funds must data tag their risk-return summaries in their prospectus filings with the SEC in searchable eXtensible Business Reporting Language (XBRL). The new system is designed to permit investors to easily search, sort and recombine information to generate reports and analysis from hundreds of thousands of companies and millions of forms.
On Dec. 17, R.R. Donnelley submitted the first mutual fund filing, for Russell Investments, with live XBRL.
8. Dodd-Frank Regulatory Reform
While the initial reactions among mutual fund and other financial services companies to the Dodd-Frank bill were trepidation and fear, by the end of 2010, many had changed their minds. With investors so shaken not just by the credit markets and mortgage-backed securities, but by the bedrock of the mutual fund industry-equities, particularly following the Flash Crash-industry leaders began to embrace reform as a new foundation for restoring investor confidence.
9. Industry Debates Proxy Reform
Following the SEC's 2003 mandate that mutual funds disclose how they vote on corporate issues, the SEC is now considering overseeing proxy advisory firms. Public companies and their advisers are pushing the SEC to more closely oversee proxy advisory firms because they wield great influence on voting decisions made by funds and other fiduciaries but face no regulatory oversight.
10. Funds Use iPad As Sales Tool
As the Apple iPad rolled out in the fall, Dreyfus became one of the first mutual fund companies to embrace it as a sales tool for its wholesalers, arming them with the most up-to-date information on the funds they sell. Likewise, Merlin Securities, which provides prime brokerage services, provided an iPad app to the hedge fund managers it serves.
And Fidelity became one of the first fund companies to create an ad for the iPad. The ad builds on Fidelity's ongoing "Green Line" brand campaign by prompting people to tilt their iPad screen to follow a maze to three destinations: low fees, 200 free trades, and free tools and research. Within a month of its launch, more than 180,000 people had viewed the ad.