Fund Fees Expected to Tumble By $38 Billion by 2012
Fees on actively managed mutual funds in the U.S. could fall as much as 26%, or $38 billion, by 2012 due to investors' renewed preference for fixed income and passive investments, Bloomberg reports, citing a report from Boston Consulting Group. This year alone, actively managed fund assets in all classes around the world will decline from $58.9 trillion to $50 trillion, representing a 15% decline, according to Boston Consulting. Worldwide, the declines through 2012 could reduce the proportion of mutual funds revenue out of the total asset management pie to 36%, down from its current 49%. Last year, active mutual funds took in $147 billion in fees, about the same amount as hedge funds, private equity funds and real estate funds-combined.
The popularity of alternative investments is expected to shoot up to 61% of total fees, and index funds' share could reach between 3% and 4%.
"Investors have wised up to the fact that the performance of classic active funds has failed to live up to benchmarks," said Boston Consulting Partner Michael Spellacy. "There's a shift by consumers to allocate to more passive, lower-fee products, and to the pursuit of alpha, or market-beating performance," Spellacy said.
What is mainly prompting the seismic shift are market losses and investor withdrawals. The average U.S. diversified mutual fund was down 40% through Oct. 31, while the Standard & Poor's 500 Index was down 37% and the MSCI AC World Index had slumped 43%.
Wall Street Layoffs in '08 Could Top 200,000
More than 110,000 people working in finance in the U.S. have lost their jobs so far this year, but that could nearly double to more than 200,000 in the final weeks of the year, the Anniston Star reports.
"Wall Street the way we know it is, frankly, gone," said Touro College Graduate School of Business Dean Dr. Michael Williams.
Williams estimates 90,000 more financial services executives could lose their jobs by the end of the year, and another 50,000 in the first half of next year.
Last year, 153,105 positions at financial services firms were eliminated, according to Challenger, Gray & Christmas.
Only 4% Have Stopped Contributions to 401(k)s
First the good news. The average 401(k) plan balance is down only 14% this year to $68,000 from $79,000 in 2007, according to Hewitt Associates. And since the precipitous decline in the stock market of the past few months, only 4% of participants have decided to stop contributing.
As well, although investors have reduced the proportion of their allocations from 58% to stocks a year ago, such holdings still account for 53.8% of portfolios. Earlier this year, however, 75% of portfolios were in stocks.
Now the bad news. Since the credit crunch has made borrowing through traditional channels more difficult, more employees are tapping into their 401(k)s for cash, in spite of the penalties and additional taxes for early withdrawals. Six percent have pulled money out, up from 5.4% a year ago. And hardship withdrawals are up 16%.
Mutual Funds on Course To Lose $70B in November
With redemptions reaching exceptionally high levels, mutual funds are hoarding cash like never before, BusinessWeek reports. Funds lost $68 billion in October and appeared to be on track to top those losses last month. By comparison, in October 2007, mutual funds lost $11.3 billion and $9.94 billion the following month.
Year-to-date, funds have lost 3.3% of assets, a bit more than the 4.3% loss in the bear market of 2002-2003, according to TrimTabs Chief Operating Officer Conrad Gann. If today's redemptions reached that level, another $38 billion would easily leave mutual funds by the end of this month.
The volatility of the market is fueling much of those redemptions, forcing mutual fund portfolio managers to hold as much as 25% of their assets in cash, rather than the typical 3% to 6%. Not only does the high level of cash mean lost trading opportunities, but the high volume of selling to meet those redemptions is pushing up trading costs.
ReFlow Management-which loans funds cash for shares being redeemed for a fee of 15 to 17 basis points, in exchange for a 28-day period in which the fund can seek to redeem the shares in a daily Dutch auction-is seeing a large increase in business.
Year-to-date, the company has provided $800 million in capital to funds. To put that in context, between its launch in 2003 and the beginning of this year, ReFlow had provided $1.2 billion.
"This environment is going to be much tougher, and people are going to look for every edge they can get," noted ReFlow President Paul Schaeffer.
Funds that are primarily sold through advisers who can allay investors' fears, or to high-net-worth investors who are not in need of immediate cash, are reporting far lower redemption levels.
Smart Financial Firms Focus On Long-Term Prospects
Even as equity values continue to fall and economic woes mount, certain financial services firms will emerge as leaders, and the ones that do will be those that focus on long-term success, according to a report released Monday by management consulting firm Casey, Quirk & Associates and asset management compensation consulting firm McLagan, titled "Crisis in Asset Management: Industry Profitability Under Siege."
Based upon interviews with executives at 50 firms, the two consultancies estimate that asset management firms' operating profits could fall 35% from 2007 levels by the end of this year. And those profits could fall another 35% in 2009, without significant reductions in headcount, incentive compensation, or both.
"The fourth quarter is only a warm-up for an extremely challenging 2009," said Jeb B. Doggett, a partner with Casey Quirk. "Deep cost-cutting will be unavoidable for most firms, and some may have to exit whole business lines in order to defend their core competitive advantages. The difficult environment will test all firms."
Firms with strong capital and that offer a diversified asset mix will fare the best and be in the best position to take advantage of growth opportunities that will inevitably emerge once the financial crisis subsides. Smaller firms, equity-focused fund managers, and multi-capability operations without strong competitive differentiators will struggle the most, according to the report.
Reserve's Second Payout, Of $14 Billion, This Week
Reserve Funds will distribute $14 billion to investors in the Primary Fund on or around Dec. 5. That will leave an outstanding balance of about $11.5 billion that investors are still waiting to get back; on Oct. 30, Reserve paid out $26 billion out of the fund, which had $51.5 billion of assts on Sept. 15, when it broke the buck.
"If we are able to sell additional securities at amortized cost (without a loss) between now and the distribution date, those proceeds will be included in the distribution," Reserve said in a statement on its website. "Over the past few weeks, the market for certain fund securities has improved, enabling the fund to sell $5 billion in securities at a profit, rather than waiting for them to mature."
More Investors Embrace Stability, Income
Americans' consumer attitudes and behaviors have shifted dramatically in the past six months, according to an October study by AXA Equitable Life Insurance. Almost 78% of respondents said income guarantees were a top financial priority, up 16 percentage points from a similar poll in April.
"It's no surprise that attitudes and behaviors have changed, especially given the period of economic instability we're experiencing," said Barbara Goodstein, EVP and chief innovation officer for AXA Equitable. "What is striking, however, is the heightened priority being placed so quickly on securing a stream of lifetime income."
Approximately 71% of respondents placed a priority on protection from outliving retirement savings, up from 59% six months ago, while protecting against market conditions increased to 68% calling it a priority, versus 53% in April.
The study found that 54% said they have not made financial changes and don't intend to do so.
The study also found that women are more concerned than men about the current market turmoil, with 84% of women saying a guaranteed source of lifetime income was extremely important, compared to 73% of men.
Conversely, women appear to be less likely than men to make changes in response to current market conditions. While 55% of men said they had reallocated money in an employer-sponsored account, just 40% of women had done so.
"Women are clearly focused on protecting retirement income and have been responding more conservatively as a result," Goodstein said.
(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.
http://www.mmexecutive.com http://www.sourcemedia.com/
