Fidelity May Cut Bonuses, Merit Pay as Profits Fall
Fidelity's net profits edged down 4% last year, and they may be weak again this year, despite cost-cutting measures and laying off 3,000 workers, Fidelity President Rodger Lawson warned employees in a recent memo. As a result, the company may scale back on year-end bonuses and merit pay for those in the middle and lower brackets of earnings.
Income may be "somewhat lower," Lawson wrote. Last year, Fidelity's revenue fell 4% to $12.9 billion, and assets under management fell 22%.
"Recent events have shown businesses face many challenges as the recession lingers," Fidelity spokeswoman Anne Crowley told The Boston Globe. "While Fidelity continues to do an excellent job, our industry and the economy in which we operate have undergone many changes that have impacted companies across all industries and will continue to do so for the foreseeable future."
Court Rules for Investors in Amerprise Case over Fees
The Eighth U.S. Circuit Court of Appeals has just ruled in favor of investors in a case against Ameriprise Financial over the fees of 11 of its RiverSource mutual funds. Coming on the heels of a similar case against Harris Associates that the U.S. Supreme Court will hear this fall, it could signal a new era in favor of investors.
"This is the first indication of where courts will go with these cases," noted William Birdthistle, assistant professor of law at Chicago-Kent College of Law.
In the Ameriprise case, Gallus et al v. Ameriprise Financial, shareholders in 11 of the firm's retail funds said they should not be charged higher fees than institutional clients. The court agreed with the plaintiffs that they were provided essentially the same services and advice as institutional clients.
In the Harris case, Jerry N. Jones et al v. Harris Associates, the Seventh Circuit agreed with a lower court on a standard that has been the norm for nearly 30 years, that the free market will determine that fees are not too high. But one judge dissented, saying the courts should have the right to compare fees in institutional and retail share classes of mutual funds.
Oregon Sues OppenheimerFunds Over 529 Loss
Following a three-month investigation, the state of Oregon is seeking $36.2 million in damages from OppenheimerFunds due to steep losses in one of its funds included in the state's 529 college savings plan; the Oppenheimer Core Bond Fund fell 36% in value last year, and is down another 10% year-to-date.
By comparison, the fund's benchmark rose 5% in 2008, according to state officials, who not only called the portfolio manager's investment choices inappropriate but "hedge-fund like." The lawsuit says the fund company was negligent, violated state securities laws, breached its contract and failed to meet its fiduciary duty. It also notes that Morningstar gave OppenheimerFunds an "F" in February for failing to communicate with investors about the true nature of its funds.
"We are taking action on behalf of Oregon families whose college accounts were battered-and their financial futures jeopardized-because of OppenheimerFunds," the state treasurer said. "Families were doing the right thing and saving for college, but unknown to them or Oregon, their money was invested in ways that were plainly inappropriate for those saving for college or already in college."
OppenheimerFunds said it would vigorously fight the charges.
CVC Acquires iShares From Barclays for $4.4B
CVC Capital Partners acquired the iShares exchange-traded-funds business of Barclays Global Investors for $4.4 billion, although the deal includes a go-shop agreement that will give rival bidders another 45 days to submit a better offer.
The asset management arm, Barclays Global Fund Advisors, had approximately $325 billion of assets under management as of December 2008.
According to a Collins Stewart research note, "The sale talks are somewhat of a surprise as management had indicated this business as being core for several years now. Tough markets evidently lead to tough decisions being taken."
NFL Retiree Gets $950K For Losses in Funds Run by Morgan Keegan
FINRA ruled in favor of an NFL retiree, Jerome Woods of the Kansas City Chiefs, who lost $1.7 million in Morgan Keegan mutual funds, but awarded him only $950,000. Woods is among dozens of investors who have filed lawsuits against the firm after losing 90% of their investments. In Woods' case, FINRA said Morgan Keegan breached his trust and was negligent by investing his money in risky junk bonds.
Morgan Keegan intends to defend the claims, a spokeswoman said. The firm believes its broker "acted appropriately given the limited investment options that the clients' goals and lifestyles allowed," she said.
"As far as the disclosure on risk, unfortunately these funds were on the leading edge of the credit crisis that developed into one of the most serious market and economic declines in the country's history. Unfortunately, these funds were caught up in that," she added.
Economy Drives Retirement Confidence To Record Lows
Retirement confidence has hit a record low since the Employee Benefit Research Institute began its annual survey in 1993, with only 13% saying they believe they will have enough money for a comfortable retirement, and 25% saying they believe they will have enough money for just basic expenses. Those already in retirement also have downgraded outlooks, with only 20% saying they are very confident.
This compares to 18% of workers in 2008 and 27% in 2007 who said they were confident about their retirement.
The three main reasons respondents gave for their more dismal outlook are: the economy, inflation and cost of living. They also cited job losses, pay cuts, depletion of retirement savings due to the market and increased debt.
The solution, apparently, for many is to work longer, with 28% saying the age at which they expect to retire has changed. Among this group, the overwhelming majority, 89%, have postponed retirement. Nonetheless, the median age at which people expect to retire is still rather low, 65, with only 21% saying they plan to postpone retiring as far into the future as their 70s.
Part-time employment in retirement is also an evident solution, with 72% now saying they still plan to work after retiring.
A great many workers, 81%, have reduced their expenses, 43% have changed the way they invest, 38% are working more hours or at a second job, and 25% have sought out the help of a financial adviser.
On the bright side, 75% said they or their spouse has started saving for retirement, one of the highest figures ever. Still, only 44% have actually tried to calculate how much they will need for retirement, and 49% of people age 55 or older have less than $50,000 in their retirement accounts.
Hedge Fund Firms Begin Offering Mutual Funds
Talk about reversal of fortune. Up until the economic crisis took full effect in 2008, mutual fund companies were anxious to get into the hedge fund game. Now, with investors heading to the hedge fund exits, the opposite is happening.
Permal Group, a hedge fund unit of Legg Mason, has just launched a go-anywhere mutual fund, the Legg Mason Permal Tactical Allocation Fund. In January, AQR Capital Management introduced a mutual fund, the AQR Diversified Arbitrage Fund, the first in a series it is planning. In 2005, Highbridge Capital Management launched the JPMorgan Highbridge Statistical Market Neutral Fund, and Highbridge is reportedly currently considering offering additional mutual funds.
Permal investors redeemed $6 billion of assets in 2008, leaving the firm with $20 billion under management, down from $38 billion at the start of the year.
Optima Predicts Funds Will Outsource Marketing
With assets continuing to fall, mutual fund companies are looking for new ways to cut costs, and outsourcing the promotional and public relations aspects of marketing is one of them, and the movement could even become permanent, according to a report from Optima Group, "Surviving the Crisis in Asset Management."
According to the report, fund companies expect their net income to fall by an average of 40% this year, and Optima believes that outsourcing marketing can reduce that cost between one-third and half.
Besides reducing costs, outsourcing gives fund companies flexibility to "either ramp up, or ramp down, marketing depending on shifting market conditions," said Dennis Dolego, director of research at Optima.
Fund companies are also reducing their external wholesalers and relying more on internal salespeople who use the web to conduct sales.
"We have seen a severe drop in assets in the first quarter, and funds will have to make dramatic changes in the way they do business to address these issues," Dolego said. "Cutting staff where there is room, freezing bonuses and incentive pay are short-term solutions. This rationalization of marketing efforts is part of a longer-term change that will affect the industry."
Gabelli Earned $46M in 2008
All things considered, earning $46 million in 2008 was a feat, yet far less than the $81 million Mario Gabelli, Gamco chairman, took home in 2007 and the $81 million he pocketed in 2002.
But considering the poor showing of the funds Gabelli manages, a 33% decline in assets under management, that was a tremendous payout. Of the $102 million that Gabelli and his portfolio managers earned in 2008, the chairman took almost half.
Mutual Fund Firms Turn to Absolute-Return Funds
Investors are looking for more flexibility than being locked into investment style boxes that fall in and out of favor. Merely beating a benchmark but still being in the red by double-digits doesn't do investors any good.
That's why three mutual fund companies, Putnam, Dreyfus and Natixis, recently introduced absolute-return funds that aim to deliver positive returns, regardless of the market's overall movement.
However, some wonder whether even professional money managers can successfully time the market, especially when so many studies show that actively managed funds trail index funds. As Boston College Finance Professor Alan J. Marcus put it, "My gut feel is that there aren't that many Warren Buffetts around."
Some recommend less-risky balanced funds and a well-diversified portfolio of low-cost funds as a better alternative.
Funds Seek Exemptions To Invest in TALF Funds
Although the underlying credit card and auto debt assets in the TALF funds are leveraged as much as 20:1, mutual fund companies anxious to invest in them are telling the Securities and Exchange Commission that they are actually structured as safe, non-recourse loans.
Thus, BlackRock and a number of other funds are asking the SEC to clarify leverage in the case of investing in these funds, which they believe can be quite profitable. They are also noting that TALF has failed to catch on among other investors.
FINRA Fines Fifth Third $1.75M for Annuity Sales
FINRA has fined Fifth Third Securities $1.75 million $1.75 million for a series of violations related to variable annuity sales and exchanges.
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