Frugality Expected to be the 'New Normal'
The mutual fund industry got a swift dose of investors' new conservative sentiment recently when PIMCO released a survey showing that 401(k) consultants are focusing on cash-equivalent and target-date funds. Now economists are debating whether "the new frugality" will outlast the recession, and the consensus is that it will, potentially as long as the next 10 years.
"It's hard to believe we're ever going back to the easy credit and free spending of the last 10 years," Richard Berner, an economist with Morgan Stanley, told The Wall Street Journal. He foresees consumer spending growing a scant 2% to 2.5% a year over the next decade, compared with 3.5% over the past decade.
If mutual fund companies can convince consumers to set some of that money aside for their retirement, of course, that is good news. But currently, many investors have moved their cash to money market funds and bank deposits, and a growing majority of Americans are working assiduously to pare down their debt.
Credit card Discover found in a survey that 35% of Americans intend to reduce their debt over the next six months, and one-third said that the extra money they will have as a result of lower payments is going into savings.
Many economists note that it will take Americans a while to recover from the $13 trillion loss of wealth since the recession began. And if it gets worse, people's outlook toward money, saving, retirement and consumer spending will be tamped down further, said Ravi Dhar, director of the center for consumer insights at Yale.
Phased Retirement a Boon For Boomers, Employers
Companies can reduce labor costs and retain key talent for continued smooth operations by considering phased retirement, Deloitte recommends. And for workers, it can protect their retirement income for a longer period of time.
"The potential benefits for a business are even greater," Deloitte said. "Phased retirement allows you to reduce your labor costs without undermining morale and productivity. Best of all, it lets you hold onto your most experienced workers so they can share their knowledge with others, and provides a ready source of talent for when the economy recovers."
Alliance, Ameriprise, Barclays, Columbia Vote Most for Higher CEO Pay
By voting in favor of management proposals for large executive pay packages rather than shareholder proposals for pay tied to performance, fund companies are contributing to excessive pay, three groups charge.
The fund companies that voted most often for the pay increases were AllianceBernstein, Ameriprise, Barclays and Columbia Funds, charges the American Federation of State, County and Municipal Employees, The Corporate Library and the Shareholder Education Network.
Fund companies that voted most frequently to constrain pay were Templeton, T. Rowe Price and Schwab. They also voted against directors on compensation committees at pay-offending companies at a higher rate than other fund companies.
The groups based their findings, in the report "Compensation Accomplices: Mutual Funds and the Overpaid America CEO," on analysis of mutual fund voting patterns in 2007 and 2008.
"Given the performance of many companies, investors in mutual funds should be outraged that their assets are being used to prop up CEO pay that is too often undeserved and unearned," said AFSCME International President Gerald W. McEntee. "The worst-ranked funds are accomplices in the overpayment of CEOs. They should be protecting the assets of their clients by demanding that CEOs get paid for performance, rather than supporting runaway pay."
As an industry, mutual funds are increasingly siding with management on compensation issues, voting with them 82% of the time in 2007 and 84% in 2008, up from 75.8% of the time in 2006.
Lipper Announces 2009 Fund Award Winners
American Century Investment Management and Waddell & Reed Investment Management won "Best Fund Group Overall" honors in the large and small fund company categories, respectively, at the U.S. Lipper Fund Awards 2009 ceremony in New York.
Lipper, a Thomson Reuters company, presented trophies and certificates to funds that topped their Lipper classifications and performed consistently well during the past three, five and 10 years.
Fidelity Management & Research Co. won 25 individual awards, while Vanguard Group won 15 awards, BlackRock won 11 and American Century won 10 individual awards.
"Each of the winners should be recognized for delivering consistently good risk-adjusted performance, relative to their peers in such dramatic events as experienced by the financial markets during the last 12 months," said Eric Almquist, Lipper's chief operating officer.
Globally, Lipper awards funds in 21 countries and regions.
Eaton Vance Launches Tax-Advantaged Bond Strategies Fund
Eaton Vance Distributors has launched the Eaton Vance Tax-Advantaged Bond Strategies Fund, succeeding a similar private investment fund that was formed in 1991.
The fund, which has a minimum investment of $1,000, is the newest addition to a suite of tax-advantaged funds offered by Eaton Vance. At least 80% of the fund's portfolio will be invested in a diversified portfolio of highest-rated municipal obligations, Treasuries or other obligations of government-sponsored enterprises.
The remaining 20% may be invested in lower-grade municipals at least A3 or A- at the time of purchase. All of the holdings will have maturity durations of between two and six years, which could be altered in the future.
"We employ a quantitatively driven, relative value approach that seeks to take advantage of inefficiencies in high-quality fixed-income markets," said Jim Evans, director of the tax-advantaged bond strategies division of Eaton Vance. "We have employed a similar approach to the management of separate accounts for the past 16 years."
Vanguard Introduces Small-Cap Global ETF
Vanguard has launched the Vanguard FTSE All-World ex-U.S. Small-Cap exchange-traded fund, its 39th ETF. It tracks the FTSE Global Small Cap ex-U.S. Index.
According to Lipper, this is the only international small-cap ETF that covers both developed and emerging international markets. Vanguard has $44 billion in assets in its ETFs.
Brokers Fear Annuities May Not Honor Guarantees
With about two dozen insurance companies downgraded by one or two notches to a negative outlook during the first quarter, brokers who sell variable annuities are beginning to wonder if those insurers will be able to honor the annuities' guarantees.
Merrill Lynch, which is one of the biggest distributors of annuities, found in a survey that 71% of its brokers think insurers are offering too many guarantees and, on top of it, 32% said they fear the insurers don't even understand those risks, The Wall Street Journal reports. In 2007, only 68% of the brokers were wary of insurers' risks and 17% were unsure of of their understanding of those risks.
Most of the insurers have been downgraded due to steep losses in their investment portfolios, but in some cases, the downgrades were due to guarantees. Insurers developed a dizzying array of guarantees about five years ago, many of them incredibly generous; one steps up the account value by 7% each year.
Recently, insurers have begun scaling back on their guarantees, even at higher prices. Others have stopped selling annuities with guarantees until they can reconfigure and better hedge their risk models. And many are offering far less equity fund investments, replacing them with index funds.
A spokeswoman for The Hartford explained: "[We have] ceded a lot of market share over the last several years because we felt that the annuity arms race was so strong and so aggressive. [We are now trying] to ensure that we are derisking our annuity business to substantially reduce the risk and capital strain."
Certainly, insurers took charges of as much as $2 billion in the fourth quarter due to poorly performing variable annuities with guarantees, and throughout 2008, insurers had to boost their capital reserves by more than $15 billion to ensure they will be able to honor those promises.
Hedge Funds Step Up Customer Service
Hedge funds are singing a new tune when it comes to customer service. After losing 37% of assets in 2008 to poor performance and withdrawals, hedge funds are traveling to see clients, rather than have them meet in their offices.
More importantly, they are lowering fees, offering greater transparency, opening separate accounts to them and becoming more lenient on redemptions.
"For a while there, managers forgot that it was our money," said Brad Alford, head of Alpha Capital Management, which vets hedge funds for clients. "Now, investors are fighting back."
But some don't expect hedge funds to make the concessions permanent.
Discount Brokerages Up Brisk Business
Trading activity is reaching record levels at discount brokerages, as increasing numbers of mutual fund investors give up the ghost on long-term investing, The Wall Street Journal reports. About 20% of online investors, or 7.5 million people, have increased their trading levels, according to TowerGroup.
Indeed, this may be signaling new investor sentiment, since in previous bear markets, investors have retreated from all forms of investing, including stock trades.
"The psychology of the market is broken," explains Michael Parness, founder of Trendfund.com, an online trading community. "People just don't trust it" and see that most of the market's recent movements have been tied to government actions. Some investors are waiting until "free enterprise" returns and companies demonstrate solid earnings before committing to a long-term outlook.
As one investor, Mark Swenson, put it, "I could no longer stomach watching my money disappear. Right now, it's a traders' market-no long-term buying and holding."
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