Week In Review

Investors Held Steady During Turbulence

Across the board, executives from leading mutual fund companies reported during the Investment Company Institute's General Membership Meeting in Washington that investors held steady during market turbulence, with only 1% to 3% redeeming equity fund shares in the face of huge market drops.

American Funds surveyed its advisers and found that a mere 1% of their clients "left the markets forever" in March. At LPL Financial, 1% to 2% "got out in March," said Mark Casady, chairman and CEO. "Most are staying the course because of the market rebound. It's all about being there to be a great coach for your clients. You cannot overstate the value of advice."

"For the most part, retail investors stayed with their allocations, especially in the retirement space," said Mark Fetting, president and chief executive officer of Legg Mason, perhaps because investments are just one of their many concerns during the financial crisis, he said.

In the 401(k) plans that Vanguard manages, 3% of investors "ran for the exits" in the fourth quarter, versus 0.7% of those in a target-date fund, said Barbara Fallon-Walsh, a principal with Vanguard.

And despite the fact that many employers are either cancelling or suspending their 401(k) match, T. Rowe Price has not seen that affect investors' participation or contribution rates, said Cynthia Egan, president of retirement plan services. "Less than 2% of assets have moved through this whole period," she said. That has also been the case with the plans that Fidelity manages, said Scott David, president of workplace investing.

Putnam Investments did not experience redemptions until February, said CEO Robert L. Reynolds. The downturn "happened so quickly, it took people a while to react. Most hung in there through year-end," he said. "In February, equity redemptions were high, but the government really worked the issue, and people realized there won't be a depression."

Fidelity found that it was able to quell investors' concerns just by listening to them. On March 23, when the Dow rallied 500 points, 1.2 million investors contacted the fund company through the web, phone or in person at an investor center. On Oct. 10, when the Dow dropped more than 1,000 points, 2.4 million people contacted Fidelity. "Neither time were there many transactions," David noted. "Investors just needed reassurance."

Crisis to be Remembered For Generations to Come

Rather than looking toward a recovery, Richard Davis, chairman, president and CEO of U.S. Bancorp, said he is "looking for a new direction."

The financial crisis, which will be remembered for generations to come, Davis said, inevitably will change the way both the banking and the mutual fund industries do business. "Our customers are making adjustments," Davis said, during his keynote address at the Investment Company Institute's General Membership Meeting in Washington.

"Look at what each generation takes away from this," Davis urged. "Inertia is not the answer. The behaviors are not indicative of what they are thinking. Get in the heads of the people and find out what they are thinking. Will people still be saving [rather than spending or investing] in two years? It's a very important question."

Fidelity, BoA, Goldman Popular with Millionaires

Fidelity Investments, Bank of America and Goldman Sachs manage wealth for the largest percentage of U.S. millionaires, according to a survey by Fidelity.

Of the 4.1 million U.S. households with at least $1 million of investable assets, 37% have at least one account with Fidelity, according to the third annual Fidelity Millionaire Outlook. The Boston company would not specify the percentage of households that use BoA or Goldman Sachs, but it said they are second and third.

Gail Graham, an executive vice president for Fidelity Institutional Wealth Services, said consolidation in the financial services industry in the past year has left more millionaires using fewer providers, but most are remaining with their advisers.

"Some people are adding advisers as a way of getting a second opinion," Graham said. "I think clients are assessing the environment, but not taking any action right now when it comes to changing advisers."

Millionaires are "beginning to invest more and are reassessing their portfolios," she said. "They are not passive, but they are not necessarily switching firms yet." She said that some financial advisers are approaching wealthy individuals and saying, "Don't move all of your assets, but give me a try, too."

Commercial and private banks remain important channels for delivering wealth management to wealthy individuals, Graham said. And now that some banks own wirehouses, she said, "I fully expect banks will be an even more important channel."

The average respondent to the Fidelity survey, which was conducted in the first quarter, was 59 years old and had $3.5 million of investable assets and $306,000 in annual household income. But 46% of the group said they did not feel wealthy and were taking action to reassess and rebuild their wealth.

According to Fidelity, millionaires' household income has fallen 19% in the past year, their investable assets have fallen 19% and their real estate holdings have fallen 28%.

Fidelity polled more than 1,000 millionaire households nationally. It found that wealthy investors are interested in increasing their exposure to fixed-income and equity products. When asked which investment category promised the best returns for the next 12 months, 34% cited bonds, fixed income, certificates of deposit and money market funds, followed by individual stocks (28%). About a third (32%) said they planned to increase their exposure to fixed income, bonds and CDs over the next 12 months, and 31% said they would invest more in individual stocks.

Longevity Risk, Education Present Growth for 401(k)s

Education and longevity solutions are two of the biggest opportunities available to 401(k) providers, according to a study by String Financial.

And despite conventional wisdom that annuities and other mortality-contingent products cannot succeed on a meaningful scale in 401(k) plans, 30% of investors said they would "definitely" and 40% said they would "probably" be willing to give up leaving a greater inheritance if they could have a greater amount of lifetime income.

In addition, 71% said they were concerned about having enough income to meet their standard of living in retirement.

Thirty-four percent of respondents said that educational materials offered by their 401(k) plan didn't properly explain concepts, and 41% said the materials could be easily found elsewhere. Only 18% said the materials prompted them to make changes in their retirement plans.

While insurers are better positioned than mutual fund companies to offer longevity solutions, they will have to "make a critical shift to becoming solution-oriented organizations, as opposed to product-oriented business units," according to String Financial.

Execs Rethink Offerings In Light of Conservatism

As investors have grown more conservative, fund companies are rethinking their entire product lineups, Dow Jones reports.

The damage that 2008 did to individual portfolios-the S&P 500 is down more than 40% since its peak in October 2007-has wreaked total havoc on key industry averages, and that bad news is likely to resonate with investors for some time. Because of how the markets performed in 2008, the S&P 500's performance over the past 10 years through April 30 is negative 2.5%.

"Investors are bewildered," said Madeline Novak, president of Novos Planning Associates. "The mindset that we have worked under for the past 20 years has changed."

Thus, fund companies are likely to put greater emphasis on bond, money market, balanced, absolute-return, target-date, index and guaranteed income solutions.

Robert Reynolds, CEO of Putnam Investments, which launched a family of four absolute-return in January, believes competitors will do likewise, since the funds give investors a compelling reason "to get back in the market."

Pimco launched an investment-grade bond fund on March 31 called the Pimco Long-Term Credit Fund. "We see greater interest in bond funds because of the liquidity, diversification, limited downside risk and low correlation with equities that they currently offer," said Wendy Cupps, head of product management at Pimco.

Russ Kinnel, director of mutual fund research at Morningstar, agreed: "Under most scenarios, I think fixed income is going to be a growing area of interest for investors."

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