Investors to Continue Seeking Fixed Income, Other Safe Funds

Investors will continue to be afraid of losing hard-earned money and gravitate to fixed-income and other safe investments, The Boston Consulting Group predicts. As a result, investment management firms need to offer new portfolios and, with fees on these indexed and fixed income offerings undoubtedly lower than aggressive, actively managed funds, they will be forced to cut costs even further.

Because firms lost 18% of assets in 2008, ending the year with $48.6 trillion in global assets, profits fell 34% last year. Profits will probably decline another 30% in 2009.

Despite the robust returns in the second quarter, said Kai Kramer, director of the global asset management practice, "Asset managers cannot be tricked by green shoots and must make sure they are ready if the crisis gets worse again, where firms see more massive outflows or another drop in the market."

To gain market share, firms should specialize, review how they pay managers and consider mergers. "Fund firms have to do the things they didn't dare think about," Kramer said. "You simply can't serve every investor in every way anymore."

Obama IRAs Could Raise $100 Billion in Five Years

One of President Obama's proposed financial reforms would require employers that do not offer a 401(k) to automatically enroll their employees into an IRA. If implemented, it would give the biggest boost to the retirement savings industry since the creation of the 401(k) in 1980, enrolling 40 million new investors and attracting more than $100 billion within five years.

It would require companies with 10 or more workers that have been in business for at least two years to participate, deducting 3% of workers' salaries and investing it very conservatively, in inflation-indexed savings bonds, money market mutual funds or stable value funds. Once the portfolio reaches $3,000, it would be moved over to a target-date fund.

Experts estimate that it would cover 40 million of the 75 million Americans who do not have access to a 401(k) or other defined contribution plan. Naturally, they applaud the retirement protection the measure would offer, but they fear that small businesses could balk at the cost of having to hire a payroll service or accountant to manage the IRAs. Others criticize the plan for not investing the money aggressively enough.

Ratings Agencies Revisit Money Market Funds

Despite the repercussions from the blowup of the Reserve Fund's Primary Fund, money market funds still have not properly addressed liquidity and credit quality issues, the ratings agencies believe, and as a result, they might strengthen their standards, The Wall Street Journal reports.

Fitch Ratings is looking at whether prime money market funds can retain triple-A ratings. Right now, sources at the company say, the funds are supported by the government through the Commercial Paper Funding Facility and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Once the programs end, on Sept. 18, the rating agency fears the funds could be as susceptible to a run as before.

Meanwhile, the Securities and Exchange Commission and the President's Working Group on Financial Markets are considering changes to money funds, including a floating NAV.

Government Spending, Capital Investment Expected to Lead Recovery

Just as the financial crisis is unprecedented, the recovery is also expected to chart new grounds, the St. Louis Post-Dispatch reports.

Government spending and capital investment will lead the way out of the recession, followed only much later by a return to robust consumer spending, according to experts. GDP growth will remain in decline this year and rebound only modestly in 2010.

Wells Fargo Senior Economist Gary Thayer believes the economy will contract 2.7% this year and then grow 2.1% next year.

Consumers are still deeply in debt, Baby Boomers realize they need to save more to be even remotely prepared for retirement, housing prices and sales are still down, and banks remain tight with credit.

As a result, the market will make a series of halfhearted advances and then retract, said Bill Greiner, chief investment officer at UMB Asset Management. However, he is bullish on equipment makers and computer technology companies.

Charles Rice of Rice Money Management believes that mutual funds tied to specific investment styles will falter in the coming months. Instead, he likes world allocation funds that have more leeway.

Advisers' Profits Rise 10%

In response to investors' interest in taking a comprehensive approach to their finances, financial advisers are moving even more broadly away from commissions to fees, and this is boosting their earnings by roughly 10%, the College for Financial Planning Annual Survey found in a survey of 390 advisers. Cerulli Associates assisted in the polling.

Advisers are on track to earn an average of $215,345 this year, roughly 10% more than $195,394 in 2008. While this is down 24% from the $283,079 they earned in 2007 and 7.5% from the $232,996 they earned in 2006, the 2009 profits are remarkable, given the market conditions.

Thus, the survey found that financial advisers are making more money, seeking more education, providing more holistic advice to clients and focusing on better customer service than a year ago.

"As people watch their retirement savings or child's college fund shrink, they are increasingly asking advisers for solutions to help live their lives, rather than simply grow their stock investments," said Bing Waldert, director of Cerulli. "That requires a more comprehensive approach with a greater emphasis on customer service and better training."

Thirty-six percent of advisers are providing clients comprehensive written plans, and an additional 46% provide clients with plans that are both written and unwritten.

In addition, 49% of advisers listed education as a key driver of success, up from 38% in 2008. Twenty-six percent of the advisers surveyed are fee-only, and 30% receive at least half of their revenue from fees.

The advisers said they are recommending record amounts of money market funds and cash but do expect to move more of their clients' portfolios over to equity mutual funds and exchange-traded funds in the coming months.

"We see a lot of reason to be optimistic in these survey results," said John Sears, president of the college. "Our industry continues to mature and adapt to people's needs. Advisers are getting away from a sales-based model and adopting a broader approach, and they are recognizing the value of education in making that transition."

9.5M Retirees Considering Re-Entering Workforce

Diminishing employment opportunities notwithstanding, 9.5 million retired Americans are considering returning to work at least part-time, according to a study by Charles Schwab. Also, 32% of currently employed Americans expect to hold onto their jobs and delay retirement.

Both choices carry significant implications and require careful planning. "The situation many Americans have found themselves in illustrates the importance of long-term retirement planning," said Rich Rosso, a financial consultant at Charles Schwab's Houston branch. "There are also a host of things people can consider to help smooth the ride."

Clients who are thinking about rejoining the workforce should consider stopping Social Security payments until after they stop working permanently, Rosso said. Clients can suspend benefits and repay what they have already received, according to the Social Security Administration. In this way, they can earn credits that increase their future benefit amount. Second, some expenses related to job hunting are tax deductible, so long as their total exceeds 2% of the job seeker's current income. Potentially eligible expenses include employment agency fees, resume preparation, phone calls and transportation, Rosso said.

Morningstar Introduces 10 New Fund Categories

Morningstar has added 10 new categories for its mutual fund classification system, six of them for commodities and four for sectors.

The new commodity categories are: agriculture, broad basket, energy, industrial materials, precious metals and miscellaneous. The new sector categories are: consumer discretionary, consumer staples, equity energy and industrials.

In addition, Morningstar has added commodities as a broad asset subclass to its six asset classes: U.S. stock, international stock, taxable bond, municipal bond, balanced and alternatives. Funds that correspond to this subclass will be benchmarked against the Morningstar Long-Only Commodity Index.

"The growing number of commodity funds and their increased usage prompted us to add these new categories," said John Rekenthaler, VP at Morningstar.

High-Yield Bond Funds Up 23% in First Half

Propelled by yields that have been at 18-year highs for the past nine months, high-yield bond funds rose 23% in the first half of the year. But managers of the funds don't think those returns can be sustained. "There's been a huge rally in high yield, with everyone repricing out the depression scenario," said Fred Hoff, manager of the Fidelity High Income Fund, which rose 26% in the first half of the year. "I don't think we're going to double that return this year, though [it] should be very nice."

81% of Active Investors Bullish or Neutral on Mart

Active traders are largely optimistic about the market and the economy, Charles Schwab found in a survey of 260 investors. Eighty-one percent said they are either bullish or neutral on the market over the next six months, virtually unchanged since the last survey in February.

Fifty-three percent expect the economy to show clear signs of recovery in the next 12 months, and 63% plan to increase their trading activity in the next six months, up from 49% in February.

As a way of better managing risk, 28% said exchange-traded funds are their preferred investment vehicle, up from 24% in February.

"The latest survey results show that trader sentiment is relatively positive despite volatility in the financial markets," said Kelli Keough, vice president of Schwab investor services. "We're seeing continued confidence in active investing as traders further educate themselves, employ increased risk management and use more sophisticated trading strategies across a diverse range of investment vehicles."

Economists See Recession Nearing an End, GDP Growth of 2% in 2010

The economy will emerge from the recession in the second half of the year, but growth will be a tepid 2% in 2010, a survey of 23 leading economists by BNA found. By comparison, the U.S. economy grew an average of 3.1% a year between 1995 and 2004. With growth so slow, it won't be able to put an end to unemployment, said the economists, who predict it will rise from 9.4% in May to 9.9% next year.

Thus, most consumers won't recognize the end of the recession until the middle or latter part of 2010. The economists don't expect the Federal Reserve to ease its monetary policy until next year, when the Fed funds rate will reach 1%. They also said that the glut of housing inventory is beginning to ease.

(c) 2009 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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