Capital Markets Committee Wants Mutual Fund Taxes Deferred

The Committee on Capital Markets Regulation released a report by Harvard Law School Professor John C. Coates recommending that mutual fund investors who hold less than 2% of a fund's shares not be taxed on capital gains until they sell those shares. The current tax scheme puts U.S. funds at a competitive disadvantage, Coates said. While the mutual fund industry in the U.S. is the world's largest, its growth rate lags behind domestic and foreign competitors, the professor said.

In addition, Coates wants investors to be able to realize capital losses in the same way they realize capital gains and to be able to invest in foreign funds without incurring additional U.S. taxes.

Committee President Hal S. Scott, also a professor at Harvard, said, "Compared to E.U. counterparts, U.S. mutual funds are taxed less favorably and regulated less intelligently. The 70-year-old structure of U.S. regulation, unlike the more modernized E.U. system, makes the success of U.S. mutual funds dependent on the resources, responsiveness and flexibility of an underfunded, under-resourced and outdated Securities and Exchange Commission."

Schwab in Big Sales Push With Lower Fees

While competitors are roiled by the market turmoil and the market faces lower returns for some time to come, Charles Schwab is proactively cutting fees, lowering investment minimums and offering popular exchange-traded funds to gain market share, Barron's reports. And the firm says the strategy is already paying off, with investors defecting from Fidelity and Vanguard.

Chairman Charles Schwab said he expects low returns for some time, along with higher inflation and tight credit due to government borrowing. Given this highly competitive environment, the firm is doing whatever it can to appeal to cost-conscious, risk-averse investors.

Whereas Vanguard requires a $3,000 minimum to invest in the Vanguard 500 Index Fund and charges 15 basis points, Schwab cut the fee on its Schwab S&P 500 Index Fund to nine basis points and lowered the minimum to $100. Randy Merk, president of investment management services at Schwab, called the move "a call to action to get back into the market."

"We're seeing a nice little pop," Merk said. "We've seen exactly what we're hoping to see. We've seen transfers from Vanguard and Fidelity based on price and minimum investment."

In addition, Schwab has filed to offer its own suite of ETFs, which Chairman Schwab calls "a major beginning for us."

Certainly, the moves come on top of a solid 2008 at Schwab, thanks to its own money market funds, which took in $113 billion-more than Citigroup, Morgan Stanley, Merrill Lynch, E*Trade and TD Ameritrade combined. That inflow was critical, for with $242 billion in assets under management, Schwab is now the nation's 13th largest fund complex.

17% of 401(k) Sponsors To Seek Out Index Funds

Employers are increasingly looking to add index funds, exchange-traded funds or other low-cost selections to their 401(k) plans, according to a survey by Hewitt Associates. Seventeen percent said they are likely to replace at least one of their actively managed funds with an index fund this year, up from 8% who said so a year ago.

This could mark a big change for the 401(k) industry, which currently has 90% of its $1.5 trillion in assets in actively managed funds. Of course, this won't change overnight, but sponsors' appetite for low-cost funds is unquestionably growing. And this is despite the revenue-sharing payments by some actively managed funds to plan sponsors as an incentive for including them on the platform.

Regulators are taking a hard look at 401(k) fees, and there is a bill in the House that would require administrators to clearly disclose fees. This could encourage more plans to include lower-cost funds, said Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee, which sponsored the bill. Defined contribution plans "should not just be the happy hunting grounds for fees and commissions," Miller said.

Citing Strong Sales, MFS Plans to Add Salespeople

MFS Investment Management said it will add analysts, relationship management executives and salespeople to its staff, as a result of strong sales this year.

Investment management areas the firm is targeting include new equity research analysts stationed in emerging markets, as well as specialists in quantitative analysis and tactical asset allocation. Within distribution, MFS will be expanding in relationship management, dealer relations and sales to support the firm's expanding retail and institutional sales.

"MFS is a major contributor to the Sun Life Financial group of companies," said Kevin Dougherty, president of Sun Life Global Investments. "MFS has built unique global research and distribution platforms that align the firm very strongly with clients. Its excellent historical investment performance is a result of its distinctive team-approach to managing money." In addition, Dougherty said, the firm will spend $50 million to expand the firm's infrastructure.

S&P 500's 35.2% Decline In 2Q09 Earnings Fails to Deter Analyst Ethusiasm

Second quarter earnings of companies in the S&P 500 are projected to be down 35.2%, but the results are not as bad as analysts had predicted, Investor's Business Daily reports. Thus, many fund managers and analysts are expecting growth to return in the fourth quarter and continue into the first half of 2010.

"So from that standpoint," reasoned John Butters, director of U.S. earnings research at Thomson Reuters, "this season is encouraging. One way of looking at it is that, year over year, this [simply] is not a good earnings season."

Bill Greiner, chief investment officer at Scout Investment Advisors, said, "What I'm excited about, and why the market moved up [last] week, is statements by companies that things are getting better. They're saying costs are under control and the business environment is improving."

With only 55 companies in the S&P 500 having reported earnings so far, it's early in the game, but Greiner expects the number of companies that outpace analysts' consensus to be two-to-one. Indeed, so far, 39 companies, or 71% of the 55 reporting, have beaten expectations.

SEC, States in Auction-Rate Securities Settlements

As the Securities and Exchange Commission and state regulators Monday announced another settlement in their ongoing auction-rate securities probes, with TD Ameritrade, broker Charles Schwab fought back against related allegations brought by New York Attorney General Andrew Cuomo.

Schwab denied any wrongdoing in response to a letter sent by Cuomo's office notifying the brokerage that it faced fraud charges if it did not reach a settlement that provided retail investors of ARS with liquidity.

"The attorney general's allegations are without merit," Schwab said in a statement. "They unfairly lay blame on our company for an illiquid market and improper behavior by the large Wall Street firms that created them and then, despite their obligations, stopped supporting auction-rate securities." The firm went on to say that to blame it for the industry's larger problems is "preposterous."

In February 2008, the auction-rate securities market collapsed as banks that had been propping up auctions allowed them to fail, leaving investors holding billions of dollars worth of illiquid securities and issuers paying penalty interest rates as high as 20%.

In nearly a dozen previous settlements in which underwriters and broker/dealers agreed to buy back billions of dollars of illiquid ARS, Cuomo stated that underwriters and broker/dealers knew of growing risks to the ARS market as early as August 2007 but continued to market them to investors even as they took steps to protect their firms.

In the letter sent to Schwab, Cuomo's office alleged that Schwab brokers "repeatedly misled investors about the risks of investing in auction-rate securities." The letter cited recordings in which Schwab brokers told investors that the securities were safe short-term investments. The brokerage failed to adequately train its brokers to ensure they had a basic understanding of the securities before selling hundreds of millions of dollars of them to investors and it knew about auction failures in the fall of 2007, the attorney general alleged.

Schwab defended its practices. "Schwab brokers, while trained to levels beyond industry standards, could not be expected to foresee and disclose market risks that even regulators and market experts did not foresee, or that were intentionally veiled by the underwriters," the firm said.

Schwab said regulators had let the Wall Street firms that created the securities "off the hook" by not requiring them to repurchase ARS that downstream investors bought.

Variable Annuity Investors Celebrate Guarantees

Say what you will about variable annuities; they returned about 6% or more for investors in 2008, while others saw 40% or more of their holdings wiped out, The Wall Street Journal reports. In fact, they were one of the best investments of the past decade, due to their minimum guarantees.

All during the bull market of the 1990s, critics assailed insurers for selling variable annuities with additional guaranteed riders. However, these guaranteed minimum variable annuities appeared to be brilliant investments in last year's market massacre.

Some of these funds pay guaranteed lifetime income based on past market gains, even in years when the market does poorly.

As one 67-year-old investor whose variable annuity still paid out last year said, "When I watch friends bemoaning the market and experiencing real pain, I feel guilty saying anything. I know that I'm doing quite well." For Thomas Hamlin, a broker with Raymond James Financial, the investments make sense because "people are sick of sliding back down to the base camp after they felt like they were about to put their flag in the top of the mountain. It's better than the alternative: mutual funds with no downside protection."

PIMCO Trims Holdings In Financial, Junk Debt

PIMCO is trimming its exposure to the debt of financial services companies along with high-yield bonds, apparently believing a correction is in the wings.

In fact, in its latest quarterly report, PIMCO says it thinks the recovery could be "W"-shaped, with the effects of the stimulus plan and consumer spending fading in 2010.

Instead, the company favors high-quality companies and diversification outside the U.S.

With high-yield up 31% so far this year, the rally "may be overdone in some segments," Greg Hopper, senior portfolio manager at Artio Global Investors, told The Financial Times. "It is more dangerous now, and there is still at least as much of a chance of bankruptcy."

Fixed Annuity Sales Soar 74% in First Quarter

Fixed annuity sales jumped 74% to a record $35.6 billion in the first quarter, according to LIMRA. One of the reasons investors are flocking to fixed annuities is because the five-year rate is currently around 3.3% to 3.5%, whereas a bank CD will yield only 2.13%, according to data from and


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

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.