Fidelity Reduces Profit Goals for Adviser Services

Fidelity Investments Chairman Edward "Ned" Johnson has told the firm's adviser services division to reduce its profit margin targets so that the company can use the money to improve its custody platform to boost its market share among advisers, Investment News reports.

Johnson made the decision since the company is not public and does not have to answer to shareholders about sacrificing profits to reinvest back in the business, said Jack W. Callahan, president of Fidelity Registered Investment Advisor Group.

"Where the privately held [nature of Fidelity's ownership] comes in is that Ellyn [McColgan, president of distribution and operations,] and Ned say, OK, we're going to allow you to reduce your margins because we're going to invest a lot of money in your technology budget," Callahan said.

Industry insiders said that Fidelity is looking to upgrade its custody platform to compete with Charles Schwab, which oversees $545 billion in custody assets, versus Fidelity's $277 billion.

Callahan said he expects the platform to be strengthened within four years, although he believes it may take longer to boost assets. "Our technology budget is four times what it was four years ago," Callahan said. "I know what Schwab's number is, and [ours is] significantly higher than Schwab's, and it's being spent in all three businesses [trust, third-party administrators and advisers]."

But Schwab isn't taking the threat lying down. "We plan to continue to spend what it takes to deliver a great platform to advisers," said Charles Goldman, president of Schwab Institutional. "The key for us is the leadership position we have in the industry and our ability to deliver services to advisers to help them grow their businesses. You can't buy leadership with technology."

Few Very Wealthy Invest In Mutual Funds, ETFs

Although many mutual fund companies pursue wealthy customers, they are likely to have a hard time winning them over, as the very wealthy prefer to invest in hedge funds, private equity and start-up companies, The Wall Street Journal reports.

A report from Prince & Associates found that the wealthy, those with between $500,000 and $1 million to invest, do flock to exchange-traded funds and mutual funds, with two-thirds investing in ETFs and more than half in mutual funds.

But their tastes diverge at the $5 million to $10 million mark, with only a scant 1% investing in mutual funds and 17% in ETFs. Among those worth $20 million-plus, none invest in mutual funds and only 1% in ETFs.

Instead, among those with $20 million or more to invest, more than a third invest in start-up companies and two-thirds in hedge funds.

Major Indexes' Returns Put Enhanced ETFs to Shame

With the major indexes performing so well, enhanced exchange-traded funds are having a hard time making a case for themselves, the Associated Press reports.

Portfolio managers of enhanced ETFs are going to have to make some smart calls if they hope to compete against regular ETFs and index funds, which are not only offering strong performance right now but are commonly sought for their lower fees and tax efficiencies.

The S&P 500 Index reached a record high it has not seen since 2000. Likewise, the Russell 2000 and Dow Jones Industrial Average indexes have also been continually reaching record highs for a number of months.

Enhanced index funds very often invest in smaller companies that fall outside of the index due to the outsize gains they can deliver, said Joel Dickson, a principal at Vanguard Quantitative Equity Group. "One of the reasons that these types of strategies have become so popular in recent years is because they've performed well," Dickson said.

But Tom Roseen, an analyst with Lipper, said investors are better off holding enhanced ETFs in the short term. "If you're pretty good at calling market rotations and you have the knack to do that, then I think enhanced index funds can work," Roseen said. "They're made for people who do want to place a bet. Certainly, this is not for the person who just buys and holds."

Active' ETF Filings Show Scant Differences in Funds

Two asset management firms are giving it another try with the Securities and Exchange Commission to introduce actively managed exchange-traded funds, but the funds' difference from existing enhanced index, or semi-active ETFs is only subtle, The Wall Street Journal reports. And that is exactly how they hope to win SEC approval.

AER Advisors, an affiliate of Alpha Equity Research, proposes using a rules-based system to pick stocks and announcing changes to its portfolio once a week on Fridays. XShares would announce its holdings from the previous day after the market has closed.

Half of S&P 500 CEOs Earn $8.3 Million-Plus

The chief executive officers of the companies listed in the S&P 500 Index earned a combined $4.16 billion in 2006, with half raking in more than $8.3 million, the Associated Press reports. Leading the pack is Yahoo CEO Terry Semel, who earned $71.7 million.

No. 2 on the list is Bob Simpson, CEO of XTO Energy, who took home $59.5 million, followed by Ray R. Irani, CEO of Petroleum Corp., who reaped $51.8 million.

And the top 10 earners took in more than $30 million apiece.

While the lowest-paid executive was James Sinegal, CEO of Costco Wholesale, with a salary of $411,688, he owns about $1.3 billion in Costco stock.

Investors Optimistic About Market: Corporate Insight

A survey of 1,000 investors by Corporate Insight found that eight out of 10 expect the stock market to rise within the next 12 months by an average of 7.2%.

"In addition to asking investors a series of questions related to their online experiences with their brokerage firms, we also wanted to find out their opinions on where they think the market is going over the next year," said Peter Ellison, chief executive officer of Corporate Insight. "When we last asked this question back in 2004, investors forecasted a rise of 9.4%, and the market actually went up 10.7%. It will be interesting to see how close they are this year."

Ellison also noted that despite their sex, age or degree of wealth, all of the respondents were equally optimistic. "The only sub-group that held a slightly less rosy view was bond investors," he said, "but that's to be expected. I believe the nature of bond investors is to be a little more cautious than stock investors."

Money Continues to Pour Into Chinese Mutual Funds

Two mutual funds that came to market in China last Monday raised $3.3 billion in a single day, Reuters reports. They are offerings from GF Fund Management, which raised 16 billion yuan, and Fortune SGAM, a division of Societe Generale, which took in 10 billion yuan.

Chinese regulators had unofficially capped the maximum amount a fund can raise to 10 billion yuan but recently eased the rules hoping that institutional money will come into the marketplace and thereby stabilize it.

"Quite a lot of retail investors were dealt a heavy blow by the May 30 crash," Shanghai Securities News reported. "This prompted some of those investors to dump stocks in favor of funds."

The benchmark Shanghai index fell 5% in the last two days of May after the government tripled the trading tax to 30 basis points.

Two other funds will also be launching this month, one from Invesco Great Wall Fund Management and another from Yimin Asset Management. The four funds are expected to raise a total of $5.9 billion.

Rising Interest Rates Could Quell Buyout Boom

Creeping interest rates may finally test the much-discussed recent run on mergers and acquisitions, according to The Wall Street Journal. That could be good news for some mutual fund investors.

For one thing, rising rates will increase the cost of borrowing. Standard & Poor's leveraged commentary and data and Lehman Brothers data suggest that buyout companies are looking to sell as much as $250 billion in junk bonds in upcoming months to fund deals, while slumping stocks make sell-offs less attractive.

To make matters worse, pension plans, which had been investing in lock-step with private equity, seem to have pulled back, while shareholders at target companies have gotten more aggressive, increasing the premiums they demand.

Among those shareholders are mutual funds, including Fidelity Investments. In May, Fidelity forced equity firms Thomas H. Lee Partners and Bain Capital to increase their bid for Clear Channel Communications. Highfield Capital Management, a hedge fund based in Boston, joined Fidelity in the fight.

Biomet, a company that manufactures artificial hips, knees and shoulders, was offered a $10.9 billion buyout from Blackstone Partners, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts and TPG. After Institutional Shareholder Services led a challenge to the offer, the group of investors upped the ante by $500 million.

"Investors right now can't imagine how the [leveraged buyout] boom would end," said Richard Bernstein, a stock strategist with Merrill Lynch. But in a note to clients, he wrote that rising interest rates and slowing stock markets "could do the trick."

Mutual Funds Scale Back Cash Reserves to 3.6%

Over the past several months, mutual fund portfolio managers have been scaling back their cash reserves, holding fully invested, diversified portfolios, The Wall Street Journal reports.

"Cash levels are plunging to what might be their lowest levels of all time," said Bank of America Strategist Thomas McManus. At the beginning of May, equity funds had only 3.6% of their assets in cash.

"Fund managers now seem less prepared for potential weakness," McManus said. "These days, cash is more of an operational decision [than a defensive hedge] on many portfolio managers' minds."

Because funds are successfully focusing on their specific investment niche or style, fewer are using cash as a strategy, McManus said. "In fact, they want to keep cash as tiny of a position as possible," he said.

In addition, he noted, many funds are putting limits on how much cash they can hold. And with an increase in the number of index funds that track a set benchmark, cash holdings are also decreasing.

Should a fund need to honor redemptions, they can turn to lines of credit at other financial institutions, said Ray Benton, a financial adviser in Denver. "Cash is seen as more of a drag these days by a majority of stock fund managers. You can see that in the fact that more funds are using hedge-like strategies these days as an alternative to cash."

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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