Since the recession hit two years ago, 80% of mutual fund firms have laid off tens of thousands of people, as total assets under management dropped from $11.999 trillion at the end of 2007 to $10.688 trillion as of October. In line with this 11% decline in assets, fees have undoubtedly plummeted by at least $1 billion a year.

While the S&P 500 delivered a remarkable 24.9% return last year, the fact of the matter remains, the stock market is still down 30% from its peak in October 2007. This is why investors in 2009 remained stock-spooked, yanking $36 billion from U.S. equity funds and socking $357 billion into bond funds.

As dismal as this picture is, it could have been far, far worse. Chalk it up to the inertia of 401(k) investors-whose balances were not totally decimated by the sheer fact that their steady, blind contributions kept them from drowning in a sea of red-and the market's miraculous rebound.

Investors are likely to remain cautious, discerning and demanding in 2010. They, their advisers and 401(k) sponsors will increasingly seek out funds with lower fees and consistent returns from high-quality, trustworthy companies. Safe, boring and sure will continue to be the mantra of the New Year. Annuities, absolute-return, international equity and exchange-traded funds will gain market share. And the old diversification standby will return, although assets will be far more broadly allocated than ever before.

More investors, perhaps with the help of enterprising 401(k) advice start-ups, will begin to seek out actual returns data-not numbers boosted by ongoing payroll contributions.

Less will mean more. More than 2,000 funds were liquidated or merged in 2009, one of the biggest years for consolidation on record, and the weaning out of the weak over a preference for stronger performers will carry on.

All of this will help to restore investor confidence, but the most important development in 2010 will be economic repair. With corporate revenues projected to move back into the black and inventory cycles and stimulus money finally taking hold, retail investors will return to stock funds, restoring year-over-year growth to the mutual fund industry.

2010 will be a year of getting real.

As Wharton Professor Jeremy Siegel put it, "Earnings growth [in 2010] will be stronger than anticipated and break the all-time high for the S&P. With $90 in earnings and a 15 P/E ratio, you get 1,350 for the S&P. That is conservative."


(c) 2010 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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