Fund performance

Finally, insiders launched candid criticism at the mutual fund industry last week, to help it respond sensibly to the economic meltdown and reposition itself to regain investor trust.

Thanks to shady money managers like Bernie Madoff who ruined it for everyone, the lucrative and surreptitious heydays of hedge funds may be gone for good.

From recommending different products to rethinking their risk management strategy, some financial advisers say they have changed their approach in the wake of last year's market slump. Indeed, many retail investors remain on the sidelines of the stock market, with assets in equity funds only half of what they were in late 2007 before the economic crisis began and the market lost 56% of its value.

Finally, insiders launched candid criticism at the mutual fund industry last week, to help it respond sensibly to the economic meltdown and reposition itself to regain investor trust.

NEW YORK - Many financial advisers are feeling extremely guilty for failing to protect their customers from the 30% equity drop in 2008, but it will take more than remorse to earn clients' forgiveness.

Money market fund assets fell by $25.22 billion to $3.764 trillion in the week ended June 3, the Investment Company Institute said.

Capital Group will cut 9% of its global workforce of 9,000, or 820 jobs, this month. This will be American Funds’ parent company’s second round of layoffs, in response to a 29% decline in assets from $1.2 trillion to $850 billion. The company eliminated 500 jobs in January.

The mutual fund industry may be waiting in vain for inflows to return once the stock market shows steady signs of life, Dave Swanson, founder and managing principal of SwanDog Strategic Marketing, warns in a new whitepaper, “How to Save the Mutual Fund Before It’s Too Late.”As he rationalizes it, “In terms of rebuilding lost trust, here we come again, asking fund investors and sellers for another chance for the second time in the last seven years.”At age 85, the mutual fund value proposition needs revisiting. Otherwise, it will continue to lose market share to exchange-traded funds and other index and passively managed products, along with quantitative models and guaranteed investments “where investors and advisers have more control over the outcome.”The most important thing that fund companies can do, Swanson says, is give back portfolio managers their stock picking powers, so that they are not constrained by strict and narrow investment mandates that tie them to style and capitalization constraints.Second, he calls upon fund companies to revisit risk management and make this an important part of every customer communication.Fund companies need to make a case for active management by demonstrating greater accountability through performance fees that tie management fees directly to results, he adds.In addition, the tax structure is no longer competitive compared to managed money and ETFs. “Years like 2008, when many investors faced a taxable event despite deep losses, only further undermine investor trust and confidence in funds,” he said. “Now is the time to push for change, while we have capital losses on the books.”In conclusion, Swanson calls upon fund companies to respond in real time to market and economic conditions and to overhaul their shareholder communications completely. “Demand that your marketers and product team put forth a plan for how they are going to adapt their efforts to today’s environment and how they will start telling your story more effectively,” he says.

With his own fund down 35% in 2008, Bob Rodriguez, manager of the FPA Capital Fund, says the industry’s performance last year “stunk,” MarketWatch reports.“We managers did not deliver the goods, and we must explain why,” he told colleagues at the Morningstar Investment Conference.Rather than sticking with mutual funds’ traditional investment discipline of being fully invested and tracking a benchmark, Rodriguez said, fund managers should have wakened up to the magnitude and “extraordinary risk” of the financial crisis and taken a different tack.“Whether in stocks or bonds, it seems as though the same old strategies were followed: be fully invested and don’t diverge from your benchmark too far,” he said. “If active managers maintain this course, I fear the long-term outlook for their funds, as well as their employment, will be at high risk.”Funds must adjust their investment mandates so that they will be better focused on macroeconomic conditions and be able to respond to adverse market conditions in the future and retain investor trust, he urged.“A more focused strategy will be necessary to excel,” he said. “If active managers continue to adhere to their old practices, we should see a contraction in the active mutual fund management universe in the next five to 10 years.”

Putnam Investments, after being hit by the market-timing scandal, poor performance and the loss of 75% of its assets, is “starting to turn around,” Great-West Lifeco CEO Allen Loney told Bloomberg. Great-West acquired Putnam from Marsh & McLennan Cos. for $3.9 billion in 2007.

Older workers are much less confident about the outlook for their retirement security than they were two years ago, according to a survey of 2,200 workers by Watson Wyatt. Understandably, those with a pension plan are far more confident than those handling their own retirement savings through a 401(k).

With yields on money market funds dropping to all-time lows and more fund companies absorbing fees to prevent breaking the buck, even then, performance is an issue for investors, The Wall Street Journal reports. As a result, bank savings accounts that yield 2% on average are attracting more money.

Vanguard will be merging the $6.7 billion Vanguard Treasury Money Market Fund into the $21.8 billion Vanguard Admiral Treasury Money Market Fund in August, and it has already closed the Vanguard Federal Money Market Fund to new accounts and additional purchases.

Investors’ unease with the stock market, despite its 40% rise since early March, does not augur well for the mutual fund industry, the Chicago Tribune reports; assets in equity funds remain at half the level they were before the crisis began in late 2007.

Although credit markets are improving, money market funds are struggling to deliver positive returns, and as a result, since late last year, nearly all money funds, perhaps as many as 90%, have been waiving fees to avoid breaking the buck, The Wall Street Journal reports.

From recommending different products to rethinking their risk management strategy, some financial advisers say they have changed their approach in the wake of last year's market slump.

In a challenge to one of mutual funds' strongholds, exchange-traded fund providers are targeting defined contribution plans.

How far the 401(k) has come since employers first introduced the savings plan in 1981. And how far it has yet to go. 401(k)s, I predict, will become universal in our lifetimes, supplanting all forms of pension plans.

While index funds already have a place in the lineup of most 401(k) plans, a proposed federal mandate to require at least one index fund option in these plans is intrusive and unnecessary, according to industry experts.

After several failed attempts, the Securities and Exchange Commission is again revisiting the contentious debate on shareholder proxy voting.