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Rating:Twitter? Unintended Consequences. Fund Leaders Share Their Thoughts Not Rated 0.0 Email Routing List Email & Route  Print Print
Thursday, May 06, 2010

Twitter? Unintended Consequences. Fund Leaders Share Their Thoughts

Reported by Sean Hanna, Editor in Chief

If the Leadership Panel at the ICI is any guide, the slow return by fund shareholders to equities, a reluctance to return to hiring and concerns over what may emerge from Capitol Hill are some of the key concerns of top leaders in the fund industry.

Greg Johnson, president and CEO of Franklin Resources, also touched on the major business trends, calling the current environment a "more normal environment for M&A." He explained that he is no longer seeing shops put into distress by the 2008 collapse looking for buyers. He added that the untying of distribution from manufacturing may also be a trend that is mostly played out.

"Before it was more of a selling culture than an advisory culture, today the advisory culture is much more important," said Johnson.

Johnson earlier slipped a quick aside on the hiring side that many in the industry may see as continued bad news. Franklin's leadership team is "more cautious, like most, about adding people right now," confided Johnson. None of the other executives on the panel -- Bridget Macaskill of First Eagle, John Walters of The Hartford or Bill McNabb of Vanguard -- took issue with Johnson's bleak assessment on current hiring.

Later, though, Macaskill confided that First Eagle has been able to hire very good portfolio analysts because "no one else was hiring them."

Johnson also confided his "surprise" at the slow return of mutual fund shareholders to equity funds even with the rebound in the stock market over the past year, though he noted that Franklin has been a beneficiary of the rush to bonds over the past two years.

Macaskill told the audience that she sees a change in the way mutual fund value is measured by advisors for their investors.

"There has been a shift in how advisors are thinking about their clients portfolios. A shift to absolute return and more flexible portfolios, Macaskill explained. She thinks that advisors are realizing that the asset allocation model they were using "did not stand up" over the past few years.

Picking up on the theme, Johnson told attendees that he sees more outcome-based solutions -- such as target date funds -- working in the marketplace.

"We are seeing more packaging and simplifying for the advisor, he added. Franklin is taking a look at each platform and is focused on become more consultative and gatekeeper-oriented.

Hartford's Walters also picked up on the trend. "The load side of the business is less as they [advisors] shift to wrap fees. The advisor is selecting a platform rather than a fund family for how they do their business," he said.

Active equity ETFs was one area where the panelists agreed their is more talk than potential.

"Frankly I do not see how an actively managed equity ETF will work," confided Walters. He explained that the full disclosure of the portfolio is needed by regulators to offer an active ETF, but that he sees no solution to problems such as front-running that the disclosure opens up. "We are not pursuing it now," he said.

Macaskill seconded Walters' concerns, quipping that her portfolio managers would rebel if she proposed sharing their portfolios on a daily basis with the public.

Johnson used the shift to indexing to get it what could have been a jab at Vanguard. Franklin, he explained, uses artistry to fill in the canvass rather than just "painting by the numbers." Vanguard's McNabb solidified his support of "paint by the numbers" kits in response.

Social networking is also a trend that the the quartet of executives was divided on.

"I don't get it," Walters confessed.

"I am even older than you, so I don't get it either," threw in Macaskill. She also wondered if future investors such as her twenty-something children are "going to require or want to meet directly or personally with an advisor."

Franklin's Johnson, though, already has a team working on figuring the issue out. "We have blogs with some portfolio managers. We have a marketing team that is very focused on this right now. Whoever gets this right it is a very efficient way to get to a big audience."

McNabb also said that figuring out the issue is something Vanguard is trying to stay on top of.

Regulatory Watch

Capitol Hill is also an issue that each of the CEOs is focused on. Hartford's Walters told the ICI members that he would like the emerging regulations to be "very carefully considered." He worries that in the rush to pass new rules, legislators and regulators will not fully consider the ramifications and leave the industry open to unintended consequences.

Johnson focused on 12b-1 fees, an area that he feels is "long overdue" for change. His idea is for regulators to change the name for the fee so that its purpose is more transparent for investors.

"We have to do a better job explaining it because it is an easy target when called '12b-1,'" Johnson explained.

McNabb also brought up the issue of money market fund reform, adding that shareholders value a stable NAV. Walters added that money funds are a source of funding for corporate America, making the issue fundamental to the economy.

Johnson touched on the question of whether fund firms will be allowed to continue to seed their own funds if the currently regulatory reforms goes through. 

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