Migration tobond fundsboosts Pimcoand Vanguard

While it has been said thata rising tide carries allboats, some US mutual

fund groups prospered more thanothers during the rally that beganafter the market bottomed inMarch 2009.

Investors poured more than$395bn into bond funds fromMarch 31, 2009 to the end of Feb-ruary and only about $24bn intoequity funds, according to Invest-ment Company Institute data.

Money market funds shed about$900bn during that period, drop-ping from $3,800bn to $2,900bn.Given the massive flows into bondfunds, groups known for having asolid fixed income line-up havedone unusually well.

“Most of the players with largenet inflows benefited from a dis-tinct asset class preference phe-nomenon,” says Jeff Keil, a princi-pal of consulting firm Keil Fiduci-ary Strategies.

“Bonds, indexed products,exchange traded funds, and inter-national tended to get the lion’sshare of flows.”

Vanguard was in the lead interms of net long-term flows, withan estimated $96bn going to funds

approximately $32bn in net newflows, coming in a distant third inthe race for new assets. The firm’slong-term assets under manage-ment grew from $51bn to $102bn.

Jed Laskowitz, managing direc-tor, head of global strategic rela-tionships at JPMorgan, says mostof the flows in 2009 went intofixed income products. “A lot ofthat had to do with how well weperformed through the difficultperiod in 2008 and the strength ofour fixed income lineup reallyacross sectors,” he says.

In particular, JPMAM saw flowsinto its multi-sector income cate-gory. For example, its StrategicIncome Opportunities fund wasthe fastest growing fund in its cat-

OverviewBeagan Wilcox Volzlooks at the success ofthe leading companiesduring the market rally

egory in 2009, taking in $7.5bn inassets for the year to March 31,Mr Laskowitz says. The fund,launched in 2008, has $8.7bn inassets, according to Morningstar.

Franklin Templeton gained anestimated $26bn in net new assetflows in the year to March 31. Itfinished that period with $298bnin long-term assets under manage-ment – an increase of $97bn.

“We’ve always had a verystrong franchise in fixed income

Continued on next page

from the market’s nadir to a yearlater, according to Morningstar.(Morningstar’s long-term flowdata exclude money market andclosed-end funds, ETFs and varia-ble annuity assets.)

Vanguard’s numbers, whichinclude ETFs, show that well overhalf of Vanguard’s more than$130bn in new US-based flowswent into bond funds, and thegroup had a total of $1,400bn inUS-based mutual funds at the endof March, says Michael Miller,managing director of Vanguardplanning and development.

Mr Miller credits Vanguard’ssuccess in part to the fact that itoffers a broad line-up of funds andis diversified in terms of its clientbase, with roughly 50 per cent ofits assets coming from institu-tional investors and 50 per centfrom retail investors. Despite theattention – and flows – that thegroup’s bond funds receive, MrMiller emphasises that equityfunds make up about 60 per centof its US assets, while bond fundsconstitute about 30 per cent ofassets and money funds 10 percent.

Pimco, the bond manager, isplaced second in terms of net newflows, with an estimated $92bngoing into its long-term funds,according to Morningstar data.The firm grew from $223bn inassets under management at theend of March 2009 to $356bn ayear later.

In a major coup, JPMorganAsset Management brought in

This report was written by theteam at Ignites, a FinancialTimes service. Ignites is anonline daily publicationcovering the mutual fundindustry. For a free trial,visit www.ignites.com

FTfmBill Butcher

FINANCIAL TIMES SPECIAL REPORT THE US MUTUAL FUND INDUSTRY | Monday May 3 2010

Bill Butcher

2 FINANCIAL TIMES MONDAY MAY 3 2010

Migration to bonds boosts VanguardContinued from page 1and between municipalbonds and corporates andhigh yields all of thoseareas have done extremelywell,” says Greg Johnson,president and chief execu-tive of Franklin Resources.The group’s “big story”, hesays, has been its globalbond funds, which havebeen “instrumental” to itsgrowth over the past fewyears.

Fidelity gained $20bn innet new flows over thesame period. Factoring incapital appreciation, thecompany’s net new assetsfor the period reached$267bn, bringing the totallong-term assets to $772bn.

Including its money mar-ket funds, which are nearly$500bn in assets, Fidelityhad $1,200bn in assets

under management at theend of February, accordingto ICI data.

Vincent Loporchio,spokesman for Fidelity,says the group calculatesits flows as being closer to$28bn. Mr Loporchio alsoemphasises performance:“Fidelity’s mutual fundsacross all asset classes, onan aggregate, asset-weighted basis, beat 70 percent and 69 per cent of theirpeers for the trailing one-and three-year periods,respectively.”

Among the biggestgroups, American Fundswas the only one with netoutflows for the year toMarch 31. It lost an esti-mated $16bn in net redemp-tions, according to Morning-star data. Yet the group’slong-term fund assets grew

by $265bn to $933bn duringthat period.

Chuck Freadhoff, spokes-man for Capital Researchand Management, theadviser to the funds, saysall equity funds – not justAmerican’s – saw outflowsduring this period and thatthe $16bn figure is a smallpercentage of total assets.

Russel Kinnel, Morning-star’s director of mutualfund research, says theinteresting story for the

rest of the year for theindustry is going to be USequity funds, given theirincreasing returns.

“It will be interesting tosee how much flows comeback and where they’regoing,” Mr Kinnel says.

He thinks AmericanFunds should at least beable to cut its rate ofoutflows with the shift.

Some fund groups havebeen trying to prepareinvestors for a changingenvironment of rising inter-est rates and renewedstrength in equities, whileof course underlining theappropriate product offer-ings in their lineup that fitthis scenario. FranklinTempleton’s Mr Johnsonpoints to the group’s latestmarketing campaign called“2020 Vision: The Case for

Equities in the DecadeAhead.”

The group believes thereis a significant amount ofrisk in overweightingtoward fixed income, hesays, and accordingly, it istrying to get investorsfocused on the long view.

JPMorgan has hit themarket with a road-showthat will run a total of 19weeks in 40 cities duringwhich it discusses withadvisers the importance ofclients taking on someequity risk.

“Clearly with marketsrebounding, and for clientsto meet their long-termgoals, they’ll have to getback into the equity mar-kets and we’ve been provid-ing a lot of support to themto do that,” says MrLaskowitz,

‘It will be interestingto see how muchflows come back [toequities] andwhere they’re going’

Planning for the boomers and beyond

Investment companies willhave to look far ahead tosee beyond the wealth ofthe baby boomers, but theirsuccess after the loominggenerational shift maydepend on the strategiesthey begin deploying today.

To capture new sources ofassets, mutual fund groupsand advisers must developrelationships with a clientbase that increasinglyfavours flexibility and yieldover net relative returns,say observers.

The boomer generation –born between 1945 and 1964– will continue to be a dom-inant driver of the investinglandscape for at least thenext 15 years, says SalimRamji, a partner at McKin-sey. Even through 2025,those who are now 50 yearsold and older will accountfor the bulk of the networth in the US. After thatinflection point, GenerationX – born between 1965 and1984 – will become the larg-est investor segment.

“But it’s still about 18years before that happens,and in advance of that hap-pening, both of these seg-ments are still good growthsegments,” says Mr Ramji.

While the boomers willultimately shift from accu-mulating savings to draw-ing down their assets,

outflows will be gradual.Benjamin Poor, a director

with strategic research pro-vider Cerulli Associates,says the boomers will con-tinue working longer thanmost people think. “There’sgoing to be a dampening ofthe floodgates of moneyleaving whatever retire-ment vehicle the investorswere in,” he says.

Most of those assets arelikely to transition into dif-ferent account structures,rather than leaving themarket all at once.

Observers recommendgroups develop new invest-ment tools – or learn to fitwithin a new investmentframework – to cater to thechanging needs of babyboomers, as well as tothe growing needs ofGeneration X.

Broker-dealers and recordkeepers in the defined con-tribution market, such asSchwab and Fidelity Invest-ments, will have an advan-tage in holding on to transi-tional assets, says Mr Poor.Even as the boomers drawdown their assets, thosefirms can assert their influ-ence by encouraging lumpsum investments into theirindividual retirementaccounts (IRAs) and othervehicles.

But on the product manu-facturing level, the transi-tion will also require man-agers to innovate in orderto deliver a retirementincome stream for boomers.Open-architecture productsthat blend exchange tradedfunds, mutual funds, sepa-rate accounts and deriva-tives will fare best in thatenvironment, says Ben-jamin Phillips, a partnerand director of research at

Casey Quirk & Associates.“This industry is moving

from what it used to be,which is a fully vertical,packaged goods industry, toa wholesale industry, whereit’s selling and makingmoney off the componentparts,” says Mr Phillips.“And for many firms, it’sgoing to be a toughtransition.”

Generation X will alsofavour open architectureproducts, but their invest-ment needs will be “morecomplicated,” says Mr Phil-lips. People between theages of 28 and 52, most ofwhom are in Generation X,control more than $5,000bnin investable assets, accord-ing to a recent report fromMast Hill Consulting andSway Research. That mar-ketplace is “competitivelyuncluttered,” thanks to theinvestment industry’s focuson retiring boomers, saysthe report.

But Generation X has dif-ferent needs. While theboomers have focused onbuilding a nest egg, the

younger generation willlook to balance savings forlong-term retirement withspending on more immedi-ate needs, such as buying ahome and funding theirchildrens’ education.

“They’re going to place apremium on products thatgenerate a specific income,rather than just relativereturn,” says Mr Phillips.“They’re going to favouryield.”

For example, Mr Phillipssees long-term demand forlong-short and high-divi-dend strategies.

Financial services firmscould also find new ways tocombine existing products,says Luis Fleites, director of

retirement markets forFinancial Research Corp.He cites New York Life,which is already marketingan approach that pairsannuities with traditionalinvestment strategies.

Reaching the youngest ofGeneration X will takemore than new investmentproducts, however. Cerulli’sMr Poor says managers facedemographic challenges,too. “In many cases you’remarketing to people whodon’t have a lot of disposa-ble income, or they’ve gotother financial obligations,such as student loans.”

The best strategy forfirms is to encourage inves-tors to start saving as earlyas possible, says McKin-sey’s Mr Ramji. One recenttriumph has been the crea-tion of automatic mecha-nisms – such as auto-enrol-ment and auto-escalation ofcontribution rates – thatincrease participation inretirement programmes.

Firms should work withregulators to furtherexpand the defined contri-bution model, says Mr Poor.“Regulation is what createdthe DC plan,” he says.“Sure, it isn’t perfect, butfrom an investment man-ager’s perspective, thoseassets are much stickierthan retail dollars.”

For even younger inves-tors, observers say commer-cial banks will also play arole in developing younginvestors as a client base.Companies such as ING andHSBC have generated astrong business in onlinesavings accounts, whichhave been an entry pointfor some investors intomore sophisticatedproducts.

InnovationScott Johnsonfinds out how theindustry shoulddeal with thedemographicshifts ahead

Generation X will become the largest investor segment by 2025 Alamy

‘In many casesyou’re marketing topeople who don’thave a lot ofdisposable income’

ContentsInnovation: planning fordemographic change.........2

Alternatives: newproducts aim to avoidvolatility.................................4

Pensions: interest isincreasing in annuities .....4

Europe: managers pursuegrowth overseas..................5

Target date funds:adjustments are made......5

Regulation: SEC sets up afunds investigation unit.....6

Independents: managersturn attention to RIAs.......6

ETFs: the retail investorhas yet to learn aboutexchange traded funds......7

Interview: Janus Capital’snew chief..............................8

FTfm/Ignites – The US mutual fund industry

FINANCIAL TIMES MONDAY MAY 3 2010 3

4 FINANCIAL TIMES MONDAY MAY 3 2010

Spate of new products sellprotection against volatility

The market crash of 2008and the volatility that fol-lowed exposed just howhighly correlated to thebroader markets the portfo-lios investors thought werewell-diversified had become.That painful lesson has sentthem seeking an alterna-tive.

Retail mutual fund pro-viders have responded witha spate of alternative strate-gies wrapped in retail-readyproducts registered underthe Investment CompanyAct of 1940. The past twoyears have ushered inscores of new funds fromcompanies like Dreyfus,DWS Investments, EatonVance, Invesco, Index IQ,JP Morgan, Natixis,Putnam, Rydex SGI andVanguard.

The new offerings seek toprovide greater diversifica-tion and performance inde-pendent of the broader mar-ket. These funds span long-short, absolute return andmarket neutral strategies

and they often employ lev-erage, commodities, deriva-tives, currencies or futuresto deliver tactics that untilrecently were available onlyto institutional or wealthyinvestors.

“At the end of the day,2008 caused product provid-ers and investment advisersto look at how they deliversolutions to their underly-ing clients,” says RobertHussey, head of Natixis Glo-bal Associates’ institutionalservices group. NGAlaunched its ASG GlobalAlternatives fund in Sep-tember 2008, and the ASGDiversifying Strategies fundlast August.

In fact, in a study involv-ing nearly 50 asset manag-ers, Cerulli Associatesfound that just over halfsaid more than 25 per centof the new mutual fundproducts they plan tolaunch will be alternatives.Virtually all of the respond-ents said alternative strate-gies would feature in atleast a small percentage oftheir new product plans,says Pamela DeBolt, a sen-ior analyst at the firm.

That trend is partlydriven by intermediaries’demand for options thatwill offer protection frommarket volatility at a timewhen globalisation haseliminated much of the abil-

ity to find such protectionin foreign or even emergingmarkets equities, says PeterBatchelar, vice-president ofproduct management forVirtus Investment Partners.Virtus rolled out its Alter-natives Diversifier fund in2005.

During most of the 1980s,for example, the correlationbetween the S&P 500 andthe MSCI EAFE indexeswas about 0.47, meaning themarkets offered diversifica-tion benefits. But between2000 and 2009, the two mar-kets converged, with anaverage correlation of 0.88,according to Virtus. Attimes during the height ofthe market turmoil, thosemarkets essentially movedin lock-step.

“A lot of investors stillassociate risk with alterna-tives,” says Mr Batchelar.But endowments and hedgefunds have been usingthese strategies and assetclasses for years to reducerisk and steady perform-

ance. “You will actuallylower the risk to your port-folio,” he says.

By packaging theseinvestments as mutualfunds, companies not onlyeliminate the qualificationstandards required of hedgefund investors, they alsooffer greater portfolio trans-parency, daily pricing andliquidity. The products alsogenerally come at a a costfar lower than the 2 and 20fee structure of many hedgefunds (2 per cent of assetsand 20 percent of returns).And those are the elementsmost important to adviserswhen considering addingalternatives to their clients’portfolios, according to asurvey of 300 advisers con-ducted by Morningstar inconjunction with Barron’slate last year.

For fund groups, growinginterest in retail alterna-tives translates into ampleopportunities to developproducts that truly offer thediversification advisersseek, says Phil Masterson,managing director in SEI’sInvestment Manager Serv-ices division “It’s a new,emerging market, so thereis room for new entrants,”he says.

Adviser demand for thediversification these prod-ucts aim to provide meansthe three-year track records

intermediaries typicallyrequire of mutual fundsbefore allocating any clientassets have become lessimportant for alternatives,says NGA’s Mr Hussey.

Groups that have strongor long-established institu-tional arms that alreadyoffer alternative strategiesmay more easily attractretail assets, says Cerulli’sMs DeBolt.

But that does not meanfirms should repackage allof their institutional orhedge funds, says AndrewProvencher, managingdirector and head of inter-mediary development atNeuberger Berman. “Any-thing we do internally, weare always thinking, ‘Isthere a way we can put thisin a vehicle that our bestpartners can utilise?’”

AlternativesRetail funds aremarketing thediversification idea.Hannah Gloverreports

Since the market crash in 2008 the search has been on fornon­correlated investments Reuters

Demand for income lifts annuity appeal

The need for a product thatcan offer a predictablestream of income in retire-ment, coupled with thedemise of defined benefitplans, has boosted theappeal of variable annuitiesand income guaranteedriders.

Steep losses in retirementplans that resulted from thefinancial crisis stirreddebate over the adequacy of401(k) plans to fund employ-ees’ retirement.

As the Obama administra-tion launched new initia-tives aimed at increasingretirement savings coverageand retirement incomesecurity, asset managersand insurers are lobbyingto influence the debate.

They are also working ondeveloping investmentproducts tailored to definedcontribution plans thatoffer some form of guaran-teed return akin to a pen-sion plan format.

The government is payingclose attention to the issue.In an effort to better under-stand the potential role ofannuities in retirementplans, the US Departmentof Labor issued a requestfor information on issuessuch as the benefits or pit-falls associated with in-planlifetime income options,current usage of theseoptions and product fea-tures. The DOL hadreceived 500 comments as ofApril 20. The commentperiod will close today.

Earlier this year theWhite House’s Middle ClassTask Force enlisted annui-ties as a key component ofits retirement plan ofaction.

The task force, led byvice-president Joe Biden,listed “promoting the avail-ability of annuities and

other forms of guaranteedlifetime income” as one offour elements for strength-ening 401(k)s.

The Obama administra-tion’s initiative to moreclosely examine theseinvestment options hasgiven providers a renewedsense of optimism but alsoexposed a widespread pub-lic distaste for certain annu-ity products.

Annuities are consideredtoo complicated and expen-sive not only by investorsbut by a significant numberof advisers who end up notrecommending the productsto their clients.

Ryan Alfred, co-founderand president of Bright-scope, a retirement plan rat-ing firm, says annuitiesneed a public relations cam-paign to improve theirimage.

“Annuity is a dirty wordfor a lot of consumers.”

Even with the word annu-ity in its name, TIAA-Cref,also known as TeachersInsurance and AnnuityAssociation – College

Retirement Equities Fund,recognises annuities have anegative connotation.

Part of the problem is alack of information andunderstanding of how theywork and what they aresupposed to do, saysEdward Van Dolsen, execu-tive vice-president, productdevelopment and manage-ment at TIAA-Cref. Annui-ties must be translated intoincome people cannot out-live, he says.

Annuities are uniquelysuited to deliver on thatmandate, says Mr Alfred.“We are generally support-ive of helping participantscreating retirement incomestreams,” he says. “I am notconvinced that anything

other than an annuity cando this. People needincome; they don’t need alump sum in retirement.”

Still, selling annuities inretirement plans has been atough slog for annuity pro-viders.

“The issue is it [incomeguarantee] doesn’t getselected very often amongplan participants,” saysDoug Dannemiller, a senioranalyst at Aite Group.“Plan sponsors aren’thearing the demand fromparticipants.”

He says people fail tochoose an annuity despitetheir need for guaranteedretirement income due toinsufficient and inadequatefinancial planning and edu-cation. “There is a fear ofthe unknown and issueswith loss of control ofassets.”

But that has not discour-aged a growing number ofproviders from venturinginto the space.

Providers such as Pruden-tial, Genworth and Metlifehave taken a crack at devel-

oping in-plan income guar-antees. Prudential andMetlife have guaranteesattached to target datefunds. Other insurers andasset managers, includingPutnam and Alliance Bern-stein, say they have productdevelopment processes inplace.

There are several chal-lenges facing these insur-ers. Adding guarantees inan annuity-like investmentproduct offered throughretirement plans needs toaddress issues of portabil-ity, single insurer risk,operational questions, andfiduciary implications.

One firm appears to beclosing in on what maybecome a prototype for aretirement plan annuityproduct. Achaean Financial,a start-up, has a patentpending application thatuses an immediate variableannuity as its basic chassiswith the objective of provid-ing initial income that iswithin 10 per cent of a com-petitive single premiumimmediate annuity.

Pension planningProviders aredeveloping ‘annuity’products withguarantees, saysMariana Lemann

‘It’s a new,emerging market,so there is roomfor new entrants’

Phil MastersonSEI

‘People needincome; they don’tneed a lump sumin retirement’

Ryan Alfred, Brightscope

FTfm/Ignites – The US mutual fund industry

FINANCIAL TIMES MONDAY MAY 3 2010 5

Target date fundsadjust to turmoil

In the wake of the market upheavalof the past couple of years, some ofthe largest providers of target datefunds have made adjustments totheir offerings.

The funds’ fortunes have largelyfollowed the yo-yoing markets.Assets climbed to $256.5bn at theend of 2009, up from $159.5bn a yearearlier, according to data fromMorningstar. At the end of 2007,assets in the funds totalled$184.3bn. Meanwhile, performancefollowed a similar pattern.

Target retirement funds in theMorningstar category for fundswith maturity dates spanning 2000through 2010, lost an average of 22.5per cent in 2008 and returned 22.4per cent in 2009.

These losses, combined with thefact that the funds are used asdefault investments for employeesin some retirement plans, have puttarget date funds under scrutinyfrom regulators and lawmakers.

The top providers of the biggesttarget date funds by assets havemade slight changes to their funds.The adjustments generally includeshifts in pricing, adjustments toallocations and the introduction ofinflationary hedging measures.

While executives at those firmsclaim the changes were not a reac-tion to market events, the timing,coupled with the heightened pres-sure on these funds, suggest other-wise, says Lynette DeWitt, researchdirector, sub-advisory market andlifecycle funds for FinancialResearch Corporation (FRC).

“There was influence on targetdate design as a result of the mar-ket,” she says. The disaster of 2008was the first big market drop thatmost target date funds experienced.“Everyone realised that a targetdate fund is a mutual fund and itwill react as most mutual fundsdid.”

Principal Financial, for example,reduced fees on its target datefunds. The group, which with$14.3bn under management at theend of 2009 has 5.6 per cent of themarket, according to Morningstar,converted C shares of its LifeTimefunds, carrying 12-b1 fees of 1 percent, into A shares with fees of 0.25per cent.

More recently Principal increaseddiversification by allocating to theDiversified Real Asset Fund, whichinvests in Tips (inflation-protectedgovernment bonds), commodities,real estate investment trusts(Reits), and natural resources.Weightings to some of the otherunderlying funds were reduced.

Mike Finnegan, chief investmentofficer at Principal, says: “Perhapsin retrospect we were too concen-trated.” The group added anothermanager to the series’ core fixedincome allocation in the autumn of2008. But Mr Finnegan says it didnot change the funds’ glide paths,which determine the way asset allo-

cation changes over the life of thefunds. “We got comfortable withthe way the glide path wasdesigned in terms of dealing withlongevity risk, market risk andinflation risk,” he says. “Our basicpremise hasn’t changed.”

Fidelity Investments, the largestprovider of target date funds, with$99.3bn under management at theend of 2009, or a 38.7 per cent mar-ket share, made similar moves inthe past 18 months. However, Chris-topher Sharpe, portfolio manager,global asset allocation group atFidelity Management & Research,says the changes to the FreedomFunds product offering were not areaction to the market downturn.

“The Freedom Funds were builton long term historical risk distri-butions, and so anything we did…was very much independent ofwhat the markets did,” he says.

But Fidelity did launch a newshare class, called Freedom K,which is offered to certain retire-ment plans at a lower cost, rangingfrom 38-71 basis points. That com-pares to fees of 48-82 bps for theexisting series.

The group also introduced lastsummer a version of target datefunds composed entirely of passiveinvestments. That was offered withan expense ratio of 19 bps, whichmatches the expense ratio of Van-

guard’s target date funds and isamong the lowest in the industry.Despite retaining the greatest shareof the market, Fidelity has incre-mentally lost market share to Van-guard over the past few years.

On the asset allocation front,Fidelity is dialling up the weight-ings to Tips and commodities indifferent components of the fundsand at different age periods, MrSharpe says. This builds on theallocation to Fidelity Strategic RealReturn fund, added in 2007.

T Rowe Price, the most heavilyequity-weighted among the fourlargest target date fund providers,has spent the past year evaluatingways to better position the com-pany’s target date series for a highinflationary environment.

T Rowe Price held $42bn in targetdate fund assets, or 16.4 per cent ofthe market, at the end of 2009.

Jerome Clark, portfolio managerof T Rowe’s target date series, sayshis team has realised that tradi-tional diversification strategies didnot function as expected when themarkets tanked, and is preparing toshift the funds’ allocations. Assetclasses being considered as infla-tion hedges include Reits, naturalresources, commodities and Tips.

Retirement savingThe main providers arealtering prices and assets,writes Mariana Lemann

A slice of European piea favourite on the menu

US managers are vying for alarger slice of European assets,as limited opportunities fordomestic growth drives them insearch of new hunting grounds.

American Century, Vanguardand Russell Investments are allbig US names that have mademoves to establish a new pres-ence or develop their existingfootprint in Europe over thepast year.

“Diversification of business isa rationale for expansion, nevermind the specific opportunitiesthat exist in Europe,” saysMichael Green, senior vice-pres-ident and head of AmericanCentury’s London office.

The group, which has built upa 50-year reputation in the USfund market, made a push intoEurope, opening its Londonoffice in 2008.

In November, the fund houselaunched four Ucits fundsfocused on US and globalgrowth equity strategies.

Mr Green says Europe is an“obvious place” in which toexpand the group’s footprint,given it is one of the mostmature and sophisticated mar-kets outside of the US.

“There has not been a lot ofgrowth in the US market as awhole for some time, and mostUS asset managers wouldexpect to get between 5 and 30per cent of their business fromoutside of the domestic mar-ket,” says Mr Green.

Opportunities to gather assetsin Europe are broadly similar tothe US, he says, as both areenvironments where individualsare required to focus on long-term savings and have anunder-funded state system.

American Century enteredthe European market at a timeof less than favourable eco-nomic conditions, a fact thatbenefited the Kansas City, Mis-souri-based asset manager.

“The economic side workedwell for us, whether that washelping us get office space orattracting staff,” says Mr Green.

“Competitors were looking toretreat as we wanted toexpand.”

Vanguard, which has built upa name in the US for its low-cost index products, also made aleap for Europe. The firm,which manages some $1,300bn(£856bn, €987bn) of assets undermanagement, announced thelaunch of 11 UK and Irish domi-ciled index funds in June lastyear. It is hoping the UK launchwill propel its push into otherEuropean countries.

“US managers are looking forgrowth outside their domesticmarket, where it has slowed,”says Jim Norris, director ofVanguard’s international opera-tions. “If they move outside oftheir home market, they have tolook at where the money is. Atthe moment Europe is one ofthose markets.”

Timing could not have beenbetter for the firm.

The UK will shortly introducereform known as the retail dis-tribution review (RDR), whichwill see commissions bannedand financial advisers movedtowards fee-based advice. Manybelieve this will favour indexfunds, as financial adviserssearch for products that will aidthe construction of low-costportfolios.

“The RDR has been a positivedevelopment,” says Mr Norris.

“In any market we go intooutside of the US, we are notgoing to pay anyone to sell ourproducts. We don’t do it in theUS, so the challenge is for us toget across the messages westand for.”

Following its UK launch, MrNorris says those countries withlarge retail markets, such asGermany, Switzerland andFrance, are the most attractivefrom a retail perspective.

He says: “You will see more ofwhat we are doing in the UKacross Europe, but it will bemore focused if we are lookingat this from an individual inves-tor perspective.”

Regulatory changes in theform of Ucits IV are also likelyto assist US managers. Thedirective, due for implementa-tion in 2011, will drive consoli-dation of products and ease thecross-border distribution of

funds. It is an approach someUS managers favour, especiallyas it enables them to distributeproducts more cost effectively.

“The movement towards UcitsIV, which will make passportingeasier and more practical, is avery encouraging trend,” saysMr Green.

“Around 10 years ago, Europewould have been looked at on acountry-by-country basis. Now,Europe can be tackled with lessadministrative and regulatorydifficulty.”

But even those managers thathave had a presence in Europefor some time have an appetitefor further expansion. RussellInvestments, which opened itsfirst office in the UK in 1979,hopes new markets will enableit to align the balance betweenits retail and institutional busi-nesses in Europe. The companyhas strong recognition in thewholesale market and withinstitutional investors and man-ages €132.6bn of assets in conti-nental Europe.

“Despite the fact we havebeen represented in Europe forsome time now, we feel we arejust scratching the surface,”says Mr Cras. “The opportuni-ties are tremendous.”

Russell rolled out four multi-manager products in Januarytargeting financial advisers inthe UK. Germany, Italy andSpain are other markets wherethe fund house is looking tobuild up a presence.

“We are identifying whetherthe skills we have as a firm canapply to those markets,” saysMr Cras. However, he adds aword of warning to managershoping to dip in and out ofEurope. “If you come to Europeyou should be in it for the longhaul and investors appreciateloyalty.”

EuropeIn pursuit of growthmanagers are headingto where the money is,says David Ricketts

London:AmericanCentury’sfirst stepintoEurope

Getty

Target date funds

Source: Morningstar

Total net assets ($bn)

2005 07 08 09060

50

100

150

200

250

Michael Green: ‘The economicside worked well for us’

FTfm/Ignites – The US mutual fund industry

6 FINANCIAL TIMES MONDAY MAY 3 2010

SEC sets up fundinvestigation unit

The US Securities and ExchangeCommission is touting a new braintrust in response to an oft-cited crit-icism that its staffers do not havethe necessary level of industryknowledge and experience to effec-tively regulate the business.

The SEC’s new asset manage-ment unit is part of a broader reor-ganisation at the agency designedto make it a more efficient andeffective regulator. The unit willfocus on investment advisers,investment companies, hedge fundsand private equity funds.

The unit is being led by BruceKarpati, who was assistant regionaldirector for the SEC’s New Yorkregional office, and Robert Kaplan,who was an assistant director ofthe SEC’s enforcement division.Prior to serving in the SEC bothmen worked as industry attorneys.The unit is planning to hire staffersfrom the industry and is continuingits recruiting efforts, the agencysays.

The US fund industry has greetedthe new structure with cautiousoptimism. Some experts say thechange could help the SEC stay ontop of an increasingly complex busi-ness that it has struggled to regu-late. Others fear that the increasedscrutiny could result in a SEC thatoverreacts and punishes violatorsfor transgressions it missed in thepast. Another concern is that fundswill be ill-prepared to deal with thestepped-up oversight.

By staffing this unit with indus-try experts, asset managers hopefor deeper analysis of complexissues, such as derivatives, whichcould result in speedier resolutionsand greater co-operation to resolveproblems that may otherwise drawharsh enforcement action.

“It’s fair to say people in theindustry have been favourablyimpressed, but it remains to beseen how it plays out,” says BarryBarbash, the head of the asset man-agement group at law firm WillkieFarr & Gallagher and a former SECinvestment management divisiondirector. “It potentially cuts bothways because areas not reviewedall that much in the past are poten-tially subject to more scrutiny.”

The asset management unit islikely to result in faster conclusionsto investigations, says Brian Rubin,partner with Sutherland Asbill &Brennan and a former senior coun-sel in the SEC enforcementdivision.

“I think the fund companies wanttheir regulator to understand whattheir products are about and howthey sell them, so a specialised unitwill help in that regard,” Mr Rubinsays. “And it should also bringinvestigations to a faster conclu-sion because the staff won’t needtime to ramp up and get an under-standing of the product.”

The asset management unit willalso aid the SEC in tracking indus-

try trends and regulatory issuesmore closely, which will allow it toinitiate enforcement actions morequickly, he adds. He acknowledgesthat funds may encounter a drainon resources if they are not pre-pared for the increased scrutiny.

One of those areas that may faceincreased scrutiny is fund disclo-sure, according to ChristianThwaites, president and chief exec-utive at Sentinel Investments.

Funds recently witnessed thiswith the SEC’s review of targetdate funds. The SEC examinedwhether or not investors wereaware that the dates included inthe funds’ names did not corre-spond to the funds’ glide paths.And just as the focal point of atten-tion with target date funds was dis-closure, funds can expect increaseddisclosure to drive future probes,Mr Thwaites says.

Other areas the SEC may focuson include shedding more disclo-sure on trading practices, fundexpenses and exchange tradedfunds, says Mr Thwaites. Theagency is already examining funds’use of derivatives, an area primedfor greater disclosure and possiblysubstantive regulation, says RussMorgan, chief compliance officer atSentinel.

Mr Thwaites welcomes a “more

activist” SEC, but also warns thatgoing too far may result in a giantoligopoly fund industry.

“One big risk in any of this is itforces more and more players in themutual fund industry to exit eitherbecause they can’t keep ahead ofcompliance costs or they don’t havethe resources to respond,” he says.

The industry can take somecredit for inspiring a reinvention atthe SEC, says David Hearth, part-ner with law firm Paul Hastings. Inrecently hiring its first chief com-pliance officer, Kathleen Griffin,former senior compliance managerand deputy code of ethics officer forPutnam, the SEC probably exam-ined the industry’s best practices indeveloping its own complianceinfrastructure, he says. “The regu-lator has adopted what wasrequired of the regulated,” he says.

Mr Hearth also praises SECefforts to staff their ranks withindustry experts. But having arespected think-tank that inspiresmeasured regulatory actions doesnot make the SEC immune to politi-cal pressure, he says. The SEC mayfind itself acting quickly on future,high-profile scandals without appre-ciating the long-term ramificationsof its actions, he says.

“The hope is that it is more effi-cient because [they] understand theissues better,” Mr Hearth says.“You hope they make better judg-ments about what is the realproblem.”

RegulationStaff are being hired fromindustry to aid expertise,writes Peter Ortiz

‘The hope is that it ismore efficient because[they] understand theissues better’

David Hearth, partner with lawfirm Paul Hastings

Manager attention turnsto independent advisers

Asset managers are shapingproducts, adjusting pricing, andrearranging distribution teamsin efforts to reach out to thescattered, but fast-growing inde-pendent adviser channel. Theefforts by manufacturers ofmutual funds and separatelymanaged accounts (SMAs) inthe US already appear to havetilted how advisers craft clientportfolios and how managersgenerate revenue.

The independent registeredinvestment adviser (RIA) seg-ment has been growing at theexpense of other channels,according to Cerulli Associates.Last year, it gained $51bn(£33bn, €38bn) in net assets,while the full-service wirehousebrokerages bled $189bn.

But asset managers have beenaware of the trend and lavish-ing attention on independentsfor several years, says DennisBowden, senior research analystat Strategic Insight, a researchconsultant. “It’s rare to find afund firm that hasn’t dedicatedsome additional effort to theindependent adviser,” he adds.

Mr Bowden says RIAs are anincreasing revenue source forfund managers that havefocused on brokerages, withindependent advisers makingup about 11 per cent of tradi-tional intermediary mutualfund sales last year, up from 7per cent in 2007. And managersare expanding the offering ofno-load and load-waived “A”share classes, which appeal toadvisers with fee-based prac-tices at RIAs and wirehousefirms alike. Mr Bowden saysabout 70 per cent of intermedi-ary fund sales involved suchshare classes last year, up from60 per cent in 2007.

But among all fee-based advis-ers, RIAs are inspiring manag-ers to change their approaches,because they tend to be savvier

about investments, says MikeMa, a principal at kasina, a mar-keting consultancy. “You stilltalk about product as a whole-saler [to RIAs], but the level ofsophistication changes,” headds.

That was the thinking behindrecent changes to “formalise”the RIA distribution effort – anddistinguish it from brokeragesales – at Legg Mason, a Balti-more-based money managerwith $684.5bn in assets, saysKimberly Mustin, the group’shead of institutional for theAmericas. “It’s much more of aninstitutional distributionapproach, so we upgraded thetalent in [the RIA] channel dra-matically,” she says. Legg madeseveral senior hires and is tar-geting sponsorship dollars atbig RIA custody platforms.

Various managers havereshaped their distributionefforts, creating dedicated RIAteams or building wholesalerforces with hybrid skill sets,says Loren Fox, senior researchanalyst at Strategic Insight.

Ms Mustin says Legg prefers

the dedicated team approach.“The way a wirehouse adviserthinks and behaves and buys isvery different from an RIA,” shesays. “They have differentneeds, and you need to havepeople specialise there.” To thatend, Legg has wholesalers whoknow RIAs both from the prod-uct end and from a businessmanagement standpoint, wherethe concerns might include howto run an office, successionplanning, or valuation of theirpractices.

Mr Fox says managers arealso launching special market-ing efforts through dedicatedwebsites or targeted video con-tent, offering information moreappealing to RIAs than othertypes of advisers, such as port-

folio manager views on theeconomy and the markets.

Ms Mustin says Legg has suchan initiative launching this yearwith a new website and dedi-cated internal staff.

On the product side, manag-ers are also adjusting offerings,often to appeal to all fee-basedadvisers, not just RIAs, Mr Foxsays. But certain products havespecial pull for RIAs. “We’veseen a lot more interest in thelast couple of years for alterna-tive [1940 Investment CompanyAct] funds like long/short funds,which can have a tremendousappeal to RIAs,” he says.

Indeed, accessing alternativesthrough mutual funds, such aslong/short or managed futuresstrategies, is more attractivethan traditional limited partner-ships, says Neal Simon, princi-pal of Highline Wealth Manage-ment, an independent adviser inMaryland with nearly $1bn inassets. “There are no liquidityrestrictions and lower fees thanlimited partnership products,”he says.

Ms Mustin says Legg is hop-ing to respond to RIA interest inalternative investments throughits Permal Group affiliate.

Managers are also aiming atRIAs through lower-cost pricingoptions such as no-load or load-waived A-share structures,which have proliferated overthe past five years, Mr Bowdensays. “RIAs will demand thelowest-priced share class that afund can offer,” he adds.

Among groups that haveintroduced share class pricingfavourable to fee-based advisersin recent years are Invesco Aim,American Funds, Dreyfus, For-ward Management, Pimco, andPutnam Investments.

RIAs are also grabbing SMAmanager attention. Pimco justlaunched a new laddered munic-ipal bond strategy exclusivelythrough Schwab Institutional’sRIA platform.

“It was decided at the mostsenior level of our firm andtheir firm that we should createa product that makes sense fortheir client base,” says BobFields, senior vice-president andmunicipal product manager atPimco.

IndependentsRIAs are an increasingrevenue source andworthy of extra regard,finds Tom Stabile

AndyRoddickplays JuanMartin DelPotro at theLegg MasonTennisClassic lastyear. LeggMasonfavours adedicatedteam to dealwith RIAs

Getty

‘A wirehouse adviserand an RIA havedifferent needs – youneed to have peoplespecialise there’

FTfm/Ignites – The US mutual fund industry

FINANCIAL TIMES MONDAY MAY 3 2010 7

Education is key to retail sector growth

The surging US exchangetraded fund industry isexpected to hit $1,000bn(£650bn, €748bn) in assetsunder management soon,but the products have yet toconquer one frontier: theretail investor.

ETFs have gained muchground since the broad mar-ket correction of early 2009.US assets in the fundstotalled $810bn at the end ofMarch, according to datafrom the National StockExchange (NSX). This isnearly double the ETFtotals at the end of firstquarter 2009 when thefunds had $484.6bn inassets, NSX says. Flowshave also drasticallyimproved. ETFs had $7.7bnestimated cash flows for thefirst quarter ended March31, versus roughly $3.2bn inestimated outflows for thesame time period last year,according to data fromMorningstar.

The $1,000bn mark is wellwithin the industry’s grasp,many believe. ETF assetsgrew by 45 per cent in 2009and would need to climbjust another 25 per cent thisyear to hit the mark, saysTom Anderson, head ofstrategy and research forState Street Global Advi-sors’ intermediary businessgroup.

“It is definitely possible,but we’ll need to see fastergrowth in US equity andinternational equity ETFsto get there,” he says.

But for all the hype, ETFsremain relatively unchartedterritory for most retailinvestors, says Scott Burns,Morningstar’s director ofETF analysis.

While there is no marketdata that breaks downinvestor demographics, MrBurns estimates that only15 per cent of ETF assetsare in the hands of retailinvestors. His estimateincludes self-directed retailinvestors and those withadvisers.

“We’re seeing a lot ofgrowth in retail investoradoption but it’s coming offof a very low base,” says MrBurns.

Most retail money is in401(k)s and such investorshave yet to switch theirmoney over to ETFs, MrBurns says. While activeretail traders have adoptedETFs, buy-and-hold inves-tors have yet to embracethe funds, he says

Part of the problem isthat many investors,regardless of affluence, arestill unaware of the benefits

of the funds, which includeliquidity, transparency andtax efficiency, saysJonathan Steinberg, chiefexecutive of WisdomTree.

The products are stillnovel to many investors,says Rick Genoni, Van-guard’s head of ETF prod-uct development. “ETFshave been available in theUS market for 17 years butfor many clients they arestill viewed as new invest-ment products,” says MrGenoni. “The potential foradditional growth is excit-ing but education remainsone of the biggest chal-lenges ETFs face.”

Peter Crawford, a CharlesSchwab senior vice-presi-dent of product manage-ment for all of Schwab’sInvestment ManagementServices, says institutionswere initially the big driv-ers of ETF volume, whichthen migrated to registeredinvestment advisers. “Nowthe migration is movingtoward retail individualinvestors,” he says. He esti-mates that a quarter of indi-vidual investors at Schwabown an ETF. “There is stilla huge opportunity to fur-ther gather interest in thatmarket segment,” he says.

Many believe retail inves-tors will provide new, sus-tained growth for ETFs.Mike Latham, managingdirector and head of USiShares at BlackRock, saysthe gap between institu-tional and retail adoptionwill close over time. In fact,Mr Latham has such confi-dence in ETFs that he pre-dicts index-based ETFs willeclipse passive mutualfunds. “Index ETFs aretruly a better mousetrapthan mutual funds and theywill continue to take mar-ket share from indexedmutual funds,” he says.

Currently, three providers– BlackRock, SSgA andVanguard – control morethan 80 per cent of the ETF

market. New entrantsemerge everyday. JPMor-gan Chase, Goldman Sachs,Eaton Vance and John Han-cock Funds have each filedwith the Securities andExchange Commission tooffer ETFs. Ben Fulton,Invesco PowerShares man-aging director and head ofglobal ETFs, compared thecurrent situation to the dot-com boom of the late 1990swhen every businessneeded to be online. Now,in the second decade of the21st century, every assetmanager needs an ETF

answer, says Mr Fulton.“It’s not well thought

out,” Mr Fulton says of allthe new ETF providers.“They don’t understand thedistribution or the prod-ucts, but they’re tired ofbeing asked about thoseflows going into ETFs.”

It is expensive to set upand staff an ETF business,and to provide product lineson a global scale, says MrFulton, who was presidentand founding partner ofClaymore Securities. He leftClaymore before it beganoffering ETFs and joined

PowerShares in 2005 (Clay-more was acquired by Gug-genheim Partners lastyear). “A lot of the busi-nesses will try for a whileand then realise [ETFs]aren’t what they do best,”he says.

Mr Latham agrees somenew entrants will close upshop, because they did notunderstand the need forscale, or failed to offer theright leadership orresources.

However, he thinks theETF market is still in itsgrowth phase and expects

more providers to enter.“It’s too early to say who isreally successful,” he says.“Everything seems toonichey right now.”

Mr Crawford of Schwabsays new entrants need away to differentiate them-selves from the rest of themarket.

San Francisco-basedSchwab, an online broker,only entered the ETF mar-ket in November. To distin-guish itself, the brokeroffered its ETFs commis-sion-free to its brokerageclients, while other online

equity and non-SchwabETFs trade at a flat $8.95.

In the future, Schwabplans to expand its ETFproduct suite to includemore large-cap or small-capfunds in the equity space,Mr Crawford says. In April,Schwab filed with the SECto offer three bond ETFsthat are expected to tradein July.

However, Schwab has noplans to launch an activelymanaged ETF. Active fundsare “more hype than actualclient interest”, says MrCrawford.

ETFsMany investors areunaware of thebenefits, writesLuisa Beltran

BlackRock, with SSgA and Vanguard, have 80% of the ETF market AP

‘We’re seeing a lotof growth in retailinvestor adoptionbut it’s coming offa very low base’

FTfm/Ignites – The US mutual fund industry

Triple challenge for chief at Janus

Richard Weil took over aschief executive of Janus Cap-ital Group on February 1.He joined the Denver-basedcompany after a 13-yearcareer with Pimco in whichhe served as chief operatingofficer, overseeing many ofits non-US businesses. Mostrecently he served as chiefexecutive of Pimco Advisory.

You were named chief exec­utive of Janus in January.What is at the top of yourpriority list now?I think we have greatopportunities across a widerange of things. We havecome out of a period of [rel-ative instability] for thecompany over the last sev-eral years, and I thinkinvestors are communicat-ing they have respect forthe great investing beingdone at Janus and at [itssubsidiaries] Perkins [avalue manager], and atIntech [provider of mathe-matically-driven equitystrategies]. They’re inter-ested in institutional space.In retail, we have lots ofopportunities, both domes-tic and international.

So the highest thing onmy priority list is to deliverstable, excellent executionand help enable the teamsto capitalise on the goodwilland interest that the fineperformance over the lastseveral years has generated.

What particular channels orareas of the company doyou see as offering stronggrowth potential in terms ofassets or new revenues?I think the Janus Denverbrand is well known forgrowth equity investment,but it’s only just becomingknown for its fixed-incomeproducts. Institutionalchannels, and consultantsand institutions are becom-ing increasingly aware andincreasingly interested inwhat we’re doing.

Having come from Pimco,the fixed income and insti­tutional business is some­thing you’re familiar with.What do you see as thekeys to boosting Janus’presence in both thoseareas?In fixed income, I think thefirst hurdle is awareness. Ithink [co-chief investmentofficer] Gibson Smith andhis team have built a finetrack record, and they out-performed during the dark-est days. I think they’rewell positioned to candidly

replace a number of thecredit managers that areout there in the fixedincome space, and they area wonderful complement tosome of the macro fixedincome investors out there.

Janus’ institutional busi­ness represents about aquarter of its assets rightnow. How do you build thatup and where would youlike to see those assets in ayear or three years downthe road?I can’t make flow predic-tions, but I can say that ourIntech subsidiary has devel-oped the lion’s share of allof our institutional assets.And right now, they’re fac-ing some challenges, butover the long term, we’relooking forward to theircontinued growth.

In the short term, theJanus brand and Perkinsare not well represented inthe institutional channels,and there’s much more wecan do, and explainingthem to people, and explain-ing the process and addingcontent and clarity aroundthose things will helpimprove the perception ofthem by consultants, who

are the key points of distri-bution in institutionalspace.

In terms of new productdevelopment, do you seeany holes in your line­up?I can’t be too specific, butclearly, we are looking toglobalise our productline-up and make sure thatour distribution teams andour relationship people inEurope and in Asia have anappropriate line-up of prod-ucts to serve their clients’needs.

Also, in fixed income wecan add in that area. Thoseare the top of the list at themoment.

Looking further out, we’llbe thinking about higher-rate and rising-rate environ-

ments, and about otherasset classes products.

Janus’s international busi­ness accounted for $12.3bnin assets, or about 8 percent of total companyassets as of the end of lastyear. Where would you liketo see that at the end ofthis year, and looking far­ther out, where do you seeit in three years’ time?I can’t give you our specifictargets for one and threeyears, but I can tell youthat the composition of glo-bal growth in the futureand wealth accumulation isgoing to be increasinglydriven by markets andcountries outside the US,Europe and Japan. We mustreact to that by buildingstrength and acceleratingour efforts offshore.

Scale is such an importantthing in this business andthere has been talk ofJanus possibly partneringwith other firms. Isthat something you wouldconsider?We continue to believe thatJanus is in the best positionto create value as an inde-pendent company, butthat’s an issue that will beaddressed by the board. Mypersonal priority is to oper-ate this franchise to greatsuccess in an organic way.But there’s a [possibility]that something inorganiccould happen.

What do you see as Janus’biggest challenge?In the short term, our sub-sidiary Intech is facingsome outflows that repre-sent a serious challenge.Beyond that, I think wehave to deliver continuedinvestment excellence andstep up our game acrossvarious fronts of distribu-tion. In the longer term, Ithink we have to deal withthe fact that global growthis increasing outside theUS, Europe and Japan.

Number two, that peoplewill use asset allocationbased on passive tools to acertain extent, replacingactive management, whichcreates a strategic chal-lenge for our business. Andto a degree, the business ofretail and institutional arealigning. Those three trendsrepresent challenges for us.

In terms of the switchfrom Pimco to Janus, doyou see similarities cultur­ally between the two organ­isations, and what are someof the more striking differ­ences you’ve encountered?In terms of similarities, suc-cess in this businessrequires a relentless pursuitof great ideas and excel-

lence, and I think certainlyPimco and Janus CapitalGroup both exemplify thosevirtues. In terms of differ-ences, the culture at Pimcois a heavily institutionalmindset. Within the JanusCapital Group, a muchmore significant percentageof the assets comes throughretail channels.

Has that difference been achallenge? It’s sort of a dif­ferent mindset.I think the challengingthing for us is that theretail adviser and interme-diary mindset is becomingmore like institutional.They’re focusing more onprocess descriptions, moreon content and education,on risk management. Theirbuying centres are doingrelatively more of the buy-ing as opposed to the decen-tralised model that theyused to run in the interme-diary distribution. And as aconsequence, they’re look-ing more institutional.

And so I am engaged intrying to help the Janusteam evolve our approachto the intermediary marketto be more institutional,in effect.

InterviewRichard Weil talksto Andrew Greeneabout outflows,global growth andpassive investment

We believe Janus isin the best positionto create value asan independentcompany

The Janus Denver brand, well known in equities, is not yet a name in fixed income Bloomberg

Richard Weil: ‘there are lotsof opportunities in retail’

FTfm