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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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February 16, 2009 12:01 AM ET
(Bloomberg)
Revenue has taken a hit mutual-fund assets dropped to $9.6 trillion at the end of last year, from almost $12 billion at the end of 2007. Fund boards are worried that mutual-fund companies may respond by cutting essential operations. “It’s critical for boards to make sure the fees charged by the adviser are appropriate but also to make sure the adviser doesn’t cut costs in a way that jeopardizes performance,” said Peter Clapman, independent chairman of the AARP Funds group, advised by AARP Financial. He is the vice chairman of the Conference of Fund Leaders. The conference—a collaboration between The Millstein Center for Corporate Governance and Performance at the Yale (University) School of Management, and the Washington-based Mutual Fund Directors Forum—was created last year for independent board chairmen and lead independent directors. Keeping a close eye on cost-cutting is one of the most important challenges that boards face this year, said Bruce L. Crockett, chairman of the board that oversees the Aim Funds, which is offered by Houston-based Invesco Aim. “You want to cut non-essential staff,” he said. “You sure don’t want to get rid of research staff.” Fund companies have already made a number of deep cuts. The most recent cuts were made by The Capital Group Cos. of Los Angeles, which cut 500 employees in early February. The firm’s Capital Research and Management Co. unit advises the widely popular American Funds. Also, recent reports indicated that Fidelity Investments was expected to initiate a second round of layoffs. The company said last year that it would lay off about 3,000 employees, 1,300 in November and 1,700 during the first quarter of 2009. Such cuts illustrate why now may not be the time for fund boards to push for lower fees. “I think [boards] have been putting pressure on fees, and that’s been a positive,” said Don Phillips, a managing director with Morningstar Inc. of Chicago. “But this is a year where you have to take into account the reality of running money.” That doesn’t mean that there will be a rush to raise fees. “I think the subject of increasing fees has been extremely inelastic for quite a few years,” said Jeff Kiel, president of Keil Fiduciary Strategies LLC, a Littleton, Colo.-based industry adviser. “Shareholders don’t feel they should be paying more, and market conditions are going to prevent any adviser from raising fees.” For many funds, however, raising fees is unavoidable because break points that lowered the price as fund assets increased will work in reverse as assets decrease. But votes to increase fees—whether by doing away with fee waivers or increasing the actual management fee—seem unlikely. Even if a board OKs it, investors will have to vote on any fee increase. “It’s effectively impossible to raise fees,” Mr. Crockett said. Yet a fund board that oversees a large group that has a robust investment adviser behind it, such as the Aim Funds, has more options than a board that oversees a group that hasn’t amassed billions in assets. “The fact of the matter is that those funds that have investment advisers with substantial resources are in a better position than a smaller fund group,” said Burton Greenwald, a Philadelphia-based mutual fund consultant. It is going to be a particularly tricky discussion this year because market volatility will make it difficult for funds to measure themselves against funds previously considered their peers. That’s because there will undoubtedly be outliers—funds that saw their assets drop so dramatically that they can no longer be used in determining whether fees are excessive. That is a factor fund boards need to keep in mind, Andrew “Buddy” Donohue, director of the SEC’s Division of Investment Management, said in remarks at a recent meeting of the Mutual Fund Directors Forum. “The challenges you face in evaluating certain data regarding peer funds, especially historical expense ratios and other cost data, are not insignificant,” he told attendees. And they aren’t the only challenges fund boards face this year. “They are going to find that they spend a lot more time in the boardroom discussing topics like valuations,” said Cary Stier, head of the U.S. asset management services practice at Deloitte & Touche. With so much market volatility, fair-value pricing will be a big issue for boards this year, he said. And with many funds experiencing a plunge in assets, boards are bound to take a hard look at the “realignment and possible merger” of funds, Mr. Crockett said. That is potentially a way for fund advisers to save money that could lessen the impact of any possible cuts or stave off fee increases, said Geoff Bobroff, an industry consultant. He serves on the board that oversees the Matthews Asia Funds, advised by Matthews International Capital Management of San Francisco. “I think this is a time for fund management and boards to shine,” Mr. Bobroff said.
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