With the mutual fund industry clamoring for the assets of retired, or soon-to-be retired, baby boomers, it is fitting that Brian A. Murdock is responsible for planning the Investment Company Institute’s general membership meeting being held this week in Washington.
That is because Mr. Murdock, 51, is president and chief executive of New York Life Investment Management LLC in Parsippany, N.J., which is owned by New York Life Insurance Co. And going forward, fund companies with close ties to life insurers are expected to have a leg up on their competitors in the race to manage the assets of the millions of baby boomers who are headed into retirement.
Such companies will have greater access to insurer expertise in the area of developing products that guarantee income, said Howard Schneider, president of Practical Perspectives Inc., an industry consulting firm in Boxford, Mass.
NYLIM offers retail mutual funds through affiliates that include the MainStay Funds division, which had more than $35 billion in assets under management as of the end of March.
Mr. Murdock said that New York Life Insurance Co. takes a hands-off approach in running its asset management unit.
“But that doesn’t mean that we don’t collaborate pretty closely,” he said.
It is a collaboration that Mr. Murdock said will work to the advantage of NYLIM, because while converting cash into income “is not an intuitive exercise,” it’s something New York Life Insurance Co. has been doing for decades.
Such synergies are why there is so much buzz over the potential growth of fund companies associated with insurance firms, he said.
Insurance companies, however, never have proven themselves to understand the asset management business, Mr. Schneider said, so success is uncertain.
“An insurance-backed asset manager should be well positioned, but historically they haven’t shown a lot of creativity,” he said.
But Mr. Murdock said he thinks that NYLIM is up to the challenge.
He understands the industry, he said, and he knows the issues that both NYLIM and the mutual fund industry as a whole must address to continue to attract investor assets.
Q. As this year’s meeting chairman, what do you see as the biggest issues facing the fund industry?
A. The theme of the general membership meeting is around mutual funds as offering enduring value, but we also want to have an honest examination of the alternatives.
We have a series of people talking about substitute products like [exchange traded funds] and other alternative products. Mutual funds have become ubiquitous, and investors tend to turn to funds, but they may look at investment products that we would never think of as a fund alternative to solve their needs. We want to know what those alternatives are and have an open and honest discussion around that.
But throughout, I think what will come through is that mutual funds remain relevant and offer enduring value to shareholders.
Q. Where do you see alternatives such as ETFs fitting into the industry?
A. The statistics around ETFs, for example, are hard to pin down, because they’re just not that transparent. Most of the survey data I’ve seen has indicated that somewhere between 70% and 80% of ETF purchases are done to create what I’ll call “synthetic equity.” It’s a deploying of money to get an exposure to a segment of the equity world. They are not really being used as a long-term savings vehicle in the way mutual funds have been used.
I’m not sure that’s how ETFs may wish to characterize themselves, and I don’t mean to speak for them.
Q. With a number of actively managed ETFs in registration, does the evolution of ETFs pose a threat to the mutual fund industry?
A. In the sense that they may evolve, that means they’re potentially a threat. But I don’t see it. I’m not really clear why they’re doing it. The core proposition of ETFs — that they actually track their benchmarks — is now being questioned. And the more esoteric the ETF, the more doubtful it is that they’re really fulfilling the promise of what they’re supposed to be doing.
Q. Of course, some people such as John Bogle [the founder and former chairman of The Vanguard Group Inc. of Malvern, Pa.] don’t believe actively managed mutual funds fulfill their promise of delivering adequate returns. What do you think about such comments?
A. You don’t think he has any sort of self-serving interest for making those statements?
Q. But other industry watchers have made similar comments. Are they wrong?
A. I would tell you that the sum of all alpha equals zero. And therefore that alpha, or the outperformance of a benchmark, can be elusive. That’s not the same thing as saying that you can’t actively outperform the benchmark, because all the evidence is that you can. It’s just that it’s hard. It’s also hard to play third base for the Yankees, but if you have the athletic skill, you can do so.
[Active management] says more to me about … who manages money, rather than that two-thirds of managers may not outperform the indexes by sufficient margin to cover their costs. But clearly, a third or more have done so and added value for a long period of time. As a result, the opportunity set becomes more binary for the players in our industry.
Q. What do you mean by that?
A. Winners and losers. At the end of the day, there is someone who won the game and someone who did not. What you’ve seen is a consolidation of flows to those who can demonstrate consistently over time that they provide superior performance.
Q. What about fund costs?
A.Expense ratios have trended down over time. You could say, based on the scale of achievements, they haven’t scaled down as much as they could have.
But while revenues have gone up a lot, so have costs. The cost of alpha — the cost to attract, retain and motivate the most talented investment professionals — has gone up hugely.
Look at the price of athletes playing major sports in this country. You go back a generation, and team owners were making those profits. Today, they’re in much more of a partnership/sharing relationship with the athletes that play for them.
Our athletes are the portfolio managers. We need to get the best. The prospect of providing positive alpha is one which we think is key to our success.
Q. Speaking of fund costs, what do you think of comments made by Andrew J. “Buddy” Donohue, director of the division of investment management at the Securities and Exchange Commission, that the SEC will examine 12(b)-1 fees and that everything, including its repeal, is on the table?
A. He raised that issue with me years ago when we were working together [at Merrill Lynch & Co. Inc. of New York]. I respect his integrity on the issue, and I think the answer is that 12(b)-1 fees were a good answer — when they were first promulgated. They made sense. But the game’s moved on, and I think we need to update the way we think about how we pay for distribution. Scale matters. People need to get rewarded. If people don’t get recognized for what they do, they won’t do it. Professionally, you can ask whether a 12(b)-1 fee is the right way to do it. Is it fair to shareholders? If you’re long-term holder, does it make sense? You get that extra fee forever; how does that work? I think it’s right and courageous of him to step up and recommend having an open dialogue about this.
Q. What do you think of the direction SEC Chairman Christopher Cox has taken with regard to mutual fund regulation?
A. I’ve met with Chris Cox, and I sense he is a very thoughtful person who’s come in and said: “We had allowed the pendulum to swing too far.” I think they’re trying to find the proper equilibrium: providing a healthy tension between regulator and regulated without undermining the ability of the industry to be successful and solve client needs. You know, it’s always been a delicate balancing act. It tends to shift back and forth.
Chairman Cox is a very talented leader who’s good at building consensus and getting people to work together rather than being divisive. He’s been successful in that regard and has tried to identify the things that will work for the industry. He has tried to find the areas where there’s good alignment and emphasizes those.
I think [the commission] will listen to us, because they know that although there was misbehavior, it was because people were not doing their jobs. When they do their jobs, our interests are well aligned with our shareholders’ needs, and therefore we have some informed things to say about what would work better for shareholders.
Q. What do you think of a proposal floated by Paul Roye, former director of the division of investment management, and others that the Investment Company Act of 1940 be re-examined and that the market, not fund directors, determine the cost of funds?
A. I think he’s dead right. You can lower fees, but you can never raise them.
Fees haven’t gone down more, in part, because it’s so asymmetric. What fund board director is ever going to say it’s a good idea to raise fees?
If the market could set the price, there’d be much more pricing experimentation, because there would be the opportunity to recover. And if there were that flexibility to compete on price, we’d probably see price going in the right direction. You would have thought that, given the industry’s growth and scale, prices would have come down somewhat more. But in the meantime, the costs of distribution, manufacturing and regulation have gone up.
Q. The environment you describe suggests that a lot of resources are necessary to succeed in today’s fund business. Does that mean barriers to entry have gotten higher? Is it harder for smaller niche players to compete?
A. They’ve been high for a long time. Over the past decade, an enormous amount of [merger and acquisition] activity took place, most of it not very successful. The winners are the same as before. And why are they winning? Because they had the right paradigm. They had investment excellence and strong distribution. They put the two together, and they became good product partners.
When some of these large firms got into trouble three and four years ago, that created an opportunity to go to a Merrill Lynch, Morgan Stanley or Smith Barney and say: “We have good product, too. Do you want to talk to us?”
Q. It looks as if you’ve been pretty successful capitalizing on that opportunity. You had more than $28 billion in gross sales in 2006, which exceeded the previous year’s record sales by 27%. To what do you attribute that success?
A. The prospect of providing positive alpha is what we think is key to our success. That’s why we pursued a multi-boutique model. We wanted to diversify our sources of alpha. Our whole philosophy is based on organizing around autonomous teams of talented, disciplined investment professionals —it’s a more reliable way of producing investment excellence. You get more continuity and more consistency of discipline, which ultimately leads to better performance. And when you have smaller teams that are highly focused in their network at a human scale, then it’s pretty clear who can do what. And they tend to like that environment.
The reason we’re both an employer of choice and an acquirer of choice for boutiques is because we really understand the environment that must be created in order to attract the talent and skills needed to manage money successfully. We devolve authority and empower these people, which is a trickier model to manage. Basically we’re creating intellectual content. It’s a bit of an artist colony approach, but that’s what it takes to create something as elusive as outperformance.
Q. Do you think that having an insurance company parent gives you an advantage as aging baby boomers seek income-oriented products?
A. [New York Life] obviously has a long history of measuring mortality risk and creating relevant product solutions. Note: I said mortality risk, not financial risk. That’s the whole issue. Will people live too long for their savings? Will they accumulate enough?
Accumulating money, although challenging when done efficiently, is intuitive. But converting that pile of cash into an income stream is not intuitive.