The stock market may be in turmoil, but rose-colored glasses certainly make things more bearable. At least that's the feeling one got after listening to remarks Thursday at the Investment Company Institute's general membership meeting in Washington.
But even though the mutual fund industry may not be suffering as much as other industries in this volatile market, the ICI leadership took the opportunity to vigorously press its case against calls for more disclosure in shareholder reports and for the regulation of competing investment products.
The ICI also signaled its willingness to oppose the Securities and Exchange Commission when it disagrees with one of its rules and to press its case in the world of politics.
For the most part, however, ICI officials seemed determined to prove the industry is in good shape despite the fact that equity funds have seen increased redemptions.
Terry Glenn, ICI chairman, conceded mutual funds are seeing greater outflows, but he also pointed out that sales of fund shares have increased as well, continuing a trend since the mid-1990s.
"The trend does not necessarily imply that the typical shareholder has shortened his or her holding period," Mr. Glenn said. "Indeed ... a range of empirical evidence suggests that the trend more likely results from the high redemption activity of a small percentage of mutual fund investors."
Record flows
To back up his statement, Mr. Glenn said that despite the market downturn, the mutual fund industry ended the year with record net cash flows into equity funds of $309 billion. He also said that the industry had $6.97 trillion in assets at the end of the year, up from $6.85 trillion the year before.
In a signal that competing investment products such as "synthetic mutual funds" - groups of equity shares that investors buy to create their own portfolio - are a growing concern, Mr. Glenn couldn't help but mention them.
"Even as imitators seek to develop products to compete against mutual funds, I believe that mutual funds will continue to be preferred by many different kinds of investors for many different reasons, particularly in helping them attain their long-term financial goals," he said.
Matthew Fink, ICI president, echoed those remarks, noting that the ICI has asked the SEC to consider regulating synthetic funds as mutual funds.
"Products that mimic mutual funds but avoid critical investor protections are creating serious and unnecessary risks," Mr. Fink said. "If parallel industries are permitted to develop - one regulated, one unregulated - the only direction we are destined to move in is a race to the bottom as competitive forces pressure all firms to minimize regulatory costs."
While calling for greater regulation of alternative investments, Mr. Fink decried suggestions that mutual funds disclose more information in shareholder reports, an issue that the SEC is reviewing.
"We have yet to see evidence that those who invest in mutual funds want more encyclopedic disclosure," Mr. Fink said. "But we have seen considerable evidence that those who trade against mutual funds would welcome it."
Mr. Fink said arbitrageurs, day traders and market timers already exploit mutual fund disclosures. If funds are forced to disclose more-detailed information, he said, such opportunists would have more chances to hurt the majority of shareholders, who are generally buy-and-hold investors.
For example, Mr. Fink said the ICI has concerns about a recent rule prohibiting independent fund directors from hiring lawyers who also may have worked or are working for a fund's independent advisers. The ICI's view is that the rule is unnecessary and could cause a fund to take on extra expenses.
Mr. Fink said one way for the ICI to move forward its agenda is to become politically involved. That means backing a public policy that would help the industry, he said.
At a later session, Philip J. Purcell, chairman and chief executive of New York's Morgan Stanley Dean Witter & Co., and Charles R. Schwab, founder of discount brokerage Charles Schwab & Co. in San Francisco, discussed their outlooks for the fund industry.
Both scoffed at the notion that companies' using the Internet as their sole means of dealing with clients represents a formidable threat to their own businesses.
Mr. Schwab, for example, said that 80% of all his company's customer transactions are done over the Internet. At the same time, 80% of the new assets flowing into the company do so through its 400 or so branches. "People want face-to-face contact," he said.
