Though it's probably not that well known by investors, the Investment Company Institute has as much to do with how mutual funds are run and advertised in the U.S. as giants like Fidelity, Vanguard and Janus.
The institute, the mutual fund industry's trade association, lobbies the
SEC and other government groups on legislation affecting how mutual funds are sold, advertised, taxed and run.
Terry K. Glenn, chairman of
Merrill Lynch's (MER Quote) Americas division and president of Merrill Lynch Funds, was elected to a one-year term as chairman of the ICI last October.
TSC spoke with Glenn about recent legislation affecting the industry, why he's not that worried about redemptions, and why he thinks Merrill Lynch can nearly double its assets under management to $1 trillion by 2005.
TSC: What are your priorities as the new ICI chair? Terry Glenn: Our No. 1 priority right now is to try to expand opportunities for Americans to save and invest for retirement. We believe the
Retirement Savings Act that passed the House overwhelmingly last year is going to be introduced in its same form, and this will be our top legislative priority for the year.
The act will expand contributions to 401(k)'s from $10,000 to $15,000 a year and to Individual Retirement Accounts from $2,000 to $5,000, which is what the inflation-adjusted amount would have been since their creation. It also allows for greater portability and allows people who have been out of the workforce to catch up with their contributions.
It is a huge win for American investors, and, honestly, since mutual funds have been the investment of choice for most of those retirement plans, it would be very good for our industry.
A second priority would be to have the law changed so that participants in defined contribution plans can officially be provided with advice and investment tools so that they can maximize the benefit of their plans.
I would love to see some tax relief in the area of mutual fund capital gains distribution. This, perhaps, is a more difficult task, but something over the long run that I would like to see done.
We will continue the investor awareness campaigns that the institute has conducted over the past couple of years. Our current program, "Investing for Success," is a partnership with the
National Urban League to address an investment-knowledge gap between African Americans and the U.S. population at large through a series of free personal finance workshops nationwide conducted by member firms, such as Merrill Lynch, and others.
An ongoing challenge is to continue an ICI tradition of speaking with a single voice so that our increasingly complex and disparate organizations -- fund complexes, banks, insurance companies and broker/dealers -- continue to be unified in supporting regulations that are good for fund shareholders and consequently good for the industry.
Finally, the most important issue is just maintaining the culture of putting shareholders first and sustaining the industry's reputation for integrity. This has been a large part of our success over the past 60 years.
That should keep us busy for the year.
TSC: Critics of 401(k) advice have said that while education and advice is good for 401(k) investors, having that advice come from a mutual fund company in the plan, with an interest in steering investors to their own funds, or perhaps to funds with higher fees, is not a good thing. Is the ICI concerned about this potential conflict of interest? Glenn: First of all, the advice providers would be subject to the strict fiduciary restrictions of ERISA [Employee Retirement Income Security Act] to provide prudent, objective advice to participants. In addition, the advice providers have to provide clear disclosure as to fees and potential conflicts of interest.
It seems almost irresponsible to me that we would place investment responsibilities and decisions on the shoulders of individual participants in 401(k)'s, and then limit their access to information.
The idea that a mutual fund company should not be able to provide advice in 401(k) plans because of potential conflicts of interest also flies in the face of common practices that exist outside defined contribution plans. Be it with a financial planner or a broker/dealer or a no-load fund, firms have regularly provided asset-allocation tools, retirement-plan models and all sorts of other kinds of advice to investors and funds.
TSC: The 60% decline in the Nasdaq and 20% fall in the S&P 500 appear to be spurring some investors to take their money out of equity funds and put it into money market accounts -- even bank accounts. In addition, early fund-flow estimates for the month of February indicate the industry might face its first net redemptions in equity funds since August 1998. Is the fund industry afraid that investors are fleeing the markets and equity funds? Glenn: Since I entered this business all the way back in 1969, just prior to one of the longest sustained bear markets in history, my reaction is, Thank God we have money market funds to serve our investors so we can retain their assets under management. That was not always the case.
Furthermore, if you look at the behavior of mutual fund shareholders at least to date, they do not panic in market downturns. And I do not expect this time will be any different.
But at least to date, there has been no flight to money market funds. Institutional investors moving into money market funds as interest rates have fallen -- not retail mutual fund shareholders -- have been responsible for well over two-thirds of the growth in assets in money market funds in the early part of this year. And in January, mutual funds actually had net sales of $25 billion, which was up from December. So the official numbers to date through January indicate there has been no flight.
Should there be some month in the future when net redemptions do occur, I think that reallocation of assets is only a natural process. The industry has always stressed diversification and appropriate asset allocation, through good times and bad.
TSC: Fund leaders have been warning for a while now that the industry, which has enjoyed tremendous growth over the past 15 years, could see its growth slow. Are member ICI fund companies worried, and what could this mean for investors? Glenn: It is true that the U.S. mutual fund industry is the world's largest financial intermediary. It's only natural to assume that this industry will find it difficult to maintain the tremendous growth that it has experienced in the past.
But I've been hearing about these warnings for at least the last decade. The very robust U.S. equity markets together with the defined contribution plans -- those two events have dramatically impacted industry growth on the upside. At least with the equity markets, we cannot expect this kind of growth -- it was the single-best period for U.S. equity markets in history -- to continue forever.
However, if you look at the demographics around the world, saving and investing is going to be a growth business at least for the foreseeable future.
In terms of the shareholders, in combination with the tremendous M&A activity we have seen in the asset management business, the maturing of the industry into a slower-growth industry should have a positive impact on mutual fund shareholders. I expect the landscape, even contracted, to continue to be highly competitive with thousands and thousands of fund investment choices for shareholders in virtually every asset category. I expect there will be improved and even more innovative services for investors in the coming years at even better prices.
The consumer -- the mutual fund shareholder -- is the winner.
TSC: Many investors have asked for more frequent disclosures of the top holdings in their funds, vs. the current policy of providing them just twice a year. In fact, 14 different investor, consumer, professional and employee groups representing millions of mutual fund investors have lobbied the ICI to work with the SEC to require more frequent disclosure. But the ICI has basically shot these requests down. Why? Glenn: I would suspect that the amount of the current holdings disclosure is adequate, and in many instances, more frequent disclosure would be a waste of people's time and money. Obviously, if you have an index fund listing 500 stocks, it serves no one to send that information to the shareholder. Or if you have a large money market fund with hundreds and hundreds of positions, I don't think anyone is interested in what those holdings are.
Some of these silly suggestions that have surfaced have even called for disclosing holdings every two weeks. My guess is that twice-a-year disclosure is probably adequate.
TSC: The mutual fund industry has been very opposed to the after-tax reporting rule that will require funds, beginning Feb. 15, 2002, to disclose after-tax returns at the highest income-tax bracket in their prospectuses. Does the ICI plan to revisit this issue with the SEC? Glenn: In general, the fund industry has always supported extensive disclosure and mutual funds have been much more transparent than other financial products.
But that doesn't mean I agree with the after-tax reporting rule. Reporting results at the highest tax bracket is not informative for most Americans. Last time I looked, less than 1% of all Americans were at the highest tax bracket. Consequently, I believe this requirement will result in inaccurate disclosure at best, and misleading disclosure at worst.
This is one area where I am concerned that other competing products that do not have to disclose their after-tax performance may market against funds based on this information, and I think that's unfortunate. Also, the fact that this information will not appear in the most appropriate place in the prospectus, with all of the other tax data, is also a problem.
There's also the possibility that people will redeem at the end of the first year, which will result in their being taxed at the income-tax rate, rather than at the capital gains rate that's imposed after a year and a day.
There was an extended comment period, and I am disappointed that the rule came out the way it did. If there is a chance to improve upon the rule, we would be happy to continue those discussions with the SEC.
TSC: Just over a year ago, Merrill Lynch announced that it planned to double its assets under management from $520 billion at that time to $1 trillion by 2005. That would be quite a feat, given that the entire U.S. mutual fund industry has $7 trillion worth of assets under management. Well, it's a year later, and you've only increased your assets by another $37 billion. How does Merrill plan to get to $1 trillion? Glenn: We have a lot of initiatives, and obviously part of our success in growing assets will depend on the securities markets and to a certain extent the currency markets because of our enormous presence outside of the United States.
Year 2000, even though the markets were tough, we had record sales around the world. Our new quantitative advisors business grew rapidly both in the United States and around the world.
Our retail businesses, particularly in Europe, are growing rapidly, particularly through third-party distributors that are just starting to sell other companies' funds. We have one of the premier brands in that marketplace. We are now the largest foreign manager of assets in Japan.
We are going to move forward with our third-party distribution plans in the U.S. Our private account business is growing at a record pace. And also if you look at our high-net-worth and ultra-high-net-worth business through our sister companies
Merrill Lynch Pierce Fenner & Smith and
Merrill Lynch International Private Client, that is a winning strategy of separate accounts and hedge funds.
Finally, 1999 was a good year for our U.S. equity funds in terms of performance, and 2000 was a wonderful year with an outstanding performance record. And coming off those two years, I suspect that we will see a dramatic improvement of flows into our U.S. domestic funds.
