This blog post originally appeared on RealMoney Silver on March 4 at 7:35 a.m. EST.
"The problem is that investors may have no idea these fees are being deducted, what services they are paying for or who they are ultimately compensating.... That's why I believe we need to critically rethink how 12b-1 fees are used and whether they continue to be appropriate." -- SEC Commissioner Mary SchapiroI plan on substantially increasing my asset management shorts -- namely, Franklin Resources ( BEN), T. Rowe Price ( TROW), AllianceBernstein ( AB), Federated Investors ( FII) and Janus Capital ( JNS) -- in the weeks ahead based on the following cyclical and secular headwinds:
- I am of the view that the rally from the generational low in March 2009 is growing long in the tooth. As I have previously written, nine-month corrections often follow the first year of multiyear market advances (e.g., 1994 and 2004). Asset managers have historically been viewed (and have traded) as leveraged proxies for the equity market, so if 2010 resembles 1994 and 2004, the asset management group and the broader markets may be vulnerable to weakness in the capital markets.
- Impacted by the investing shock of 2008 still on the minds of many, a steep and unprecedented drop in home prices in 2008 to 2010, wage deflation crimping real disposable incomes, a record number of jobs lost, an elevated level of structural unemployment, the hesitancy of corporations to hire, the difficulty for young adults (and baby boomers) to gain employment, investor equity inflows might remain subdued.
- Maturation of the baby-boomer age group means the loss of a historically important contributor to mutual fund inflows. As they age, their propensity to invest diminishes.
- Draconian cost cutting by corporations continues apace. More S&P 500 companies than at any time in history are either reducing or eliminating 401(k) contributions entirely, and 401(k) contributions are the lifeblood of the mutual fund industry and of many asset managers.
- There is growing evidence that the Obama administration and the SEC will target 12b-1 fees (i.e., annual distribution and marketing fees that current mutual fund shareholders pay) in the months ahead. Nearly $200 billion in 12b-1 fees have been received by asset managers over the last 10 years.
- Much of the inflows to asset managers over the past two years have been in fixed income (especially of a non-U.S. kind). My view is that a bubble is forming in fixed income. If I am correct and a large price decline in bonds (and increase in yield) occurs, asset managers could be disintermediated.