E x ecutive perspective
The Feeling is Mutual
Do funds have more fun? We sat down with
George C. W. Gatch, CEO of J.P. Morgan Funds, who
discussed the evolving landscape for mutual funds.
In the excerpts below, George weighs in on what’s new
for fund line-ups both within DC plans and in the
broader marketplace.
What are the big trends affecting mutual funds? We have seen a continued
trend toward asset allocation funds and
more “packaged” mutual fund suites
such as TDFs. We expect to see even
more risk-based asset allocation funds,
and options that help participants position themselves for retirement such
as managed account programs. Plan
sponsors and participants are increasingly looking for solutions that alleviate some of their worry by, for instance,
turning responsibility over to a professional manager. Another trend we see
involves the heightened focus by plan
sponsors and the general public on fees
and overall transparency. We expect to
continue to see an unbundling of fees
attached to mutual funds.
What is the latest pattern you are
seeing in DC plan fund line-ups?
It’s not limited to DC plans, but broadly, investors are reassessing their fund
line-ups as a result of what has transpired over the past two years in the
financial markets.
8
JOURN EY Spring / Summer 2010
Curious, though, as much of the research seems to indicate that investors
in DC plans spend hardly any time
on their investments... True, but there
is a growing sense of urgency among
plan sponsors. Many are taking a fresh
look to make sure that they’re properly
aligned in terms of risk and return.
For example, some people who thought
they had invested in a low-risk fixed income strategy woke up amid the credit
crisis to find out that wasn’t necessarily
the case.
Is there a difference in the DC/
DCIO approach to fund selection?
Essentially, we see it is being one in the
same as far as decision-making goes for
both channels. When a plan sponsor is
thinking of changing the record keeper,
then that’s an obvious juncture to consider changes in the fund line-up. But
it’s probably prudent for DC plans to
periodically—at least annually—review
their funds’ performance and consider
adding or streamlining.
What are the key legislative initiatives
you are keeping an eye on? Our main
concern on the regulatory side is that
Congress might seek to mandate certain
investments such as an annuity or index fund option within all 401(k) plans.
We think those decisions should be left
up to plan sponsors. On the other hand,
it seems that some of the pressure that
had been brought to bear by legislators
on things like TDFs—in terms of naming conventions and
glide path requirements—has diminished as markets
have recovered.
What is some of
the newest thinking in terms of
fund strategies? One of the biggest lessons learned from the
financial crisis is that investors were
not diversified enough. We at J.P. Morgan have been strong advocates for increasing diversification through access
to strategies that have low correlations
to U.S. stocks and bonds. These alternatives could include market neutral
funds, inflation hedges, exposure to nontraditional asset classes through extension strategies like international REITs,
convertible bonds, commodities and
absolute return fixed income strategies.
Isn’t the TDF structure one way to access these extension strategies? Yes, as
it’s unlikely that any of these would be
available as stand alone DC options. That
doesn’t mean they won’t be one day,
but many plans already have too many
funds. Instead, we’re seeing plan sponsors start to tap alternative strategies via
TDFs which incorporate them. Some
larger plans are developing customized
TDFs with extension strategies.
continued on p. 30
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Speaking Investments contined from p.7
Plan Sponsor Roundtable continued from p. 14
or bonds for a given investment strategy no matter where the companies
are listed. Interestingly, institutional
investors have invested more of their
money with global funds than emerging market or other regional-based
strategies (excluding pure U.S. or traditional multi-regional International)
over the past two years, says J.P. Morgan’s Emmett. He adds: “If it makes
sense for DB plans, why shouldn’t DC
participants have access to the same
opportunity?” So going global may
involve a strategic rethinking of the
fund line-up in more plans.
We moved from lifestyle funds a few
years ago. Originally, our default option
was a money market fund, and that was
scary because we saw employees who
retired with 100% of their retirement
savings in money market funds. When
we rolled out lifestyle funds, it had a
positive reception. But there was still a
lot of confusion. Some people put onethird of their money in the aggressive
bucket, another third in moderate and
the remaining third in conservative.
When TDFs came along, we found
that suited a lot of our employees. They
are the solution to the age-old question:
‘What do I do with my money?’ It’s
been two years now. When we started
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Executive Perspective continued from p. 8
In your view, what makes for a successful fund complex? While there are a
lot of components, strong risk-adjusted
returns are the most critical factor. But
you also need a strong investment management culture and a sense of continuity among the team of investment
professionals and their managers.
There is a lot of discussion about the
relative virtues of commingled funds,
SMAs and mutual funds. What is
your view? Commingled funds and
separately managed accounts (SMAs)
provide increased flexibility for the plan
sponsor, including the ability to negoti-
30
JO U R N E Y Spring / Summer 2010
ate fees. On the other hand, mutual funds
provide services that most commingled
funds and SMAs don’t—such as a
detailed prospectus, the oversight of an
independent board and greater transparency, including daily valuations.
And mutual funds have the added
benefit of portability, the ability of the
participant to take the assets with them
if they leave or retire.
How has the mutual fund industry
fared in the wake of the credit crisis? It’s pretty clear that the image of
mutual funds has actually improved
a great deal compared to other
investment vehicles and, at the
end of the day, the mutual fund
industry’s outlook is very strong. Shareholder and investor protection have
proven to be very resilient and mutual
funds continue to be the dominant
investment vehicle of choice by individual investors. Think about it—more
having employee meetings, we made
sure to put a quick enroll form and a
pen on every chair. As a result, we got
a very good response. Ask them to go
home and do it on their PC? Forget
about it!
ISENHOUR: Do your plans see their objective as getting participants to retirement or through retirement?
GLEASON: We’re through. I think
that’s mostly because we have DB plans
which take them through retirement
and we want our 401(k) plan to offer
the same thing to all participants.
STEWART: We’re focused on to. Ideally, we’d like to provide the tools for
post-career retirement, but our focus is
just trying to maximize where they are
when they get to retirement age.
CONGER: We’re also more to, even
though we have a DB plan as well. We
might get back to through at some point
in the future. Several years ago we allowed employees to take a lump
than 80 million U.S. households invest
in mutual funds.
What drew you to mutual funds in a
bank as diverse as J.P. Morgan? I’ve
been involved with mutual funds at
J.P. Morgan since 1990. Twenty years
ago, J.P. Morgan had seven mutual
funds and $4 billion in assets under
management (AUM). Today, we have
over 100 funds and over $400 billion in
AUM. In the early 1990s, it was hard to
get fund managers interested in managing a mutual fund because there was
more visibility running SMAs for pension funds. Now, every fund manager
we have wants to manage a mutual
fund!
Each issue, we answer questions we
receive from readers. Please send
your questions to:
[email protected]