Mutual Funds and a Changing Landscape
Pruning your portfolio? Some trends to watch
Investors can be a fickle lot. But for more than three decades, they've bought into one idea that has really never fallen out of favor: the mutual fund. These workhorses are in almost every investor's portfolio, and they continue to dominate the financial options available to Americans saving for college and retirement.Even as economic worries weighed on them -- a recession that just wouldn't end, a drop in global markets of more than half, and a jobless rate near 10 percent, to name three -- many investors focused on retirement held fast to their funds. A March study by Vanguard Investments found that less than 1 in 7 Americans made any change to their 401(k) retirement savings plans during the crisis. At the end of last year, despite the strains of one of the worst decades in market history, Americans held more than
Though the breadth of the market's devastation revealed that diversification is no guarantee of protection, for most individual investors "a sensible balance of mutual funds still makes a lot of sense," says
As they do, investors will find that they face a changing landscape. Shifting demand, new investment choices, and fallout from the downturn mean that the most common type of fund owned by average Americans -- equity funds run by a stock-picking manager -- will experience new competition. Demand for stock funds, which dried up during the recession, has barely reversed this year despite an ongoing market rally. "We've seen ongoing demand weakness in equity funds. It's picked up [recently], but overall demand for equities has been pretty weak throughout this recovery," says
Another Year of the Bond?
Stock funds remain by far the favorite of most investors; equity funds still held nearly
Still, that doesn't mean bonds are a "buy." It's clear that 2009 will be remembered as a legendary year, when the average total returns of bond funds topped 16 percent as fund managers snapped up all sorts of bonds at bargain-basement prices during the credit crisis. That opportunity is largely over, and investing pros are growing increasingly wary of all sorts of debt as the current fixed-income rally cools and an eventual rise in interest rates, which will hurt bond prices, seems more inevitable. Some sectors, like municipal bond funds, have seen inflows slow noticeably already.
Longer term, the question remains whether more investors will stick with bonds when the economy rebounds. Some analysts, including Reid, argue that demographic shifts favor bond-fund demand as income-seeking baby boomers approach retirement. But stock funds have been resilient even after the past decade of middling returns. They've drawn the lion's share of investing dollars for years, and it's tough to predict a real break from that stock-loving tradition, analysts say.
New products rise.
The all-star fund manager is a fixture in the fund world. Names like Pimco's
This decade, no rival to traditional funds has come on as strong as the exchange-traded fund.
These popular, low-cost index trackers hit a milestone in late 2009, when assets under management topped
Target-date funds, another fast-growing option for investors looking for a simple way to diversify a portfolio, gradually shift to a mix of more conservative assets as a specified date of retirement nears; they offer a built-in asset allocation "glide path" designed to gradually decrease risk over time. Such funds drew ire in 2008, when some aging target-date investors were spooked by the amount of equity risk in their funds as markets sank. The outcry prompted a government call for improved risk disclosures by such funds. But the asset class appears to have weathered its first major test in respectable shape, if consumer demand is any indication. In 2009, new enrollees in company retirement plans put 42 percent of total contributions into target-date funds. The newly launched
Interest in both ETFs and target-date products has been "off the charts," says
A hiccup in fees' long decline.
Low costs have long been among the biggest selling points for mutual funds; average annual fees and expenses paid by mutual fund investors have fallen by half since 1990. Unfortunately, bad times in the economy and markets are also bad for fund fees.
Last year, fund expense ratios jumped to their highest levels since 2000, according to
If it seems counterintuitive that funds would raise fees rather than cut them as investors raced for the exits, the process also works in reverse. As assets flow back, keep an eye out for announcements of lower fees among the more brazen funds.
The price of ownership of mutual fund shares matters. Soon, those costs should resume heading down.
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