ICI meeting covers use of alternatives in funds

The use of alternative hedge-fund-like strategies within mutual funds was a hot topic of discussion last week at the Investment Company Institute's 50th annual general membership meeting in Washington. That trend is likely to continue, said Edward Egilinsky, managing director of alternative investments at Rydex Investments of Rockville, Md., during a panel discussion on alternative investments in funds. "At the end of the day, clients are looking for absolute return," he said. One way funds can provide those returns is to offer access to investments such as the 130/30 strategy, Mr. Egilinsky said. In this strategy, a manager shorts 30% of the portfolio and uses the proceeds to go long an extra 30% in areas where growth is predicted. Funds also can begin to look more seriously at commodities, currencies and managed futures, Mr. Egilinsky said. But not everyone on the alternatives panel was as enamored of the idea of making such investments available to retail investors. "It's about suitability," said panelist Marc O. Mayer, executive vice president of New York-based AllianceBernstein LP and executive director of AllianceBernstein Investments Inc.
Retail investors aren't as savvy as institutional or high-net-worth investors and may not understand the investments, he said. But they can be made to understand how the strategies work, Mr. Egilinsky said. And because alternative strategies are presented in a mutual fund wrapper, they come with the investor protections absent in a hedge fund, he said.

EUROPEAN MODEL

Alternative investments weren't the only item on the agenda at the Washington-based ICI's conference. Some industry leaders picked up on recent calls to overhaul the mutual fund structure and replace it with a more European model that isn't subject to oversight by an independent board. "You cannot conceive of a more fruitcake model than the one we have today," Arthur Zeikel, retired chairman of Merrill Lynch Asset Management, a former unit of Merrill Lynch & Co. Inc. of New York, said of the U.S. fund model. He made his comments during a panel discussion on leadership in the mutual fund industry. Even though they don't actually launch funds, independent directors control fund pricing and can even replace a fund's adviser if they see fit, Mr. Zeikel said. "In a sense, it's counterintuitive," he said. "Today, independent directors own the business." It is "ridiculous" how little say a fund adviser actually has in the operation of the funds it manages, said panelist Mellody Hobson, president of Chicago-based Ariel Capital Management LLC. The ICI has also registered its support for adopting the European fund model. The introduction of such a fund model in the United States "would make the U.S. regulatory framework for registered funds more compatible with the regulatory framework for funds in other leading jurisdictions around the world," the ICI wrote in a letter to the Senate Republican Capital Markets Task Force on Feb. 25. The ICI also devoted an entire panel to the discussion of the European fund model in March at an investment conference it sponsored in Phoenix. Not everyone is gung-ho about the idea, however. It would be a disservice to investors if such a model were ever adopted in the United States, said Don Phillips, a managing director with Morningstar Inc. of Chicago, commenting during the panel discussion. European funds are more costly than U.S. funds partly because there is no one to question the fund adviser, he said. "It is understandable why Mr. Zeikel and others want to have more control over funds, but "he's not thinking of the investor experience," Mr. Phillips said. Regardless, the entrenched interests involved make it unlikely that U.S. investors will see anything resembling a European fund structure anytime soon, he said.

12(B)-1 FEES

Meanwhile, though many conference attendees had 12(b)-1 fees on their minds, the Securities and Exchange Commission had no presence at the ICI conference. But that didn't stop conference attendees from voicing their opinions on 12(b)-1 reform, which seems increasingly likely. Many attendees said they wouldn't take issue with calling 12(b)-1 fees something different, but support for anything beyond greater disclosure was hard to come by. SEC staff members soon are expected to recommend that 12(b)-1 fees be broken into at least two parts: a sales load and a portion that pays for shareholder servicing and distribution-related administration. But 12(b)-1 fees allow smaller fund companies to pay for shelf space, Ms. Hobson argued during the panel discussion on leadership in the fund industry. Without such fees, "I don't think a small company like ours would exist," she said. The expected reform of Rule 12(b)-1 wasn't the only regulatory issue discussed at the conference. "I see a huge wave of regulation coming our way" concerning retirement plans, said Cathy Heron, senior vice president and senior counsel for the fund business management group at Capital Research and Management Co. in Los Angeles. The company is the adviser to the American Funds group. Ms. Heron made her comments during a panel on the U.S. retirement market.Proposals related to greater fee disclosure within 401(k) retirement plans are already being floated, she said. In his opening remarks at the conference, Paul Schott Stevens, the ICI's president and chief executive, focused on changes the ICI thinks need to be made with regard to 401(k) plans. "Government policymakers should look at the obstacles that keep so many employers from offering 401(k) plans and make every effort to remove them," he said. That, however, doesn't appear to be the direction in which the government is heading. "Today, 56% of small private- sector employers do not offer a pension plan, in part because of the administrative complexity involved," Mr. Stevens said. "Unfortunately, this point seems lost on those in Congress who favor new and cumbersome mandates that are likely to retard broader coverage of these important retirement plans." E-mail David Hoffman at dhoffman@investmentnews.com.