Published on December 22, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company- written by Gregory Shulas
Poll: Industry Gripped by Ambivalence in 2011
The mutual fund industry foresees a mix of good and bad for 2011, predicting a rebound in equity funds but major challenges in the municipal bond and money fund markets.
That’s according to the results of an Ignites survey that polled readers on what they see as the most likely events to occur in the coming year. The answer options provided a full range of responses from the optimistic “Investors return to equities en masse” to the pessimistic “A wave of defaults sparks a crisis in the muni market.”
The results suggest a high level of ambivalence in the industry about what the future holds.
Roughly 27%, or 80 voters, said investors will move en masse to equities next year. That made it the top response.
But equity market optimism was largely muted by concerns over credit markets. The second most popular answer with about 20% of the response, or 58 voters, predicts that a wave of defaults will spark a muni bond market crisis next year. Moreover, 16% or 47 voters, believe tighter regulations and thin yields will push most money fund firms to exit that market.
Other potential trends received less support. Roughly 14%, or 41 voters, prognosticate that the Dodd-Frank Act to be overhauled by Congressional Republicans, while 12%, or 36 voters, believe 2011 will be marked by an uptick in M&A. Meanwhile, 9% believe the SEC will adopt 12b-1 reform.
The favorable equity market sentiment comes after bond products attracted massive inflows as part of a larger de-risking trend. The development boosted the profile and flows of the industry’s top bond shops during the past two years.
But signs that the so-called “flight to safety” is reversing have emerged, industry observers say.Pimco‘s Total Return Fund was among the bond funds that saw a decline in assets in the past month as investors sold off Treasurys, Bloomberg has reported. However, Pimco still enjoyed a stellar year for their products through November.
Additionally, Pimco’s Total Return Fund is broadening its investment policy to allow stakes in equity-linked securities. The fund’s portfolio manager, Bill Gross, has said he expects bonds to weaken following Federal Reserve asset purchases.
Bruce Johnston, founder of sales consultancy DBJ Associates, says firms should be asking themselves whether they are prepared for the equity market’s re-emergence.
“The balance sheets of large-cap companies are cleaned up and poised for growth. It is a clear trend,” Johnston says. “But the question is: Are firms prepared to take advantage of what is coming up? If prices for equity firms were cheap, did you take advantage of it? Did all that money saved by cutting jobs go right into the bottom line or did some of it go toward buying equity firms?”
Andy Klausner, founder of asset and wealth management consultancy AK Advisory Partners, says the poll’s mixture of optimism and pessimism is a sign of the times.
“It has been a very good year in the markets – better than in the economy as a whole,” Klausner says. “However, the high percentage of respondents thinking there are problems ahead in the muni bond market represents the part of the industry that realizes that unemployment is too high and the deficit is growing too quickly.”
“I do agree with the general consensus that with the new Republican majority in the House, that there is a chance that Dodd-Frank will face some overhaul. Overall, there is certainly a better chance here given some of the problems that have already emerged in the [Act] as opposed to other major areas of debate like health care,” Klausner says.
Dan Crowley, partner at K&L Gates and previously general counsel to former Speaker of the House Newt Gingrich, also sees the potential for Congress to revisit regulations that were hastily put together following the financial crisis.
“A bipartisan chorus of concern is already emerging about the speed with which the regulators are promulgating proposals that could have a profound impact on the economy and on U.S. competitiveness,” Crowley said in an e-mail message. “House Republicans will be particularly focused on the cost versus the benefit of proposed regulations, and we will almost certainly see corrective legislation to address unintended consequences enacted in stages in the coming Congress.”
As of 3 p.m. Tuesday, nearly 300 Ignites subscribers participated in the survey, which is an unscientific sampling of the publication’s subscribers. Readers voted only once on a voluntary basis. Ignites’s audience consists of financial advisors, money managers and service providers.
