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WEDNESDAY, MAY 9
GMM Policy Forum
General Membership Meeting, Operations and Technology Conference
America faces a skills crisis and other deep challenges in education, said U.S. Secretary of Education Arne Duncan at the annual GMM policy forum, part of ICI’s 54th General Membership Meeting. In a conversation with ICI President and CEO Paul Schott Stevens, Secretary Duncan offered a range of ways to address these challenges, including specific recommendations for the fund industry.
“This is a national issue of complacency,” Duncan said. “As a country we have rested on our laurels for far too long.” He cited a 25 percent dropout rate and a system of teaching math and science that is “fundamentally broken.”
Financial literacy is also an area of concern, according to the Secretary. “We are graduating far too many people who are financially illiterate.”
Secretary Duncan elaborated on ways the U.S. can surmount these hurdles. American teachers should be paid more, he suggested, adding that the U.S. should emulate countries such as Finland, Singapore, and South Korea, where the teaching profession enjoys more prestige and teachers are drawn from top ranks of university graduates.
While the federal government cannot “micromanage 100,000 schools,” Secretary Duncan said it can serve as a vital source of funding, a catalyst for change, and a means to bring more accountability into education.
The private sector also has a role, Secretary Duncan emphasized. He offered praise for local partnerships and efforts such as Ariel Community Academy, a Chicago public school sponsored by Ariel Investments. He also offered the fund industry three ways to further educational progress. First, he urged ICI attendees to engage politically on education with leaders at the state and local level, with a focus on financial literacy as a piece of the approach. Next, he stressed the importance of having fund companies further their efforts to create diverse workforces. Finally, he said the fund industry could be a part of a national call to action to raise awareness on educational matters.
“You can have a tremendous, tremendous impact,” he said.
THURSDAY, MAY 10
GMM Leadership Panel: Lasting Values for Challenging Times
General Membership Meeting
Helping investors cope with economic risks in Europe and the United States, select products that best meet their financial goals, and manage expectations in a turbulent environment with rising interest rates are among the top challenges for fund advisers, a panel of industry leaders told ICI’s General Membership Meeting.
Opening Thursday’s GMM session, Paul Haaga, former ICI Chairman and Chairman of the Board of Capital Research and Management Company, led a wide-ranging discussion of issues that are affecting managers, financial intermediaries, and investors.
- Economic risks: A recent survey of Fidelity Investments’ high net worth investors found that “three things are keeping them from investing—the U.S. elections, the European economic crisis, and the U.S. debt ceiling—and only one of those has a fixed time to conclude,” said Ronald O’Hanley, President of Asset Management and Corporate Services at Fidelity. Panelists agreed that Europe’s debt and growth problems are making investors shy away from risk. “Europe is undergoing a multi-year deleveraging process,” said Gregory Fleming, President of Morgan Stanley Investment Management. “There is slow progress, but it’s not going to disappear from the screens anytime soon.”
- Bond investing: Panelists agreed that the inevitable increase in interest rates could bring surprises to investors who have turned to bond funds for stability and income. “People do tend to forget that when interest rates go up, bond prices go down, and you can have capital losses,” said Kenneth Olivier, Chairman and CEO, Dodge & Cox.
- Finding solutions: Panelists agreed that the number of funds and investment products, which has grown as product differentiation led to product proliferation, is likely to shrink in the years ahead. “Investors are overwhelmed by choice—they need to know what products make sense for the outcomes they desire,” said Marie A. Chandoha, President and CEO of Charles Schwab Investment Management, Inc. “Our challenge is to create building blocks that offer solutions.”
- Fund governance: These executives agreed that a healthy working relationship with independent directors is key to ensuring that funds serve investors. Managers and trustees “are on the same side here—we both want to provide great service to shareholders,” said Olivier. O’Hanley noted that “the quality of independent directors is at an all-time high—and it needs to be. These are very tough and complicated jobs.”
A Year in Review: Compliance Challenges 2011–2012
Mutual Fund Compliance Programs Conference
In a quiz-show style session, compliance experts reviewed the challenges, lessons learned, and forthcoming developments of 2011–2012 in a panel discussion at a Thursday session of the 54th annual General Membership Meeting.
Opening with a tongue-in-cheek quote attributed to Chairman Mao advising “having clear-cut criteria to go by and engage in self-criticism to identify the fragrant flowers or poisonous weeds among us,” moderator Robert P. Scales, Chief Compliance Officer of Columbia Acorn Funds, set up overarching principles for the discussion.
Expert networks and mosaic theory was examined, as it continues to be an important issue “to establish appropriate compliance structures so that firms and shareholders are protected,” said Scales. “Major developments on this front in the past year include the increasing importance of criminal law enforcement and criminal law concepts in what used to be a civil law environment,” said panelist John H. Walsh, Partner at Sutherland Asbill & Brennan. Scales offered five elements to a good compliance program for expert network usage: written policy provisions, due diligence, training, monitoring, and testing.
Identifying government entities under pay-to-play rules was acknowledged to be an ongoing challenge. Richard J. Gorman, Chief Compliance Officer, Oakmark Funds, acknowledged ICI “to the rescue” by seeking no-action relief, stating an alternate set of records can be kept of accounts of government entities if they can be reasonably identified as being held in the name of the government entity on the records of the investment pool. “That’s the key,” said Gorman. Scales advised that because “all of our policies are evolving in this area…pre-clear everything….given the terrible consequences of making a mistake, it’s probably best if you have very broad clearance.”
Stephen M. Benham, Compliance Director of HSBC Global Asset Management (USA) Inc., suggested caution until the legal challenge to the CFTC’s Rule 4.5 amendment is resolved. “There’s a rule out there and we have to respond to it.”
Managing Global Funds in Challenging Times
General Membership Meeting
Immense opportunities lie ahead for global fund managers, agreed panelists at a session at ICI’s 54th General Membership Meeting.
“We are only seeing the tip of the iceberg,” said Vijay C. Advani, Executive Vice President, Global Advisory Services at Franklin Resources, Inc. Advani, whose firm draws half of its flows from outside the United States, cited a recent survey predicting the population of individuals defined as middle class will increase from 1.5 billion currently to 5 billion by 2030.
A key part of the opportunity for fund managers is fiscal pressure on governments worldwide. “Due to the poor situation of public finances, we will need to use private savings to finance pensions,” observed Christian Dargnat Chief Executive Officer of BNP Paribas Asset Management
As they address opportunities, however, asset managers also face stark challenges. One among them is simply establishing asset managers in the minds of customers across the globe. “Our industry doesn’t really have a brand,” said Timothy F. McCarthy, Chairman and CEO, Nikko Asset Management Co. McCarthy noted that surveys conducted by his company in Asia revealed widespread confusion about the differences between fund companies and other financial service providers.
Andrew Formica, Chief Executive, Henderson Group plc, agreed that education was a pressing issue, particularly in key markets like China. “It’s wrong to assume that the knowledge and level of understanding is replicated across the globe, because it’s definitely not,” he said. “Education has to be the bedrock of what we do.”
Part of the education challenge involves communicating with regulators, particularly in a policy environment that shows signs of fragmentation based on divergent national priorities. “There is so much regulation coming, and often it’s in conflict with regulation in other jurisdictions,” said Formica.
The panel was moderated by Dan Waters, ICI Global’s Managing Director. ICI Global was launched in October 2011 to serve as a trade organization focused on regulatory, market and other issues for global investment funds, their managers and investors.
Operations and Technology Leadership Roundtable
Operations and Technology
At the Leadership Roundtable for the Operations and Technology Conference, leaders from the industry answered questions posed by the moderator, Barry Benjamin—U.S. and Global Asset Management Leader for PricewaterhouseCoopers, LLP—as well as questions from the audience. The major issues the panel discussed were people, regulatory change, technology, and social media.
On the issue of people, the panelists agreed that none of their firms had trouble with recruitment. William J. Galvin, Global Head of Transfer Agency for Invesco, said, “I think our industry is still sexy to graduates,” because they see not only the challenges, but also the opportunities that exist. One very important thing, noted David Musto, CEO for JPMorgan Retirement Plan Services, is getting the right people. Just as important is motivating, training, and retaining these talented employees once they have been recruited. Crucial to that goal has always been mobility and stability, said Galvin; Julie St. John, Chief Information Officer for The Capital Group, argued that for millennials, however, stability is not as important as the core value of integrity, and the knowledge that their work is important to the company.
Benjamin asked the panelists to weigh in on regulation, in terms of industry readiness, as well as the time and effort spent complying with new regulation. Galvin said that “as a transfer agent, regulatory changes are part of our DNA” and that management spends a great deal of time trying to understand not only how new regulation will impact the firm, but also how it will impact shareholders. St. John argued that even though the industry is still not quite sure what compliance with the Dodd-Frank Act will entail, the industry is well positioned to be able to comply. Musto agreed, saying that leaders know that some new regulations are coming, so they must be focused on being flexible. “Typically any new regulation brings an opportunity in the marketplace, so you need to think about how you can build around it,” instead of simply fighting the changes.
St. John noted that everyone is still coming to terms with new technology, especially with social media, largely because of compliance regulations. But that doesn’t mean that the industry should not strive to do more. St. John said, “We think it’s really important to continue investing in foundational technology.” Once the industry is able to sort out these new technological tools, Galvin argues, both the industry and investors will be able to get so much more out of their relationships. As far as what further innovation will look like, Musto said, “We’ve already automated most of the things that can logically be automated, so the fun part now is trying to solve the less-structured processes and problems that actually account for a lot of the costs in our organizations.”
The panelists agreed with St. John that the industry must keep in mind that the “number one focus is meeting the needs of our investors” in the face of the “volume, pace, and velocity of change.” In addition to great fund performance, Galvin noted that investors also need continuing product development. Musto reemphasized the importance of getting the right mix of talented people in an organization, in addition to innovative technology: “it’s all about having the right people and resources to be able to execute innovations.”
Luncheon with Keynote Speaker
General Membership Meeting
“What is the role and responsibility of business leaders, corporations, CEOs, when you know that the path that the country is going down is not the right path, and people are being left behind?” That was the question posed to ICI’s 54th General Membership Meeting by Starbucks Chairman, President, and CEO Howard Schultz during his lunchtime keynote address.
Schultz provided his answer to the question in urging community action informed by values that extend beyond profit motive. “We can’t wait for Washington, and we have to recognize that we have a responsibility to the country, to the communities we serve,” he said. “Shareholder value is not only based on making a profit.”
Schultz illuminated the proposition with a look at the recent history of Starbucks, the company that he has led since 1987.
In 2008, Schultz said, Starbucks’ business was reeling from effects of economic downturn and from what he perceived as “a sense of entitlement” that arose from the company’s astonishing growth during the 1990s and early 2000s. At a meeting in 2008, company managers gathered for a frank business discussion and an opportunity to do community service in neighborhoods still recovering from Hurricane Katrina in 2005. The meeting was pivotal, Schultz recalled, because it “rekindled, reminded people of the values and humanity of the company.”
Schultz also described Starbucks’ more recent efforts around the issue of unemployment and what he perceived as an insufficient response from policymakers. Notably, Starbucks has funded an initiative, the Opportunity Finance Network, which provides low-cost credit to small business and to which 740,000 people have contributed.
“If we embrace a collective pursuit that matters beyond the money,” Schultz concluded, “more profits will be made, because we will be giving back to people who need it the most.”
The Media, the Medium, and the Message
General Membership Meeting
In a candid conversation exploring how the mutual fund industry must engage “old” and “new” media to communicate their messages, panelists Arianna Huffington, President and Editor in Chief of the Huffington Post Media Group, F. William McNabb III, Chairman and CEO of Vanguard, and Gillian Tett, U.S. Managing Editor of the Financial Times shared their perspectives on today’s media and messaging.
Moderator Mellody Hobson, President of Ariel Investments and Chairman of the GMM Planning Committee, kicked off the discussion by asking panelists how the mutual fund industry is faring as it relates to communicating through the media.
Panelists agreed that there would be great value in focusing on deepening the financial information being delivered by the media. "Do we do enough to step back and create a framework?” asked McNabb. Tett agreed, offering, “I think the key thing people are looking for today is the ability to join up the dots. People want to make sense of a fragmented world.” Huffington opined that the media did a bad job at predicting what was going to happen before the credit crisis of 2008 and that “our biggest responsibility is to provide biopsies and not autopsies.”
Huffington and Tett voiced a challenge for the industry in the collapse of trust in businesses, banks, and governments, and noted that people are increasingly saying they trust the people they read on media sites, blog authors, and their peers. “People go to places where they can be heard,” said Huffington. “They don’t just want to hear from you, they want to hear from each other.”
McNabb offered that he thinks the power lies in educating investors. “People are hungry for interpretation and framing and sorting through all of the noise.” He shared that Vanguard investors were looking to “us as their fiduciaries to put a human face on what was happening” during the crisis of 2008. “That to me was the power of the media.”
Hobson closed with concern that it is contradictory to focus on long-term messages amid responding to the short-term noise of the 24-hour news cycle, and queried panelists on their feelings about the future of traditional news sources. The “present and future is going to be a hybrid combination of traditional journalists and the new media coming together,” said Huffington. McNabb agreed, “I think it will be a hybrid and all of these different channels will evolve in ways we can’t imagine.”
Transfer Agent Changes in a Subaccounting Environment
Operations & Technology Conference
The swift transition to a subaccounting environment dominated by omnibus accounts will require fund operations professionals to evolve and adapt, panelists said at ICI’s 2012 Operations and Technology Conference.
“This is just the environment that we’re in now,” said panel moderator Nino Palermo, Vice President of American Funds. Palermo suggested the trend toward omnibus accounts was unlikely to reverse. “It behooves all of us to work together to define how the environment should look to make it most compliant and cost-efficient for our respective shareholders,” he said.
As explained in detail here, with omnibus accounts, intermediaries such as broker-dealers maintain the records of each individual customer’s transactions and provide information, such as trade confirmations, statements, tax documents, and shareholder communications to those customers.
One means to adapt to this new environment is technology, and panelists discussed potential benefits of OmniSERV,a platform that seeks to provide centralized, automated reconciliation and invoicing capabilities. “OmniSERV puts everyone on the same plane,” said Lou Taite, Director of Mutual Fund Operations at Lord, Abbett & Co. “At the end of the day, standardization leads to better checks and balances and better efficiency.”
Heidi Croel, Senior Vice President Franklin Templeton Investments, concurred but cautioned against overreliance on techology. “I’m hopeful that OmniSERV will help streamline,” she said, “though it’s tough for me to gain comfort that technology will take the place of what some good analysts are doing.”
Better communications and ongoing education are also key in adapting to omnibus environment, noted Laura Stanley, Vice President, Dealer Services at Invesco. Stanley said the transition had caused significant changes in how Invesco approaches initiatives such as new fund launches and product development.
All panelists agreed that the shift to omnibus requires keeping a focus on transparency and upholding other core values of the fund business. “From a fiduciary standpoint, we know we built our business on the direct fund channel in large part because of the services we’re able to extend to the small investor and the low-cost custodian fees that we’re able to extend,” said Shan Dagli, Vice President at OppenheimerFunds. “We want to be confident that that transition is mindful of that arrangement.”
Serving Retirement Savers in a Changing Regulatory Environment
General Membership Meeting
The 401(k) and other defined contribution plans are evolving toward new structures and products to help participants solve their savings and investment challenges, and new regulations now under consideration need to be crafted to support that trend, a panel of retirement plan experts told ICI’s General Membership Meeting.
After years of expanding investment options, plan sponsors and providers are shrinking menus and packaging funds to make it easier for participants to chart their course toward a secure retirement. The 401(k) industry must pay attention to “what Apple is teaching our consumers to demand—simplicity, elegant design, and control,” said James D. McCool, Executive Vice President, Institutional Services, at Charles Schwab & Co. The 401(k) plan of the future, he added, “must pass the iPhone test—can I take it out of the box and start using it right away?”
Automatic enrollment, auto-escalation, target date funds, and more effective participant education can help reach that goal. “For most participants in most plans, target date funds are the best tool” to help “overwhelmed” savers, said Michael Falcon, Head of Retirement for J.P. Morgan Asset Management. Beyond that, providers need “easier ways to communicate” with participants to answer their most common question: “’how am I doing—am I red light, green light, or yellow light?’” Falcon said.
Panelists expressed concern, however, that pending and contemplated regulations could slow the trend toward simplicity by erecting barriers between participants and those who serve them. New 401(k) disclosures, for example, could fuel “a race to the bottom, with all the focus on getting the lowest fees,” unless participants get a clear message on the services those fees provide, said Dan Houston, President, Retirement, Insurance, and Financial Services for Principal Financial Group. Panelists agreed that the disclosures would serve participants better if they included more context: “Knowing your fees doesn’t help unless you know whether they’re average, typical, high, or low,” McCool said.
Another regulatory pitfall could be new “standard of care” regulations for plan providers that aim to “expand the definition of plan fiduciaries,” said panel moderator Jamey Delaplane, Principal at the Vanguard Group. Delaplane queried the panel on potential repercussions. “There could be significant repercussions, particularly in the IRA space” if more categories of participant education and assistance are subject to fiduciary standards set by the Employee Retirement Income Security Act (ERISA), Delaplane noted.
Sponsors and providers must work together “to preserve the employer-based system and promote its development,” Houston said. “And then we need regulatory alignment with that objective.”
Minimizing the Risks of Litigation, Regulatory Proceedings, and Operational Errors
The Investment Company Directors Workshop, Mutual Fund Compliance Programs Conference
A keen focus on process and the right “tone from the top” are essentials for compliance personnel, fund boards, and fund advisers as they mitigate and manage risks, said panelists at a joint session of the Investment Company Directors Workshop and the Mutual Fund Compliance Programs Conference.
“Risk management is evolving in the mutual fund industry,” said panel moderator Pauline C. Scalvino, Chief Compliance Officer at the Vanguard Group.
Panelists briefed the audience on different sources of risk. On regulatory proceedings, Michael R. Young, Partner at Willkie Farr & Gallagher LLP, listed five principal items that regulators are watchful of: lack of loyalty, lack of care, violation of technical rules, deliberate misconduct, and nondisclosure.
Daniel T. Steiner, Executive Vice President and General Counsel at ICI Mutual Insurance Company, discussed litigation risk and named the three most frequent types of lawsuits: state law claims brought for fiduciary duty, cases brought under the Investment Company Act of 1940 alleging excess fees, and challenges on adequacy of fund disclosure.
Steiner said operational errors, such as trading the wrong securities, account for about 10 percent of all amounts paid out by ICI Mutual.
Panelists acknowledged that there is no one-size-fits-all approach to managing or overseeing the management of these types of risks. Still, they offered a number of suggestions.
For fund boards, Alan G. Merten, Lead Independent Trustee at Legg Mason Partners Fixed Income Funds, recommended that issues of compliance and risk be dealt with by all board members, rather than a discrete committee. “You need different perspectives,” he said. In that vein, Merten stressed the importance of consulting outside counsel on matters of risk.
Panelists also emphasized the importance of having CEOs and other senior management set the right tone around risk. At Vanguard, Scalvino said, senior management have sent a clear message that “it’s okay to raise your hand” to question practices or to seek explanation.
Well-established processes are also indispensable. “It is remarkable how much a focus on process can do to reduce risk of regulatory, litigation, and even operational errors,” said Steiner. Young agreed, urging establishing processes around communication. “You want to build a structure of sustained interaction where you are communicating not just when something goes wrong,” he said.
Fund Distribution: Evolving Challenges and Complexities
Joint Session for General Membership Meeting and Operations and Technology Conference
“Fund Distribution: Evolving Challenges and Complexities,” a joint session for the General Membership Meeting and the Operations and Technology Conference, explored the implications for the fund industry of the continuing transition to fee-based advisory programs, trends in product development, and the use of social media. Bob Cunha, Principal at Market Metrics, moderated the discussion, which focused significantly on the increasing use of the Rep as PM (representative as portfolio manager) platform. One of the main arguments against these models is portfolio turnover and the relatively large volume of trading.
Paul Hatch, Head of Investment Strategy and Client Solutions at Morgan Stanley Smith Barney, said, however, “I’m not sure we have enough data today to determine whether ‘PM-ers’ are too active.” Instead, he argued that these advisory or discretionary models are better for clients because they decrease volatility, decrease dispersion, and generally will increase returns for the clients.
Scott A. Curtis, President of Raymond James Financial Services, said that, following forthcoming regulatory changes by the Securities and Exchange Commission to define “fiduciary duty,” it might become easier to fulfill one’s fiduciary duty to clients by acting as PM. In that case, he suggested, there would be significant growth of these platforms. Bill Dwyer, President of National Sales for LPL Financial Services, said that today’s market lends itself to a more active management style.
The panelists also discussed trends in product development, specifically, exchange-traded funds (ETFs). Cunha noted that there is a fear in the mutual fund industry that ETFs will “kill” mutual funds. Hatch said bluntly, “There is no chance that ETFs are going to kill open-end funds.” The panelists pointed out that even though ETFs have grown, mutual funds still dominate the market, with total mutual fund assets currently more than 10 times the roughly $1 trillion level of assets in ETFs.
The panelists agreed that even if ETFs grow further, the market is not a zero-sum game; that is, ETF growth does not have to come at the expense of mutual funds. Curtis commented, “As long as mutual funds can outperform ETFs, there will be a place for actively managed mutual funds.” The panelists also agreed that portfolio diversity is key. For example, there has been a bull market in bonds for decades, said Dwyer, but, in anticipation of an eventual bear market, it is important to encourage advisory clients to invest in equity funds and also non-correlated assets.
On social media, Hatch said: “I think it will fundamentally change everything we do. It’s not a fad; it’s changing the way we as humans communicate with each other.” The other panelists agreed that social media present a huge opportunity, but noted that the industry still has a long way to go in realizing the potential of these channels. Curtis said that even of the advisers in his firm who do use social media, the number of them who actively use these platforms for outbound marketing is negligible. Dwyer noted that one of the big issues is, given the utility of social media, how they can best be used by firms. The goal is, he said, to develop the ability to get content out in a way that’s useful to investors.
FRIDAY, MAY 11
A Regulatory Update Featuring Mary Schapiro
General Membership Meeting
Restoring the reputation of the Securities and Exchange Commission (SEC), market volatility and market structure, financial literacy, and the SEC’s efforts to make further structural changes to money market funds took center stage as SEC Chairman Mary Schapiro fielded questions from Mellody Hobson, Chairman of the ICI General Membership Meeting and President of Ariel Investments, on May 11.
Schapiro cited a number of agency achievements and improvements in her three and a half years as chairman, including more enforcement actions, the reorganization of the Enforcement Division and examination program, and hiring a significant contingent of experts from industry on issues ranging from exchange-traded funds to risk management. “When I look at where we are today, I feel pretty good about it,” she said, but went on to say that the commission has “lots of work to do,” particularly in the area of technology. “We are on the right trajectory, but we have a long way to go—and we should always feel like we have a long way to go,” Schapiro said.
On money market funds, Schapiro repeatedly stated her concerns about “the risks posed, the potential for runs” and the Commission’s desire “to confront this issue.” Referring to Reserve Primary Fund’s breaking the dollar after the failure of Lehman Brothers, Schapiro said: “We know what happened in 2008…it’s real, it happened, and we have to be worried” about future risks. While the reforms adopted by the SEC in 2010 are “very good and very positive” and “work well for what they do,” Schapiro said that she still “comes in every morning when there’s a problem [in markets or economies] and say, ‘what’s the impact on money market funds?’”
Schapiro said that any rule proposal from the SEC would be accompanied by “an informative, useful cost-benefit analysis.” She urged the fund industry to continue its dialogue with the Commission on proposed changes. “I am always open to discussion,” she said. “ICI and the SEC historically have a very constructive relationship.”
Schapiro cited market structure as an area of deep personal interest and acknowledged that it deserves a “lot more attention and scrutiny than [the SEC has] been able to give it.” Following reforms put in place since the “flash crash” of May 2010, the SEC now will consider “limit up-limit down” proposals, requiring a trading order to be within a certain range, and will work on building a consolidated audit trail framework for market oversight. Other matters needing attention are dark pools—off-exchange trading venues that are less transparent than exchanges—algorithmic trading, and the “tactics of high frequency traders,” Schapiro noted.
Asked by Hobson whether she is worried about the saving and investing patterns of the younger generation, Schapiro remarked, “We have wholly failed in providing them a financial education.” Among other things, she noted the SEC has held training sessions for high school teachers to learn about the markets and investing. However, she called for a renewed commitment and concentrated efforts by regulators and industry to improve financial literacy. Schapiro also suggested a need for policymakers to keep in mind the needs of older investors who are not financially prepared to retire.
Schapiro responded good-naturedly to Hobson’s more personal questions. The chairman shared her belief that team sports—including field hockey and lacrosse—in her high school and college years helped her in operating as a member of a regulatory team in all of her roles, including as an SEC Commissioner in the 1990s, head of the Commodity Futures Trading Commission, and CEO of the Financial Industry Regulatory Association. Hobson also asked what Schapiro would say if one of her daughters said, “Mom, my life dream is to be a regulator.” Saying twice that she would be proud, Schapiro concluded, “I genuinely hope they do pursue careers in public service.”
Investment Management in a Rapidly Changing World
General Membership Meeting, Independent Directors Workshop
Industry leaders exchanged views on developments in China, the ongoing European debt crisis, and how the United States is doing compared to other major economies in a lively and insightful session at ICI’s General Membership Meeting.
William F. “Ted” Truscott, CEO, U.S. Asset Management and Columbia Management and moderator for the session, kicked off a conversation about China by asking about recent changes and continuities. Michael A. Avery, President, Waddell & Reed Financial, Inc., and Executive Vice President, Ivy Investment Management Company, said China is at another crossroads: more and more people are joining a middle class and becoming prosperous, while the rise in use of social media is making this population very aware of opportunities. Richard H. Frank, CEO, Darby Overseas, agreed, and pointed out that wages in China have been rising an average of 16 percent year over year. What these rising wages means is not just more purchasing power for people, but “pressure on the markets to find less expensive venues” for manufactured goods. Vietnam, Frank said, is increasingly seen as the place for high-quality, low-cost, efficient manufacturing.
Avery agreed with Truscott’s point that everyone is “long on China,” because there is so much opportunity there and so much continued growth. Avery said that being long on China is believing in a group of people who are becoming rapidly prosperous and who have discretionary income to spend. All panelists agreed with Avery’s comment that as this group increases, the country as a whole will turn their attention to healthcare, entertainment, and financial services. Kathleen C. Gaffney, Vice President, Portfolio Manager, Loomis, Sayles & Company, said that from an investment perspective, while there is some issuance coming out of China, two major issues were liquidity and getting the required information. One way to get exposure to China, though, was through other countries like Korea and Singapore.
Turning to Europe, Gaffney said she thinks the eurozone will hold together “because they need each other. Their ability to kick the can down the road,” she said, has been astounding—and that they’ve done it just right. Avery said that if Greece leaves the eurozone, there would be “potentially catastrophic consequences.” He added that he suspects what will happen is a continuation of the “extend and pretend” strategy: Greece will be given more time to repay its debts, and everyone will pretend Greece will eventually pay those debts.
Truscott turned to Frank and asked if a plan like the Brady Bonds plan effected in Latin America in the 1980s would work for Greece. Frank said that the Brady Bonds worked well because each country agreed to accelerated reforms: they privatized industries, opened their markets, and liberalized the financial markets. They also had the ability to devalue their currency. Greece doesn’t have all these tools available, said Frank, but what would help is a debt reduction plan coupled with changes to the financial system that would indicate to investors that there are growth prospects.
Talking about the United States, the panelists agreed that among all the major economies, the U.S. system is gaining traction. The United States is generating positive GDP—not large, but consistent—and auto sales are better, housing seems stabilized, and the United States is the only major economy where more energy is being produced. The cost of labor has also fallen, making the United States attractive to foreign companies. Avery reminded attendees that the new demographic cycle of millenials (those born between 1976 and 1999) is as big as the Baby Boomer Generation, and the leading edge is just entering their peak earning years.
One threat, all agreed, was the low interest rate environment. The Fed has done a good job, they agreed, of infusing cash into the economy and allowing the markets to “take a breath.” As the United States continues to gain traction, the real challenge will be for the Fed to pull back that cash fast enough to avoid a rapidly rising rate environment.
Because rates are going to rise, said Gaffney in a theme echoed throughout the panel, investors must be educated that “the safety they seek in bond funds is actually quite risky.” Instead, the panelists said investors should consider equities, emerging markets, and a long-term investing horizon as opportunities.
General Membership Meeting
Actors dying on set, getting held up at a Chinese border crossings at cost of $500,000 per day, having filming disrupted by floods, sandstorms, snowstorms, and diarrhea outbreaks: George Lucas has seen it all.
“In the movie business,” he told the closing session of ICI’s 54th General Membership Meeting, “every day, something is going to go wrong.” Lucas, founder of Lucasfilm, Ltd., was interviewed by Ariel Investments President Mellody Hobson, ICI Governor and Chairman of ICI’s GMM Planning Committee.
Beyond the tales of woe, however, Lucas gave insights into how he has managed the chaos of the film business.
One is to think long-term. Lucas discussed how he turned down a large director’s fee for “Star Wars” in exchange for sequel and licensing rights. “I was concentrating on what I was going to do five years from now,” he said. “[The studio was] concentrating on next quarter.”
Another Lucas insight: ignore critics and those looking to micromanage. Lucas recalled his battles with studio executives who wanted to alter his movies. “I’ve spent my whole life cutting out that middle man so I can do whatever movie I want,” he said. “I win or lose on my own.”
Yet Lucas described the ability to work with others as essential. A focus of the George Lucas Educational Foundation, he noted, was social and emotional learning for young people. “If you really want to be successful in life, you have to know how to control your emotions.”
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