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An Age of Uncertainty

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The mood was one of caution and uncertainty at the 16th annual Morningstar Investment Conference. Held June 23-25 in Chicago, this was the first of the research giant’s conferences since the mutual fund scandals broke last fall. Attending investment advisors and program participants alike voiced concern about the direction of interest rates, the ultimate response of the SEC to the most recent mutual fund scandal, and a wide range of other issues, including the continued growth of mostly-unregulated hedge funds that have attracted a growing number of investors through products like funds of funds. Unlike the typical industry conference, this year attendees probably left with as many questions as answers.

Not surprisingly, the session on “Reforming The Fund Industry” proved to be one of the most well-attended and contentious. Don Phillips, Morningstar’s managing director, kicked off the session with the widely seconded observation that, “We’re all going through scandal fatigue.” In his opening remarks, Robert Pozen, non-executive chairman for MFS Investment Management, laid the blame for today’s scandals on the industry’s shift in the 1990s to a “more marketing than fiduciary culture.” While he came down strongly on the side of mutual fund reform, Pozen steadfastly resisted calls to make fund manager compensation and personal holdings in the funds they manage part of the public record. Panelist Mercer Bullard, founder and president of advocacy group Fund Democracy, took the SEC to task for its failures noting, “There’s no question the SEC let us down.” He cited the need to establish standards for independent boards and called on the SEC to hold such boards accountable for their actions. Ballard also voiced the sentiments of most of those assembled when he also noted that enforcement of mutual fund regulations is an area much better handled by the SEC than by individual state attorneys general. All the panelists agreed on the need for the operations of mutual funds to be as transparent as possible. Panelists also addressed the importance of making the offering statements given to potential investors as easy to comprehend as possible rather than the current maze of legalistic bureaucratese designed more to stave off potential investor lawsuits than to impart important investment information. As with most of the issues raised during the discussion, it was in the specifics that agreement broke down.

In response to Phillips’ questions regarding what good has come out of the fund mess, Charles Haldeman, Putnam Investments’ president and CEO, answered, that everyone certainly has a “clearer understanding of the fiduciary duties of portfolio and asset managers.” “The most important changes are cultural,” said Pozen as he called for a return to the industry’s fiduciary roots.