What has the mutual fund industry accomplished in the past 30 years, and how is it poised to build on these developments in the next 30 years? I think the crowning achievement for the mutual fund industry over the past three decades was turning a nation of savers into a nation of investors. If we look back 25 to 30 years, the financial markets were stagnant. I joined the industry in 1982; stocks had lost an average of 2 percent per year for the previous 10 years taking into account inflation. People weren’t interested in investing. With interest rates in double-digit territory, saving seemed easy, safe and productive.
As a result, money flowing into bank products was 3.5 times greater than cash flows into mutual funds. Mutual funds were a fringe player in the financial world, with about $350 billion in assets in 1982, 75 percent of which was invested in money market funds.
As stock market conditions began to improve in the mid-’80s, so did the fortunes of the mutual fund industry. About one in 10 American households owned mutual funds at that time; today, nearly half of U.S. households are fund investors, entrusting some $12 trillion to our products. We as an industry helped turn passbook savers into financial markets participants. That’s looking at it in the aggregate. It is more compelling and rewarding to look at on a singular basis. Nothing gratifies me more than receiving a letter (or more often these days, an e-mail) in which the writer tells me he sent his two kids to college thanks to Vanguard Wellington Fund.
This industry was built shareholder by shareholder. And the loyalty and trust that we’ve built with an entire generation of investors is why I continue to be optimistic about the future of this business. And this trust isn’t happenstance. It results from the culture of the mutual fund industry, which is quite different from that of many other industries. The difference is that we live our lives with a sense of fiduciary duty. Of course, that duty exists by statute, but more importantly is core to our culture. This is such as a key aspect of how mutual funds have competed and, to an extent, dominated much of the competition over the course of the past several decades.
It’s summed up in the short statement, “The interests of the client always come first.” Yes, that’s a motto that’s been used to sell everything from cheeseburgers to airline tickets. But for the successful firms in our business it’s a way of life, and it is woven into the very fabric of our industry.
It’s easy to say, but having lived it for the past 25 years, I believe this philosophy of “what’s good for the client will be good for the firm” has been the single most important success factor for this industry.
Finally, I am optimistic because this is a highly competitive industry. To paraphrase Gordon Gekko: “Competition is good.” As you know, competition drives innovation in any line of business, but it’s been absolutely critical to moving our industry forward and improving the way we serve clients. Over the history of the mutual fund industry, firms have empowered clients with choices about how they invest. There have been significant innovations in the products investors can select, how they pay for them, and the related services they receive.
What do you expect the fund industry to look like 30 years from now — in terms of its size, number of players, global growth, regulation, clients, technology, etc.? The industry will undoubtedly be larger from an assets-under-management standpoint. And while the next 30 years might not be as salubrious in the financial markets as the last 30 years, I view the growth prospects to be quite good. We’ve also benefited tremendously from a highly favorable tax environment — from the IRA and traditional 401(k) of yesterday to the Roth 401(k) and the 529 plan for college savings. These policies have been a great benefit to investors and great growth engines for the industry. They will continue to be winds at our collective backs.
The industry will be larger, but dominated by fewer firms. The large private firms that remain adaptive and innovative will continue to be successful. Small boutique firms will also have the opportunity to thrive. That’s been the long standing tradition of the business.
U.S. fund groups also have a huge opportunity to grow their business globally. As an industry, we offer the best value in the world. As markets open up and firms seek to diversify their businesses, you’ll see U.S. companies with the scale, expertise and flexibility begin to meet more success on a global scale.
Technology has also played a key role in the industry’s success and will continue to do so. The shareholder is largely oblivious to the back-office technology gains that have made fund firms vastly more efficient and cost-effective. On the other hand, the client does see the Internet, which has revolutionized mutual fund investing. Investors can learn about investing online; they can conduct investment transactions online, and they can manage the mundane details of account management online. As bandwidth increases, you will likely see more personal advice and account management delivered through the Internet, enabling firms to interact with clients and create more personalized solutions to their investment needs.
What will be the most important development for the industry in the next 30 years? Demographics present a tremendous opportunity for the fund industry. The baby boomers that “grew up,” if you will, investing in mutual funds are beginning to retire. I frequently use myself as an example. I was born in the middle of the baby boom and made my first IRA and 401(k) plan contributions in 1982. A mutual fund company has been my investment provider to this point and will continue to be. The bottom line is that the product that served boomers extraordinarily well as accumulators will continue to serve them extraordinarily well as retirees.