Bob Pozen is a man who knows his way around the mutual fund industry. Just ask Presidents Obama and Bush, the SEC, Harvard Business School and the Massachusetts voters who have urged him to run for the U.S. Senate, not to mention mutual fund firms including Fidelity Investments and MFS Investment Management.
Now, the mutual funds guru and author of Too Big To Save? How to Fix the U.S. Financial System is co-author of the painstakingly detailed The Fund Industry: How Your Money Is Managed. Indeed, Pozen and co-author Theresa Hamacher’s examination of how mutual funds are bought, sold and managed is so comprehensive that it stands to become the fund industry’s bible.
"Just as veteran stock fund managers prize their tattered copies of Ben Graham and David Dodd's Security Analysis, coming generations of fund industry leaders will cling to this essential text,” writes Morningstar Managing Director Don Phillips in the new book’s foreword. “There's no other book that gives readers such a thorough overview of how the fund industry operates, its evolution, its regulation and what makes it tick."
In addition to being a recently published author, Pozen (left) is chairman emeritus of MFS, which in 1924 established America’s first open-end mutual fund, the Massachusetts Investors Trust. He is also a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution. And before his tenure at MFS, Pozen was vice chairman of Fidelity Investments.
Want more proof of his expertise? Pozen has served as chairman of the Securities and Exchange Commission's Advisory Committee on Improvements to Financial Reporting. And in 2001 and 2002, he was a member of President Bush’s Commission to Strengthen Social Security. His plan to save Social Security was included in a series of memoranda to President Obama from the Progressive Policy Institute.
A Democrat, Pozen recently told Reuters that he wouldn’t run for Senate “unless the Democratic Party asks me to, if they want someone who is socially liberal and fiscally disciplined.” But if the party wants a confrontational figure to take on Republican Sen. Scott Brown next year, Pozen added, “then they shouldn’t choose me because I won’t be that type of candidate.”
In a conversation on Thursday with AdvisorOne, Pozen didn’t address his political ambitions, but he did speak at length about the mutual fund industry in relation to the Dodd-Frank financial reform act, changes in regulation of investment advisors, U.S. retirement planning and the global economy.
“People are investing huge sums in the fund industry. We have $11 trillion in this,” he said in explanation of why he decided to write his book now. “If people don’t understand how their money is being managed, they could become very unhappy about what’s happening.”
Q: How did this book come about? Why did you and Theresa Hamacher write The Fund Industry?
A: In 2001, I wrote a book called The Mutual Fund Business, which was geared to investors. At the same time, the National Investment Company Services Association (NICSA), the trade association for back offices that Theresa is head of, had commissioned somebody to do a nuts-and-bolts book on mutual funds for back-office service providers.
Those books were successful within limits, each selling between 5,000 and 10,000 copies, and both are now out of date. Theresa and I know each other, and we thought what we really ought to do was to combine them into one book. We thought we could work together well, and we did. The really important thing is that she has a wonderfully light touch as a writer, and I tend to be heavily analytical, so it was a great partnership.
Q: Who is your intended audience?
A: We have three different audiences. The most important one is investors, because there are close to 100 million investors in mutual funds, and a large number of them know relatively little about their funds. They may just know a fund’s return for the last year. Our attempt here is to write something to help investors be better informed about choosing funds and understanding their performance. For example, Chapter 3 is dedicated to explaining the disclosure documents that come from the fund complex. How many people actually read a fund prospectus? The answer is almost no one. Our chapter looks at what investors really need to look at in terms of the riskiness of a fund. We’re giving focus on how to handle the flood of information.
The second audience is the industry, meaning all the people who work in the industry and the people who service the industry, and I’m including custodian banks, accounting firms, law firms, journalists and new people manning the phones for a company like Vanguard. This is pretty much going to be the bible for all of these industry people. It has a tremendous amount of detail about how you compute loads, how 12-b funds work, how fair-value pricing works and so on. This is a source book. If an issue comes up about whether a fund is fooling around with its NAV, we tell you how NAV is calculated and whether you’re allowed to have adjustments.
The third audience is universities and business schools. We have a website, and I’ve written a manual for people teaching the course at universities or business schools or training in the fund complex. It also includes about 14 case studies that I’ve written for the Harvard Business School as well as assignment questions, a teaching plan and the answers.
Q: What does your book have to say about retirement planning?
A: We have a whole chapter explaining what happens in retirement. You may not understand the tax features of retirement plans and how they operate. What’s the difference between DB and DC plans? How do rollover IRAS work? We have millions of people in 401(k)s who actually know very little about those plans. I think they’ll do a lot better in terms of investing while they’re accumulating and also planning for their retirement if they understand the tax and investment issues.