Don Phillips, managing director of Morningstar, says that the mutual fund industry uses its annual gathering in Washington each year “to cheer itself up.” This year, the industry is trying to overcome the fact that the “wind has not been at the back” of its bread-and-butter strategy—active management. Rather, “passive strategies are where the flows have gone,” Phillips told AdvisorOne during the Investment Company Institute’s (ICI) annual conference on Thursday.
Because “actively managed funds as well as money market funds are under pressure,” Phillips says, the industry is turning toward more passive strategies like exchange-traded funds (ETFs). “The flows into passive [strategies] have been gaining momentum for the past several years,” he says. However, to “better showcase active management,” Phillips continues, the industry is using more alternative strategies and “go-anywhere” funds, which “allow [fund] managers to add value.”
While ETFs and target-date funds have been “growth areas” for the industry, Phillips says, only three fund firms—Fidelity, Vanguard, and T. Rowe Price—“have been beneficiaries of flows into target-date funds because [as] record keepers, they put their own target-date funds into their clients’ plans.” Fidelity and T. Rowe Price, he adds, are “not big players in ETFs, just target date” funds, while “Vanguard is a big player in both.”
While target date funds have rebounded since the 2008 market meltdown, the nation’s mutual fund managers must nonetheless ensure that investors understand what they are buying in a target-date fund, added Ronald O'Hanley, president of asset management and corporate services at Fidelity Investments, during a panel discussion at the ICI event. “We have to be very clear with shareholders exactly what they are investing in in these types of embedded solutions” like target-date funds, O'Hanley said.