The mutual-fund business is more obtuse and difficult to read than ever, from new fund types and investment classes to a market that has confounded pundits and investors alike.
That doesn’t mean I can’t try to get a reading on it.
Each year at this time, I make my forecasts for what I expect to see as some of the bigger stories in the fund world for the coming 12 months. In 20 years of making my calls on the industry, I typically have gotten about three-fourths of my prognostications right; when I’m off, it’s often more a case of being “early” than flat-out wrong.
If that holds true this year, five of the following items will set the tone for how investors feel about funds and ETFs a year from now.
The big fund stories for 2015 will include:
An alternative fund blow-up.
Problems with GL Beyond Income -- a closed-end fund that invested in illiquid consumer debt, and where the manager currently is facing fraud charges -- show the worst of what could happen in “alternatives funds,” but to call GL a fringe player may be giving it too much credit. Read more about fraud charges at GL Beyond Income.
That said, the problems show how hard it is for fund boards, compliance officers and others to get a good handle on a complex, illiquid, potentially volatile or unstable asset class.
Judging from the number of alt-fund false-starts — where firms have brought ideas to market and killed them quickly — some bad ideas haven’t survived long enough to get into trouble.
That changes this year. Some liquid alternatives fund will prove to be not so fluid, and as investors try to figure out how (and if) they can get their money out/back, the entire industry will take a step back to question whether 'alternative' is actually a euphemism for “too risky.”
An SEC intervention on alternative funds
Whether or not the first scenario is correct, the Securities & Exchange Commission is working on a review of alt funds, not so much because it expects trouble, but because regulators wonder whether fund boards are properly equipped to oversee these funds.
Expect them to decide that trustees can’t be trusted on the most complex of these issues, not without some additional hurdles to jump through. This, too, will slow the growth of new issues in the alternatives space this year.
Three-year track records being used to convince investors that they’ve made a mistake being cautious
In 2014, the focus was on five-year records, because they looked good with the financial crisis completely out of the data. Those ugly numbers from 2008-09 are still in the 10- and 15-year records so the number advisers and funds will focus on this year is the three-year result.
That is a way for advisers and fund brass to suggest that the 13.7 per cent gain on the Standard & Poor’s 500 SPX, 1.79% in 2014 represented more of a down year than the sixth straight year of a bull-market recovery. Domestic large-cap funds are up about 19 per cent annualised, on average, over the last three years, while the average foreign stock fund is up double-digits, despite a down year in 2014.
The last three years have been anything but average, however; while the industry will keep putting its best foot forward, at some point the music is going to stop playing and investors are going to have a year when they again think that funds completely failed to live up to expectations.
Unpleasant tax surprises from some big 2014 winners
The tax-loss carryforwards from the financial crisis have been exhausted, replaced by large gains that will generate taxable distributions when long-time winners are sold.
Distributions aren’t a big problem in good years like 2014, when funds, generally, were up and the taxes feel like a cost of doing business.
If there’s a market reversal, a significant decline or a flat or single-digit year, however — and especially if increased volatility pushes managers to sell into apparent trouble — funds may find themselves generating tax bills that equal or eclipse their growth; investors aren’t going to be happy with over-sized tax bills on mediocre results.
Better-than-expected bond-fund returns
Pundits have been saying for years that the moment interest rates started to creep up, bond funds would be crushed.
That’s not happening in 2015. Sure, the Federal Reserve is poised to hike rates, but it won’t happen until late in the year (if at all), and it won’t be enough to surprise a market that already is anticipating small increases.
Eliminate the big fear of downside risk and you will wind up with another year where bond funds don’t wow anyone, but do better than otherwise expected.
Bill Gross failing to impress with his new fund
There’s no denying that Bill Gross is one of the best bond-fund managers in history, and he long said that one of the things holding him back at his flagship Pimco Total Return Fund PTTRX was just how large that fund had become.
When Gross broke away and joined Janus taking the helm at Janus Global Unconstrained Bond he was freed from the burden of size.
He was not, however, given the kind of market conditions in which he typically excels.
At some point, that will change, Gross will take full advantage and investors will be rewarded, but that point’s not coming this year. Gross won’t look horrible in 2015, but he won’t be a world-beater either.
More target-date funds being closed for being off-target
Several notable fund companies shuttered their entire lineup of target-date funds in 2014 — from iShares closing ETFs to Legg Mason and Hartford shuttering traditional funds. That wasn’t an anomaly so much as a start. Read about the funds that closed in 2014
As the fund industry struggles to figure out how to best categorize and manage life-cycle funds, companies that have failed to gain much market share are going to bail out, regroup and figure out how to get back into the market more effectively as the industry comes up with what it will market as a “better approach” to the problem.