L'évolution de l'industrie de la gestion d'actifs

Don Phillips discute des changements observés ces 30 dernières années dans l'industrie de la gestion d'actifs aux Etats-Unis.

Christine Benz 12.01.2017
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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. How has the investment landscape evolved over the past 30 years, and how might it evolve into the future? Joining me to discuss that topic is Don Phillips. He is a managing director for Morningstar.

Don, thank you so much for being here.

Don Phillips: Sure, Christine.

Benz: Don, we wanted to sit down with you. You recently celebrated your 30th anniversary with Morningstar. You are a storehouse of knowledge about the investment industry and mutual funds in particular. So, I wanted to start by kind of talking about your arrival at Morningstar 30 years ago. You were Morningstar's first mutual fund analyst, answering an ad for that job. Let's talk about what the fund industry looked like when you encountered it back in 1986.

Phillips: It was a very different industry. You had a lot of mom-and-pop shops, little niche players. It had a lot of character back then. But you also had these big behemoths, big insurance companies and brokerage houses that were in the industry, a lot of whom are no longer in the industry. And so, it was a really bifurcated kind of market.

And it wasn't necessarily a great market for investors. There were some great opportunities and some wonderful funds, things like Pennsylvania Mutual or Sequoia Fund or Nicholas Fund. I mean, there were great funds around, but there were also a lot of big, large mediocre funds and a lot of bad practices. No one was really shining a light on the industry. So, there were things like, places where you had to a pay a load to reinvest your income distributions in a mutual fund. You had very poor disclosure. Funds didn't even have to disclose who their portfolio manager was, as if that that wasn't important. In fact, the industry argued that it wasn't important, that investors shouldn't worry about something like that.

And we were able to kind of turn that argument on its head and say, "Look, would any of your portfolio managers buy stock in General Motors if GM wouldn't tell them who the CEO was?" And yet, at the same time, they turned around and said, it wasn't important for you to know who is running the mutual fund that an investor might have had all of their retirement savings in. So, it was kind of poorly lit playing field and one that wasn't necessarily that favorable to investors.

Benz: So, let's talk about how things have evolved, how, at least from a disclosure standpoint, things have gotten better. One thing I wanted to talk about was the whole business of classifying and categorizing funds that, initially when you were an analyst, all investors really had to go on were the prospectus objectives. Let's talk about that and how Morningstar tried to refine that and make it a little easier for investors to sift among funds.

Phillips: It was very much a seller's market back then and there was a lot of game-playing going on. As you mentioned, the prospectuses, anyone who has read those knows how vague they can be. And they are written by the lawyers to give maximum flexibility to the manager so that the fund company can never come back and be sued for doing something that they weren't supposed to do. So, basically, the lawyers would write the prospectus that would allow them to do basically anything, which made it essentially a nearly useless document for an investor trying to understand what role that fund played in the portfolio.

To get that sense you had to dig dipper into what the holdings were. Or you could look at what the fund name was and that's where the problems came up, is that you could call something a growth and income fund and it would go into a growth and income category. But you might have a manager who very much underemphasized income, and they would be in the same category as someone who overemphasized income. And so, it was the sellers drawing the lines, not the investors themselves.

And that's where I think Morningstar added some value, again, shining some light on the playing field. And it came from listening to what advisors were talking about. They were saying how do I explain to my clients how I built their portfolio, which funds fit in which roles, which fund plays the short stop, which is the first basemen. And they started saying how do I even explain to my clients why we own more than one U.S. equity fund. The investor would say, hey, we've already got a U.S. equity fund, why are you adding a second? Let's add a gold fund. And the advisors would say, well, gee, I could see adding a gold fund but that should maybe the seventh or eighth fund we add, not the third.

And so, hearing the concerns that they had, we came back and came up with the style box, which is just the way of looking at the actual holdings that the funds were invested in. And then just putting them into some basic buckets, whether they are investing in large-cap, mid-cap, or small-cap stocks and whether they seem to have the characteristics that a growth investor, a value investor, or someone in the middle, maybe growth at a reasonable price, might buy. And the idea was just to give investors a shared language to get people on the same page so that you had a better alignment of interest between how the fund was being managed, what the advisor thought their client should have, and then what the clients needed for their long-term goals.

Benz: There has been some misconception about the goal of the style box in our category system with some fund companies initially sort of squawking that we were trying to prescribe their activities in some fashion. Let's talk about that.

Phillips: Those complaints didn't come until much later. I mean, at first, people really--initially saw the utility of this. And in the beginning, it was what it was always intended to be: It was descriptive. It was only later when advisors started using it as more of a restrictive tool and started saying, I'm going to fire managers that move across a line in the style box. That's when the fund companies started getting upset. And we were sympathetic to that, and we thought of this as a descriptive tool not something that was restrictive.

Now I'll go on to say that the advisor or the investor has every right to say that if you're managing money, if the fund manager is managing the money in a way that's different from what they anticipated, they've got every right to say maybe that's not what they want. But we didn't want this to be restrictive. We didn't want to rein in a manager. You have to realize that these lines are artificial. What we want to do is just contribute to the debate and get people on the some page.

And the problem was that we'd call up and talk to one manager in the morning and she would say, "I'm a growth investor, so I'm buying IBM." And then in the afternoon, we'd talk to someone else and they'd say, "Well, as a value investor we really like IBM." And we realized that these managers weren't lying to us. They just had different definitions of what growth and value meant. And we thought if we could get some shared vocabulary out there, a shared sense of maybe what small cap means or what value means that then you could begin to have a more intelligent conversation and you could understand some of the nuances of one manager's style versus another. So, we wanted this as something that would unearth these nuances rather than something that would bury all of them and pretend that all managers within a category are the same.

Benz: Let's talk a little bit about fund expenses. I know that it's something that Morningstar is keenly attuned to, the direction of fund expenses, trends in fund expenses. Let's talk about how that landscape has evolved over the past 30 years.

Phillips: Well, I think that gets to--what I'd say the major theme of the last 30 years is it's moved from a seller's market to a buyer's market. When I got into the industry 30-plus years ago, people used to say at conferences, mutual funds are sold not bought. And what they basically meant was, look, if you pay enough to get on the right distribution list, if you have enough financial incentives to get brokers to sell these things, then you can move whatever product you've got, whether it's particularly good or not.

Today, clearly that's not the case. And it's not that every individual investor has become much more engaged in the process, it's that a whole army of buyers' agents has emerged: the rise of the independent financial planners, the more professionalization of the brokerage community as a whole, the rise of the financial press. All of these things have been big contributors, and they have been advocates. And when you've had that movement plus Morningstar shining more light on the information and making the information about funds available to a wider community, what you had a was a very healthy process. And because of that money has systematically moved away from higher-cost to lower-cost funds.

You could go back 10 or even 15 years ago, and you see that money went somewhat indiscriminately to high-cost or low-cost funds. Today, it goes almost exclusively to lower-cost funds within their category, which doesn't mean everything has to be the no-load direct-sold channel, but just even within different distribution channels, assets go to the places where investors get better value. And that just shows what happens. Sunlight being a great disinfectant and that if you just shine a light on this and you've got powerful people out there in the free market, they will go out there and try to fight for their clients that things tend to move in a very good direction.

Now, you are getting a lot of regulators piling on and saying, look, we want to enforce this movement, but the movement is already well in place that you can't sell an expensive, poor-performing fund today. The assets investors have already moved; the market has worked and things have moved to lower-cost products where investors get a better deal.

Benz: In that vein one of the huge trends that we've been observing in the industry over the past decade-plus has been the uptake of index products, now exchange-traded funds. In your view, do you think that investors are perhaps giving up on actively managed funds to their detriment?

Phillips: I don't know that I'd go that far. I would say that the great thing is that investors have more choices today, and I think that's a terrific thing. The rise of the index fund is a great thing. Even if you don't have a penny in index funds, you benefited from it, because that's one of the things that's put more pricing pressure on actively managed funds.

Now, I do think that in some ways the debate has gotten kind of out of whack, and I think someone like Jack Bogle will be the first to say, what's happening with ETFs today doesn't really fit with the spirit of indexing. The spirit of indexing is that you buy and hold the entire market forever. And today what people are doing is that they are trading slices of the market like crazy. And that's not necessarily a positive thing. In fact, it's almost certainly something that will harm investors over the long term.

But the fact that index funds, the good-quality, broadly diversified index funds, exist that investors can use to complement their portfolios, they can use them exclusively or they can use them along with actively managed funds, that's a wonderful thing. Innovation is something that's helped investors, and that's one of the big pluses today. It's never been a better time to be a fund investor. You have a toolkit today that's better than the most elite professionals had a decade ago. So, you've got access to great managers, to great investment opportunities at a fraction of the cost that they were available even five or 10 years ago. So, this is all very positive. There is more transparency, there's better regulation. It's a great time to be an investor in mutual funds if you're in the United States. It's not quite as clear in other parts of the world.

Benz: Right. I know we do our global study where we look at that and do see that the U.S. is in many ways from a disclosure standpoint and a lot of other ways ahead of other foreign markets.

Phillips: The U.S. has really been a model except on one thing, and that's the taxation of internally generated capital gains on a mutual fund. It's one of only four markets in the world where that happens and truly puts active funds at a competitive disadvantage to index funds. And if assets go to index funds because they merit them, that's one thing. If they go because the taxation tilts the market that way, that's something quite different and that unfortunately is the case. And it would be great if the fund industry were in a better position in terms of its respect in Washington that it could fight to get rid of that really unfair systematic disadvantage that active managers have, the fact that they have to disgorge more capital gains and thus become less tax efficient than more passively managed products.

Benz: I know that's on your docket of things that you would like to see improve for investors over the next years. But let's talk about other things, other ways in which you think the industry, the investment industry and in particular, the fund industry, could improve for investors.

Phillips: Well, I think, its failing is that the industry continues to align itself far too much with Wall Street as opposed to Main Street. Mutual funds have a great opportunity to be the voice of the small investor to corporate America. And it's a role that the industry has shunned and constantly the leaders in the industry have said, "Well, we're more like the brokerage firms or the insurance companies or the banks than we are like the investors that we serve." And rather than being the advocate for the investors that they serve, they tend to see themselves as just another part of Wall Street. And I think that's a huge problem.

The other problem is that the industry doesn't yet serve as many people as it should. It's done a great job of serving its existing clients. It serves high-net-worth individuals, the affluent, the emerging affluent, all very well, but the industry really doesn't serve the broad population as well as it could. And I think part of the problem there is that the industry doesn't look like the broad population, especially when you get to the upper management of asset management companies.

We just had a report that came out on women in asset management. And sadly, in the U.S. women are in top positions at only half the rate that they are globally. Only 1 in 10 top positions in fund management is filled by women and I think the story is even worse when it comes to looking at people of color. So, if the industry is going to be the voice of the small investor, if it's going to be the voice of the American investor, it needs to look like the American investor. And today it doesn't, and I think that's a big shortcoming that the industry has to address.

Benz: Let's talk about your approach to investing, not specifically, but I know in addition to being an observer of the investment industry, you are an avid investor yourself. What's your counsel to investors who are navigating this environment? What's your best piece or pieces of advice to them?

Phillips: I think it comes down to control what you can control, and live with what you can't. Just accept that you can't control interest rates, you can't control the overall direction of the market, you can't control panics. But you can control your own behavior. You can be smart about the things you can control. So, you can live within your means. You can become, at an early age, systematic about saving and be very disciplined about doing that. And set up a path where you save more over time. You can be long-term oriented and focusing on your long-term goals and making sure that your investments are aligned with those. And then you can control variables that you can control to a certain degree, exercise what control you can over cost and taxation.

And then on top of that if you could just be perhaps a bit mildly contrarian. If something goes deeply out of favor, that's the time to stack up on it and to refill. And if you are putting new money into the portfolio, it's easy to be disciplined about that. Just go to the areas that have underperformed in the recent past. We started doing a study over 20 years ago about buying the unloved, buying the funds that everyone else is selling out of. And the record of that system over multiple decades is just astonishing. And sadly, what it bears evidence of is the fact that most investors are doing somewhat poorly because they are bailing at the wrong time. But if you can be a bit contrarian on top of having that long-term discipline, I think you can do very well. Again, you've got great tools, better tools than you've ever had before. If you just focus on your own discipline, that combination is a real powerful one for investors today.

Benz: OK. Don, you've been a great champion for investors for 30 years. We look forward to your contributions going forward. Thank you so much for being here today.

Phillips: You're very welcome.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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A propos de l'auteur

Christine Benz

Christine Benz  responsable des questions de finance personnelle de Morningstar.