Paul Schott Stevens, President and CEO of the Investment Company Institute spoke earlier this week in Luxembourg on "Sustaining Asset Management's Global Momentum" at the ALFI Global Distribution Conference. Stevens says, "Since 1992, worldwide mutual fund assets have risen from roughly $3 trillion to about $25 trillion, an eight-fold increase.... This remarkable rise was not preordained. It came, as the American statesman Dean Acheson observed, the way the future always does: "one day at a time." We have a record of which to be proud, no doubt -- and a very sobering set of responsibilities. If the next 20 years are to be as successful, we must continue to keep faith with our investors -- one investor at a time, one day at a time." (Note too that today's WSJ has an article "Call by Fed for Money-Fund Curbs", which has some quotes from industry nemesis Boston Fed President Eric Rosengren.)
He continues, "As might be expected, the global rise of asset management brings rising challenges, both for us and our regulators -- and many of these challenges came to the fore during the most recent financial crisis. The crisis reminded us -- if we needed reminding -- that managing assets is not the same thing as managing results. Like all other participants in the financial markets, our funds are affected by events in the real economy, by events in financial markets, and by government policies. Funds and their investors were hit hard by the crisis. I do not mean to suggest that asset managers were at the center of the financial crisis. Funds, in particular, did not cause the crisis. Instead, the strong systems of regulation that govern registered investment companies in the United States and comparable funds in other jurisdictions withstood that storm and served investors well."
Stevens says funds must "frame expectations." He explains, "All the products we make available to investors, whether they pursue the simplest or most complex investment strategies, involve risks. And, as we learned once again in the recent financial crisis, those risks can come from unexpected quarters and have significant consequences. I believe our investors generally understand that investing brings risks -- and that the prospect of enhanced returns brings with it a need to assume greater risks and volatility. But some policymakers and commentators don't understand that tradeoff -- or don't think investors are capable of comprehending it on their own. We see this in calls for regulation that would limit investor choices or impose particular investing models."
He adds, "While we work to protect our investors' choices, we also must ensure that we help investors balance their perceptions about our products with market realities. To this end, as ever, investors need better understanding of our funds. They need clear and concise information about the funds they choose. More broadly, we face a societal challenge in all of our countries to educate our citizens as investors. That means, first of all, educating citizens on the need to invest -- making sure they understand the risks of failing to participate in our financial markets, just as they understand the risks those markets pose."
Stevens also says, "Our second challenge is to maintain a strong culture of innovation. To a very large extent, finding new ways to serve the needs of investors has been at the heart of our success. Money market funds, index funds, exchange-traded funds, lifecycle or target date funds, sector and hybrid funds -- these are all examples of innovations that have answered investors' needs and fueled the global growth of investment management. Unfortunately, the financial crisis has given financial innovation a bad name in some quarters. Some policymakers and academics have concluded that financial innovation is useless or dangerous. Former Federal Reserve Chairman Paul Volcker has said on several recent occasions that "the most important financial innovation that I have seen the past 20 years is the automatic teller machine. Yes -- he's serious when he says that."
He explains, "Now, it is probably no accident that innovation in the capital markets is under attack at this time. One result of the financial crisis is the ascendancy of banking regulators and the notion that prudential supervision is the only valid model for financial regulation.... There is, of course, more than a little irony in the ascendancy of banking regulators, given that the financial crisis was first and foremost a failure of the banking system -- the latest in a string of perennial banking crises that have occurred despite numerous global efforts to increase bank capital and reduce risk."
Stevens tells us, "Indeed, three years after the worst of the financial crisis, policymakers trying to deal with sovereign debt issues on Europe's periphery are still constrained by fears about the banking system's stability. As one analyst recently observed, problems in the banking sector truly have been at the very center of all the recent turmoil. And yet many authorities place an overriding priority on the need to address the risks of the "shadow banking system." Depending upon who's using it, this loosely defined term can sweep in many of the activities in the capital markets, including a good portion of what funds do. This is a matter for concern -- not merely for funds, but for the financial system and our economies generally."
He explains, "To begin with, the term "shadow banking" is inherently misleading. As the Federal Reserve Bank of New York said in a staff report, "the label 'shadow banking system' ... is an incorrect and perhaps pejorative name for such a large and important part of the financial system." Second, sticking this misleading label on capital market activities implies that these activities are "loosely regulated" or even unregulated. The Financial Stability Board's recent note on shadow banking, for example, implies that a bank-dominated financial system is inherently superior, with less systemic risk. The note provides no substantiated basis for this view."
Finally, Stevens comments, "Bank-style regulation is neither necessary nor workable for U.S. mutual funds and their counterparts in other jurisdictions. It would deny our economies the benefits of diverse, competing channels for credit and capital. And it would concentrate -- rather than reduce -- the sort of systemic risks that we saw throughout the banking system in many, many countries in the recent crisis. At ICI, we have addressed these issues in a comprehensive response to the FSB's note. I urge that the fund industry globally continue to defend its unique role within the financial services industry."
