Here are the best guesses on the fund world's big stories for the new year. These aren't necessarily events on the scale of the economic crisis of 2008, but expect to see:
• Money funds close. If interest rates don't go up soon, a flood of fund firms will shut down money-market-fund businesses because there is no profit in it. Charles Schwab, for example, acknowledges that fee waivers, necessary to keep its money funds delivering any return at all, cost the company more than $100 million in revenue each quarter. The vast majority of money funds have fee waivers in place; corporate boards aren't willing to sacrifice revenue forever.
Already, several money funds have closed down or stopped accepting new money. Without higher rates near term, that will become a bigger trend. When rates do rise, the financial firms will reduce waivers and keep virtually all of the increase for themselves, at least initially.
Once rates eventually go up, institutional money funds, catering to corporate treasurers and other big power players, could end up hurting if customers leave for better-paying commercial paper. If a rate increase is big enough, an institutional fund will fail.
• Bond funds get hurt. Bond-fund yields are well below traditional norms, but that hasn't stopped investors from flocking to these funds for safety. Industry researcher Strategic Insight estimates that a record $400 billion moved into bond funds in 2009.
When rates rise, bond-fund prices fall, and bond-fund investors suffer.
• Hot funds cool. Historically, the fund industry always has followed the trend. When an area of the market gets frothy and looks good, fund firms pile in. Commodities, real-return and absolute-return funds are the latest trend beneficiaries. They inevitably will falter.
• Smaller target-date funds close. The biggest fund companies dominate the life-cycle and target-date market. Smaller players, those without a big business in corporate-retirement programs, will call it quits. When that happens, innovation and the evolution of these funds will stop, and consumers will be stuck with what is out there, which leads to mediocrity.
• Crossroad for exchange-traded funds. Some of the biggest investment firms, including Goldman Sachs Group and T. Rowe Price Group, want to make a splash in the ETF market in 2010. If they can gain traction, then competition and innovation will follow. If they find that the top providers have a stranglehold on ETF assets, that is bad news for the ETF field.
• The SEC whiffs on 12b-1 fees, again. The Securities and Exchange Commission has recognized that 12b-1 fees, sales and marketing charges that are added to a fund's base expense ratio, are confusing and problematic. Regulators have vowed changes, but have done nothing. They tabled the issue in the middle of the financial crisis, promising to get back to it when other matters weren't so pressing. Even if the economy and markets improve in 2010, the agency won't get this job done.
• Hungry investors get stupid once more. Amid the market's recovery, most observers still see something more like a return to normal, where stock gains will be in the 6%-to-10% range. For some investors, that is insufficient. Despite warnings from consumer and regulatory groups, they will dive into leveraged ETFs and other risky plays, confident they can make more. Ruin awaits.
• Summary-prospectus failure. This short-form document offers investors a few pages of some data before they buy a fund. More and more fund companies have started using it, saving them millions of dollars in paper, production and mailing costs. But investors aren't going to pay attention to a four-page prospectus any more than the 40 pages they get now. And don't expect fund firms to pass along those savings as a fee reduction either.
