May 31, 2011

SPEAKING VOLUMES: A Review of The Fund Industry: How Your Money is Managed

Robert A. Robertson

Approximately 87 million Americans invest in mutual funds, either directly or through retirement accounts. These investors likely include 90 percent of households with an ABA member. With the importance of these investments and the growth of the fund industry, Robert Pozen and Theresa Hamacher's insightful book on fund operations--The Fund Industry: How Your Money Is Managed--is a must-read.

Pozen and Hamacher are veterans of the mutual fund business. Pozen is chairman emeritus of MFS Investment Management, as well as a senior lecturer at the HarvardBusinessSchool and a senior fellow at the Brookings Institute. Prior to MFS, he was an executive for many years with Fidelity Investments. Hamacher is president of the National Investment Company Service Association, and the former chief investment officer for Pioneer Investment Management USA. Contributors to the book include other industry luminaries, such as Deborah Miller, director of equity quantitative research at MFS, and Eric Roiter, lecturer in law at BostonUniversity and former general counsel with Fidelity.

The authors examine the fund industry from a unique perspective, from the basics to complex concepts and, equally important, they do so in plain English. Unlike numerous other books that attempt to help investors decide where to put their money, The Fund Industry explains how the $12 trillion mutual business operates.

"Mutual funds are unique because their investors don't go to a stock exchange to buy and sell their shares, they go directly to the fund itself. As a result, a fund's share price isn't established by traders . . . rather, it's equal to the fund's net asset value . . . ." From this foundation, the book takes the reader through the fund portfolio management process and the role of portfolio managers. "Active management seeks to beat the return of an index through insightful securities selection. Industry insiders often call this generating positive alpha," with alpha representing the difference between the market return and the return on an investment portfolio.

New to the book's second edition is a chapter devoted to money market funds. The chapter addresses the money fund investment process and the role of money funds in the U.S. financial system, particularly during the 2008 credit crisis. "It wasn't until the Reserve Primary Fund broke the buck that the government took direct action." "The federal government stepped in with a series of programs to reduce fund redemptions and stabilize the markets," including implementing the U.S. Treasury's temporary guarantee program.

Also new to the second edition are discussions of other types of fund products, such as the operation of exchange traded funds (ETFs) and hedge funds. "Let's explore how ETFs operate from day-to-day. We'll look at how ETFs create and redeem shares and how they manage subsequent market trading of their shares, focusing on investment company ETFs." The hedge fund section explains common hedge fund strategies, including equity long-short, relative value, distressed, and leveraged strategies.

Several chapters are dedicated to international funds: "Cross-Border Investing," "Cross-Border Asset Gathering," and "The Market for Investment Funds: Beyond the United States and Europe." "Investing overseas also raises a host of operational issues . . . [M]ost mutual funds buy securities locally and entrust them to local custodian banks--called sub-custodians--for safekeeping." After U.S. funds that invest abroad, the book reviews European retail funds called UCITS, an acronym for the awkward phrase "Undertakings for Collective Investment in Transferable Securities."

In addition to being a resource for investors, The Fund Industry contains career track vignettes for persons who are considering a career in the fund business. Over the past 12 years, fund industry employment in the U.S. has grown 38 percent to 157,000 workers in 2009, according to the Investment Company Institute. Twenty-eight percent of the industry's workforce was employed by a fund's investment adviser or third-party service provider in support of the portfolio management function, such as investment research, trading and securities settlement, and information systems. Jobs related to fund administration, such as accounting and compliance, represented 11 percent of industry employment. The Fund Industry's career track vignettes include:

  • Stock Analyst: "Interested in becoming a stock analyst?"
  • Bond Portfolio Manager: "Wonder what it's like to be a bond portfolio manager?"
  • Money Market Credit Analyst: "Interested in becoming money market credit analyst?"
  • Fund Accountant: "What does it take to be a fund accountant?"
  • Hedge Fund Manager: "What's involved in running a hedge fund?"

For those interested in these areas, including lawyers who practice in the fund business, the vignettes provide true operational insight. Also for lawyers, you should consider other books that do a workmanlike job of providing a business and legal framework for mutual funds. These books include: Tamar Frankel and Clifford Kirsch, Investment Management Regulation (Fathom Publishing, 3rd ed. 2005) and Matthew Fink, The Rise of Mutual Funds: An Insider's View (Oxford University Press, 2nd ed. 2011).

Plain English and insightful depth are the hallmarks of The Fund Industry's more than 500 pages. The book is accessible to the investor and investment professional who are new to the marketplace, and it serves as an excellent reference for the more seasoned. The book has a broader perspective, but makes a nice companion book to Lee Gremillion's work, Mutual Fund Industry Handbook: A Comprehensive Guide for Investment Professionals (John Wiley & Sons 2005). The Fund Industry succeeds in assembling the various segments of the fund business into a coherent and complete picture. Pozen and Hamacher should be commended for their tremendous effort.

Robert A. Robertson

Partner, Dechert LLP

Robertson is a partner in the Financial Service Group of Dechert LLP. He is the author of Fund Governance: Duties of Investment Company Directors (Law Journal Press 2011, originally published in 2001).