Morningstar is now calculating a new variable that it calls the success ratio of mutual funds, which is the share of total returns that investors realize. Mr. Phillips quoted long-time Fidelity Magellan portfolio manager Peter Lynch, who said that, "Magellan was a great mutual fund; it is just too bad that it did not make any money for anyone." Mr. Phillips added that, "total returns are the right way to evaluate portfolio managers but consumers often do not capture the entire return due to weaknesses in human behavior which result from chasing performance, delayed purchases, early redemptions, and the inability to stay the course"

However, Mr. Phillips was not ready to let the mutual fund companies off the hook, adding that, "while mutual fund companies do not totally control investor returns, they can exercise some control through marketing, sales bonuses, etc. The point is balancing salesmanship with stewardship." He quipped that a few years ago, "everyone said that they wanted to be like American Funds but meanwhile they were introducing internet funds"

He also added that this is not a mutual fund specific issue, saying that, "the phenomenon is evident across mutual funds, hedge funds, index funds, and exchange traded funds"

The difference is the smallest in the municipal bond, balanced, and asset allocation fund categories because these are generally part of buy-and-hold investment strategies. "Mutual funds that have slower and steadier approaches to their investment returns result in better overall investor experiences," he added

Furthermore, as everyone knows, fund flows have been concentrated for several years. Mr. Phillips restated a long held Morningstar research conclusion that those flows have gone not to funds distinguished by active or passive investment strategies or load or no load pricing, but rather to funds which avoided the market timing scandals and with below average pricing in their respective channels; he added to this theory, saying that, "the winning fund companies also all have high success ratios"

Mr. Phillips closed his prepared remarks by offering the prescription that all CEO Summit attendees, financial advisors, distributors, and manufacturers, "are in the behavior modification business. The focus should be on sound asset allocation and disciplining investors' emotions to reduce mistimed purchases and sales. Mutual fund companies and financial advisors who work together toward this goal will greatly enhance the investor experience"

	CEO Summit XIII Guest Speaker George Gatch (CEO, JP Morgan Funds Management, JP Morgan Chase)

Mr. Gatch made the point that many retail investors in both the US and in other countries have too much of their portfolios allocated to their home country stock market. "Investors anchor themselves to their own equity markets," he said. Meanwhile, he argued that asset classes are expanding widely; for instance, JP Morgan's Private Bank has expanded its use from three asset classes in 1997 to 21 in 2007 (including international, inflation protected bonds, private equity, commodities, & market neutral strategies), but amazingly, 64% of assets in defined contribution plans are still invested in large cap equities"

Mr. Gatch offered a wide range of investment product opinions, including that access to alternative assets classes with low or negative correlations is an advantage; shorting constraints limit many smart mutual fund managers from applying their full convictions; there is a lot of discussion regarding 130/30 funds and inflation protected funds and target date funds offer institutional quality diversification. He said that, "investors will increasingly use alternative investments, but so far their experience with non-traditional products has been limited." He argued that while market neutral funds have done poorly, others like inflation-protected bonds have done well. Investors should also consider commodity-linked products and mutual funds that short stocks"

Open architecture structures are driving mutual fund distribution, while proprietary distribution within major distributors is declining rapidly; Citi and Merrill Lynch sold their asset management subsidiaries, which is surprising because asset management has both higher margins and higher likely growth rates than brokerage. But there are select case examples holding their own; for instance, JP Morgan's Private Bank places 80% of its client assets with proprietary managers"

The market for third-party distribution is impossible to ignore, creating a huge opportunity for JP Morgan Asset Management

Investment performance and innovation will separate the winners from losers - "the only thing that matters is investment performance. Flows go to top performing funds and new strategies with good salespeople," said Mr. Gatch

John Gunn (CEO, Dodge & Cox)

	CEO Summit XIII Guest Speaker John Gunn (CEO, Dodge & Cox)

John Gunn is CEO of Dodge & Cox, where he oversees almost $200 billion in assets under management in separate accounts and its four mutual fund offerings, including its stock fund, international stock fund, balanced fund, and income fund. Dodge & Cox has been remarkably successful since its founding in 1930; the firm has had terrific investment performance, typically shuns publicity, and avoided all of the recent mutual fund scandals. The firm has also long maintained a core set of principles, which are rarely discussed outside of the firm. Mr. Gunn joined Dodge & Cox in 1972, soon after earning his MBA from Stanford University. Mr. Gunn is also a trustee of the Dodge & Cox Funds and a member of Dodge & Cox’s Investment Policy Committee, Bond Strategy Committee, and International Investment Policy Committee.

After an introduction by Chip Roame (Managing Principal, Tiburon Strategic Advisors) & Karl Mills (President, Jurika, Mills, & Keifer), Mr. Gunn addressed Dodge & Cox's philosophies around running the firm, making numerous insightful points:

• Dodge & Cox has long believed that the best strategy is, "to be distinctive in a fragmented market"
  
• Mr. Gunn believes in keeping it simple - Dodge & Cox has just four mutual funds, no international separate accounts, similar holdings across accounts, a single investment philosophy, and a single office. “I love the mutual fund business because it allows us to focus; the separately managed accounts business is distracting because the clients are looking at tracking error and other crazy statistics”
  
• More specifically, Mr. Gunn shared numerous Dodge & Cox management theories, including, "at Dodge & Cox we believe in a kind of financial Hippocratic Oath – first, do no harm. The higher your fees, the less your clients make. And we also believe in low turnover – one of our company mottos is - don’t just do something…stand there,” adding that, "the one who wins is the one who makes the fewest mistakes"
• Dodge & Cox buys "companies' stocks that are out-of-favor or under a cloud, ones that are embarrassing to own if you reveal it at a cocktail party." And he added that, "we don’t believe that past price performance has anything to do with our desire to own or not own a stock; there isn’t a momentum bone in our bodies”
• Mr. Gunn has a skeptical view of hedge funds, saying that they are, "just a reallocation of funds amongst the rich people," and recognizing that the market is a zero sum game, "so if so many hedge funds are doing so well, someone must be losing. No other business operates under so many unproven hypotheses. Some will do well, but collectively they will be disappointing. In the 1990s, the financial industry took investors over a cliff and now they are saying, ‘if you pay me more, I’ll do a better job"
• Dodge & Cox believes in hiring as few people as possible. “We hired as few people as we could early in their careers and did not let the place become people-intensive. With only 53 shareholders, Dodge & Cox has a group-decision process, which constantly operates face-to-face in one location.”The firm hires young executives, trains them, and seeks to retain them, creating a common culture and investment philosophy that permeates the firm

In his question & answer time, Mr. Gunn offered the following answers to some questions:

• The dominating investments theme going forward will continue to be the economic advance of the developing world. Fundamentally, the biggest world shift is coming from the 5 1/2 billion people in the underdeveloped world
• Dodge & Cox' board members, "own 35%-50% of the firm." Mr. Gunn believes that going public, "would be a huge distraction"; he also believes that selling would "wreck the company." Dodge & Cox shareholders must sell their shares at ages 65 to 69 at book value, which is likely 2%-3% of fair value. Selling partners have, "a ten year claw-back where if the company is taken public, they would realize their proportion of the profits"

Stephanie DiMarco (CEO, Advent Software)

	CEO Summit XIII Guest Speaker Stephanie DiMarco (CEO, Advent Software)

Stephanie DiMarco is CEO of Advent Software and has engineered the growth of the company from a startup in 1983 to its current status as one of the leading providers of software and services for the investment management industry, with more than 4,500 clients in 60 countries managing more the $14 trillion. After retiring in the late 1990s, Ms. DiMarco returned to Advent in 2003 and successfully led the company through a turnaround, introducing new products and transforming the firm's business model to be based on recurring revenues and term licenses, boosting the firm's stock price 500%. Today, the company is in a position of unprecedented strength and stability, with record revenues of $184 million in 2006.

After an introduction by Chip Roame (Managing Principal, Tiburon Strategic Advisors) & Tom Lydon (President, Global Trends Investments), Ms. DiMarco addressed the impact of several key industry trends (the growth of assets worldwide, the explosion in alternative investments, and the increasing demands for compliance & reporting), and highlighted the opportunities for investment managers to harness technology to efficiently capitalize on these trends, making the following points:

• Ms. DiMarco began by offering up the following history of industry structural changes - "the 1970s brought deregulated commissions, the 1980s brought self-directed investors & tax-deferred retirement accounts, the 1990s brought mutual fund mania, and the 2000s are bringing globalization & alternative investments"
• In this decade, she recognizes both the rise in global consumer wealth and the globalization of the investment management business, noting that, "there are eleven economies that have been growing 20%+ per annum for a decade"
• Similarly, she believes that, "alternative assets, foreign money managers, and hedge funds are hot growth areas," saying that, "hedge funds have provided a new market for Advent; there were 600 hedge funds in 1990 and 9,600 in 2007 - and many of them are potential Advent clients."

In her question & answer time, Ms. DiMarco offered up the following answers to questions:

• Ms. DiMarco recognizes that, "there is lots of competition in her industry," but that, "competition is very fragmented; it is the land of a thousand niches, adding that financial services companies account for 45% of the Standard & Poor's 500's earnings; segments include prime brokerage, institutional management, hedge funds, and private client services, each with its own regulations"
• She sees tremendous opportunities across these segments, saying that, "what we try to do is understand and master new growing segments, build the technology, and leverage it. It's difficult to scale if you are doing a lot of customization; our best return on investment comes from off-the-shelf sales. Clients are telling us what they want and if it makes sense from a business standpoint, we build it"
• Ms. DiMarco believes that she is a much better business person having taken some time off during the Internet bubble. "After retiring in the late 1990s and then coming back to turn the company around in 2003, I'm a different person," she said. "The toughest experiences make the best business people. You can’t make decisions or drive your company according to what Wall street thinks; if you let that drive your agenda, you will get confused about what is in the best interest of your company and your clients. I am trying to do what is best for the company and its shareholders."
• She's also not anti-acquisition but her firm did get burned in the past by making acquisitions outside its core focus; "organic growth is Advent's best strategy," she added

Upcoming Tiburon CEO Summit XIV: April 10-11, 2008

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