The Markets December 9, 2009

Another Record-Setting Year for ETFs?

2009 could be another record-setting year for exchange-traded funds (ETFs), according to a new report.

Reported by

Research firm Strategic Insight (SI), owned by PLANADVISER’s parent company, Asset International, Inc., has estimated that U.S. exchange-traded funds (ETFs) drew net inflows of $110 billion in the full year 2009.  

While SI noted that figure (which includes exchange-traded notes, or ETNs) is short of the record inflows of $176 billion that ETFs enjoyed in 2008, that level “will likely bring U.S. ETF assets past $750 billion at year-end, setting a record for ETF asset totals.”  SI noted that, worldwide, ETF assets now exceed $1 trillion.  

In a press release, SI said that, much like traditional mutual funds (see “Bond Mutual Funds On Track for Record Inflows in 2009”), ETF flows during 2009 were driven mostly by taxable bond ETFs and international equity ETFs, which together accounted for roughly 70% of all ETF net inflows. 

Trillion Mark?

“Coming after the surge in ETF growth in 2008, this year’s continuing momentum for ETFs marks a maturing of the space. The diversity of the ETF marketplace allows for growth when markets decline as well as when they rebound,” said Loren Fox, SI senior research analyst. “Given what we’ve seen, it’s possible that U.S. ETF assets will hit the $1 trillion mark in 2010 or 2011.”  

Across all industry segments, including ETFs, stock and bond fund assets increased by more than $2 trillion in 2009, benefitting from strong net asset value (NAV) appreciation, and from record bond fund inflows.  

Such a yearly increase in managed assets was the largest in the fund industry’s history (the prior record of annual asset gains occurred in 2003 when long-term fund assets increased by $1.36 trillion), according to SI.  

Yet, even with such dramatic rebound in 2009, stock and bond fund asset are still $1.3 trillion below their levels at year-end 2007. 

More information is available at www.sionline.com.

Compliance December 9, 2009

Yellow Pages Publisher Faces Stock-Drop Suit

R.H. Donnelley Corp., publisher of the Yellow Pages, is facing a lawsuit brought by 401(k) plan participants who claim the company should have discontinued offering company stock as a plan investment choice.

Reported by

The suit alleges plan fiduciaries violated their duties under the Employee Retirement Income Security Act (ERISA) by continuing to offer the stock and maintaining the plan’s heavy investment in stock when it was no longer prudent to do so. Defendants are also accused of failing to avoid certain conflicts of interest that inhibited their ability to act in the best interest of participants, and of failing to monitor persons to whom management and administration of the plan was delegated.

The complaint filed in the U.S. District Court for the Northern District of Illinois proposed to represent a class of plaintiffs who were participants in or beneficiaries of the plan from July 26, 2007, to the present. During this time, Donnelley’s main source of revenue, print advertising, dropped off, and this, combined with the company’s long-term debt, caused R.H. Donnelley to be a “seriously troubled company,” the complaint said.

The company’s stock fell from a value of nearly $70 per share to less than a penny per share.

The suit said defendants allowed the plan to stay heavily invested in company stock even though they knew or should have known that:

  • the company was not adequately reserving for its bad debts in violation of generally accepted accounting principles, causing its financial results to be materially misstated;
  • the downward pressure the company was experiencing with its advertising revenue was not a cyclical change, but was due to a permanent shift in customers moving away from print yellow pages advertising;
  • the company had far greater liquidity concerns and ratings downgrades than it had previously disclosed;
  • given the turmoil in the economy and the shift away from print advertising, the company had no reasonable basis for its projections about its 2008 results;
  • the company’s stock price was artificially inflated as a result of its undisclosed problems; and
  • the plan’s heavy investment in company stock would result in investment losses to the plans and to participants.

The suit seeks restoration of losses to the plan.

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