By Chuck Jaffe, MarketWatch
Most people making forecasts for 2017 are fessing up to how murky their crystal ball was a year ago, but when I looked back at my calls for 2016, it was the first time in 20-plus years that I pretty much got everything right.
The reason is that I look for the big future headlines in the mutual fund business, not in the broader financial-services industry or the world at large. In that narrow realm, it’s possible to look at trends and available information and make a savvy call. In most years, I get roughly three-quarters of my predictions right, with one forecast being a bit too early and another being the wild turkey of the group.
Thus, reading the proverbial tarot cards visible nowadays in the fund world, here are my predictions for the coming year — the big fund stories I expect to make headlines in 2017:
1. Continuing increase in fund and ETF liquidations and mergers:
According to investment researcher Morningstar Inc., the number of funds liquidated in 2016 was nearly double the level from a year earlier, while ETF closings were up 25%.
This even as the market kept up its long rally. Most experts are forecasting returns for 2017 that are low or flat — with gains concentrated in the first six months and balanced by setbacks thereafter. If the outlook for the market is ugly before Halloween, the fund firms that didn’t give up on their unloved and under-appreciated offerings in 2016 will take that step. Expect around 750 funds and ETFs to be dead by New Year’s Eve.
2. A blow-up in commodities ETNs, and a massive reduction in the exchange-traded note business:
The beginning of 2016 saw some moments when commodities notes such as iPath S&P GSCI Crude Oil Total Return ETN /zigman2/quotes/204600377/composite OIL +0.70% were completely disconnected from the action of oil prices, trading at premiums rather than fair value mostly due to back-room technical reasons. The end of 2016 saw trouble for leveraged exchange-traded notes, with Velocity Shares de-listing a few issues — and then creating and re-issuing brand new replacements — leaving investors confused and mistrustful.
Exchange-traded notes are a cousin to exchange-traded funds, but they are not the same and their different structure comes with inherent, problematic flaws. The weird setup is precisely why many backers now want out, and many investors never want to be in them; those feelings will only intensify this year as trouble surfaces in some commodities offerings.
3. A “liquid” fund has a liquidity crunch:
Liquid-alternative funds have been increasingly popular in the business in recent years, their potential downsides largely overlooked … until now. Despite their name, liquid-alt funds often hold securities that aren’t so fluid; that’s not a problem, unless there’s a need to cash out of securities in a hurry.
With the Fed hiking rates, you can expect increased volatility. That, in turn, makes investors jumpy. If they get antsy and want to pull too much from a liquid-alt fund, those redemptions could force sales at just the wrong time, at which point investors learn the difference between what is “liquid” and what is “easily sold without affecting the price.”
Funds will either lock investors in — trying to prevent losses — or let them suffer. Either way, the pain is real.
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