Chuck Jaffe: Investors deserve a few 'gifts' from mutual funds
BY CHARLES JAFFE Market Watch
Wednesday, November 28, 2012
11/28/12 at 4:11 AM
With Thanksgiving falling early this year, mutual fund executives have plenty of time to put together gifts for shareholders.
The problem, however, is that what we have to beg for as "gifts" are actually things that fund companies should provide simply because it's the right thing to do. Regulators know it, but they will require these kinds of disclosures only if/when they have to slap the fund world on the wrist for some sort of wrongdoing, because every round of mutual fund "reform" is really about injecting some common sense into the investment process.
There's a nearly endless list of ideas and improvements that would help shareholders, but I'd settle for just a few upgrades a year. Here's what I want fund companies to give shareholders:
Stop selling mediocrity
If a fund's biggest asset to the sponsor is that marketers can sell it - rather than deliver superior performance - it's not in investors' best interests for that fund to keep going.
Yet mediocre funds create something of an annuity for their sponsors, regularly delivering fees from investors who are inert or simply oblivious to the fact that they are settling for inferior, uninspired results.
Make the fund world a meritocracy; if a fund doesn't deserve to keep going, kill it off. Merging it with something better or simply liquidating it and encouraging investors to find something better would be a blessing.
Tell investors about sister funds
If investors buy funds with similar investment styles and significant overlap in holdings, they don't get the diversification they sought from a new fund.
Fund honchos know which of their funds are substantially similar; investors should be told. A simple statement showing which members of the family have, say, 20 percent overlap would do; disclose - in the part about risks of ownership - that buying a fund if you already own the following sister funds creates the risk of concentrating a portfolio, rather than diversifying it.
Provide comparative fee information
Past performance is no guarantee of future results, but above-average costs are a sign that a fund is going to have a tough time in all market conditions. When a fund shows its expense ratio - even as it has become easier to get an actual dollar amount being taken from shareholder accounts - it never shows how those costs shape up against the competition.
If funds can compare performance to an index or average - required in the prospectus by rule - they can compare expenses to the average fund in the peer group. It could be a simple column added to the chart on fees.
Show manager records
Continuing the theme of better comparative data, funds should disclose each manager's career track records relative to the peer groups and benchmarks they have competed with. That way, shareholders can not only see clearly if a new manager has been good or bad since they replaced the old skipper, but they can look at a manager's evolving career history.
Pay the fund's directors with fund shares
Shareholders want independent directors to have their interests aligned with the people they represent, so pay them with shares. This not only helps to stop the problem of directors who have no stake in the fund, but it would tell investors which funds in the family that directors feel most comfortable with.
Offer a quick summary of prospectus changes
Whenever a fund changes its prospectus or the rules it operates under, those adjustments should be highlighted up front. Sports rule books, for example, typically do this by highlighting what is different this year.
Original Print Headline: Investors deserve a few 'gifts' from mutual funds
Chuck Jaffe, senior columnist for MarketWatch, can be reached at firstname.lastname@example.org or at Box 70, Cohasset, MA 02025-0070.