Knowing where to get a real explanation when something goes awry with your mutual fund can be as mysterious as Stonehenge. Suppose you've learned the fund bought shares of Enron (ENE
) last summer, and you want to know why. The stars of the show, portfolio managers, aren't paid to talk directly to investors and rarely do. The grunts, customer service reps, respond with little more than scripted spiels. And the bosses, fund company execs, owe their first duty to the investment firm. Only after that do they serve you, the fund's actual owner.
So just who is answerable to you? It's an obscure group of people known as the fund's independent directors, who from now on will find themselves under a new spotlight. The Securities & Exchange Commission on Jan. 31 put into effect a set of rules that demand more disclosure from directors, including how much they have invested in the funds they oversee, their conflicts of interest, and their rationale for approving a management contract with the fund's investment adviser (table).
The SEC also is requiring more prominent disclosure in every fund's annual report of the simplest facts, such as who the directors are, their occupations, and where they can be contacted. Before, investors could find these basics annually in the esoteric "Statement of Additional Information," a filing they don't get automatically and must know to ask for.
Will this fuller, more conspicuous disclosure make funds wondrously better investment vehicles? Don't count on it. Most investors will neither notice nor care. But I do think the new rules will help some investors enlist directors in solving problems, while also encouraging lackadaisical directors to supervise their funds' investment advisers more closely. The law charges independent directors (or trustees, as they're sometimes known) with looking out broadly for investors' interests. Trouble is, hardly any investors know that. To those who do, independent directors too often have seemed to side with funds' investment advisers--whom they are supposed to supervise--over investors.
Perhaps the directors' most critical job is ensuring in their annual review of a fund's management contract that costs stay down, or investors at least get what they pay for. They don't always. I searched Morningstar's database for domestic stock funds that suffered below-average returns in the five years ended Dec. 31, 2001, yet charged above-average expenses. The search found 773 such funds, including plenty from high-profile families such as Alliance, Oppenheimer, Putnam, and Van Wagoner.
Consider a specific case, Alliance Quasar Fund. Since 1997, it returned 0.17% a year on average, leaving it among the worst 11% of comparable funds, according to Morningstar. Performance over other periods also was dim. Yet Quasar's owners pay a premium price--1.67% of assets in annual expenses, vs. the average 1.42%. It's as if they are charged for sirloin and get tripe. Edmund Bergan Jr., general counsel to Alliance funds, did not return my call for comment.
In the end, though, it's not Alliance that's responsible. It's the fund's six independent directors, whom Alliance's fund holders in 2000 paid an average of $186,432 for overseeing an average of 38 Alliance funds, including Quasar (which paid the six an average of $4,213). "We are concerned and we are working hard," says Quasar independent director William Foulk Jr., a Greenwich (Conn.) investment adviser who has more than $100,000 of his own money in Alliance funds. "We won't let up." He added that directors will take a close look at Quasar's performance and fees in July when Alliance's contract comes up for renewal.
Under the SEC's new disclosure rules, if Quasar's directors approve another contract with Alliance for investment advice, they will have to tell the fund's owners, in the Statement of Additional Information, why the deal is sound. Ditto for other groups of independent directors. With a spotlight on them, some of the fund world's darkest mysteries will be harder to hide.
Copyright 2002 , by The McGraw-Hill Companies Inc. All rights reserved.
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