There are no hostile takeovers in mutual funds.
Bad managers are entrenched until they resign or the fund’s directors give them the boot. Shareholders generally have no say in the matter; unlike a corporation, where dissident investors can slug it out on the open market, most mutual funds don’t even have to tell customers when they make a management change.
Lousy funds can go on indefinitely.
It’s such a recipe for complacency that legendary investor Warren Buffett said in the 2002 annual report of Berkshire Hathaway that “A monkey will type out a Shakespearean play before an independent mutual fund director will suggest firing an inept manager.”
For proof, consider the strange case of the Phoenix Market Neutral fund, and TFS Capital, the management firm that wants to run the $66 million portfolio, as it appears to be the perfect example of how insulated management is from hostility that might actually lead to improved performance.
On April 12, Richard Gates of TFS Capital sent a letter to the board of directors of Phoenix Market Neutral. Here’s my quick translation of the two-page letter:
“Your current management team stinks at managing this fund. We run a similar fund, and we actually make money for shareholders doing it, so let us run the money.”
Gates has a point.
Phoenix Market Neutral is one of the worst funds in its peer group, with annualized losses for every meaningful time period from the last 12 months since its inception in 1998. The fund is an “analysts’ pan” at Morningstar Inc., and ranks dead last in its category for “tax-adjusted return” over the last five years.
By comparison, the TFS Market Neutral fund has an annualized gain of almost 15 percent since its launch in September 2004. One big negative is the firm’s longevity; TFS was founded in 1997 and its funds are less than 3 years old.
Both market-neutral funds take a quantitative approach to their long- short, hedge-fund-like style of investing. Examine the prospectus documents of the two funds, and it’s clear their objectives and methods are substantially similar.
Look at Phoenix’s annual report to shareholders, and the company’s message from the president, George Aylward, says that “the board’s focus is on investment performance and serving the best interests of shareholders.”
Gates’ letter suggested that living up to such a statement should include seeking out a manager who can actually make money for shareholders.
“We’re confident that if the board searched for a new manager – and picked us from the competition – we could go in there, add value, and make the shareholders better off,” Gates said in an interview.
Joe Fazzino, a spokesman for Phoenix Investment Counsel, suggested that the letter is roughly the equivalent of junk mail.
“Phoenix Investment Counsel gets calls on a regular basis from sub-advisers, and we have no obligation to respond to each unsolicited marketing proposal,” Fazzino said.
But fund industry insiders and boardroom observers say the TFS letter is anything but routine, and suggested that in the world of stocks, it would have demanded a response. They wonder why a fund firm would ignore it.
TFS may push the issue and approach shareholders directly, but they won’t gain much traction; shareholders could wake up and leave the Phoenix fund in favor of TFS, but there’s no mechanism to overthrow the empire. More fights for fund control would be a good thing for investors, but you’d make more money wagering on the monkey to finish typing “MacBeth.”
Chuck Jaffe is senior columnist for MarketWatch. He can be reached at jaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
