Dear fund-company honchos:
In this season of giving — at the time of year when investors are realizing that many of your issues will be paying out big capital gains and generating nasty tax bills on mediocre performance for 2007 — you should be getting shareholders a little something special.
I’m not talking performance here, as results are not a gift but rather a promise to the people who entrust you with their money. Instead, it’s my holiday wish list.
If you’re like most of your shareholders, you’re feeling the economy’s pinch this year, so I’ve made a list that requires nothing more than energy and effort. As much as I’d like to see the elimination of 12b-1 fees, I’ll settle for something that’s less costly.
This holiday season, I’m hoping fund companies will give me:
Management knows that investors are not well served owning several funds with similar styles and overlapping holdings; in fact, many prospectuses include language to suggest that investing in more than one of the firm’s funds “might not provide meaningful diversification.”
Funds could provide a meaningful disclosure by saying which of their funds don’t play well together. A simple statement suggesting that one fund may not be a good fit with certain siblings would do it.
Mutual funds must tell shareholders if the manager has investments in the fund, but they do it in the “statement of additional information,” (SAI) or Part II of the prospectus. That’s the part no one reads; funds don’t even send it out unless an investor specifically requests it; even then, they try to direct shareholders to their websites instead.
But the first part of the prospectus includes the manager’s background and experience.
Funds should add a boldface line to the end of that bio, saying if the manager holds shares in the fund, giving a brief description of those holdings, and suggesting a look into the SAI to find out the details. In that way, investors know that the manager is along for the ride.
One thing the subprime mortgage crisis has shown — again — is that the last people to know that a market issue is hitting home will be the shareholders of the fund. Fund companies should communicate about key issues by e-mail.
Investors in Fidelity Inflation-Protected Bond fund, for example, might have gotten a note about the fund’s losses in subprime holdings, explaining why the fund is lagging its peers and saying why a TIPS fund has subprime paper to begin with. The fund’s investors had no clue they might be exposed.
Consumers should know if they are the manager’s most critical and important customer, and in many cases they’re not.
Fund sponsors disclose in the SAI if the manager runs additional investments. That’s important, but management should disclose how much money the manager (or team) runs and the percentage of assets that the fund represents. A fund that is a small portion of the manager’s responsibility may get less attention; investors should know the priorities.
Funds revise their operating terms all the time, but you’d practically have to know the prospectus by heart to recognize changes — good, bad or neutral. Because investors lack that memory, funds should detail upfront any changes made from one year to the next and explaining why the change was made.
In the end, I’m just asking for information that fund firms already have.
Yours in the spirit of the season,
Chuck
Chuck Jaffe: cjaffe@marketwatch.com.
