Archive for Sunday, July 16, 2000

Mutual fund managers unlocking portfolio secrets

July 16, 2000

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If you've ever tried to figure out what you own in a mutual fund, you know it's not easy. So imagine your fund manager giving you a complete, up-to-date list of what's in there and sending you e-mail whenever he or she makes a big change.

It's happening.

Some upstart mutual funds are designed to grab the attention of information-addicted investors by handing out more information or disclosing their holdings more often than the twice-a-year requirement from the Securities and Exchange Commission. Some invite discussion between investors and fund managers, sharing praise, criticism or stock picks.

One company even stays in touch by e-mail.

In doing so, these funds are lifting the curtain between you and those who manage your money. And some of the old-line fund companies -- even the industry's trade group -- don't like this trend one bit.

Bucking the trend, some funds invite discussion between investors and fund managers, sharing praise, criticism or stock picks.

"We have expressed the view that the current requirement to disclose portfolio information semiannually remains appropriate," Investment Company Institute President Matthew Fink recently wrote to one of the upstarts, OpenFund, which puts its entire portfolio on the Internet for anyone to see.

Nevertheless, fund portfolios have become a hot marketing tool.

"Certainly we've found investors have a greater appetite for knowing and becoming involved in their investments," says Peter Greenley, spokesman for the Montgomery Funds, the company that recently sent out an e-mail explaining its decision to dump Microsoft shares in its US Select 20 fund. "So we've found the Internet is a fantastic way to begin to form a new way for investors to relate to their mutual funds."

The IPS Millennium Fund last September started a manager's diary, to disclose reasons for buying or selling. About a year ago, it began disclosing its holdings once a month, rather than once a quarter.

"We have moved forward," President Greg D'Amico said. "On the Internet, the mind-set is that making information as readily available as possible is the key to success."

Not to mention making the fund stand out in a universe of 11,500 mutual funds.

Proprietary concerns

The IPS Millennium Fund, thus far, hasn't undertaken an advertising campaign, because it hasn't had to.

Money poured in after a stunning 1999, when its total return was 189 percent. The fund is in the negative numbers, down 18 percent, so far this year but plenty of those new investors haven't left, either.

The fund has about $400 million today, compared with $180 million at year's end.

The IPS story gets to the heart of some of the issues that old-line fund companies raise about changing the disclosure rules.

IPS updates its entire portfolio holdings once a month -- without, apparently, any inordinate amount of difficulty or expense. Investors send congratulatory e-mails about the openness, D'Amico said.

Old-line companies argue that frequent, full disclosure is difficult, costly and would make funds vulnerable to competitors.

"The reason we don't disclose the complete portfolio more frequently is we do not want the Street to be about to front-run our portfolio managers," said John Demming, a Vanguard spokesman.

That means, if Vanguard's fund managers' intentions were known, others might copy its moves and therefore drive prices up or down. Massive mutual fund portfolios can't move quickly.

"The primary goal here is to protect the interest of shareholders," Demming said.

For OpenFund founders Donald Luskin and Dave Nadig, that's not the point. When they were money managers with Barclays Global, they say, they knew their institutional clients well.

"When General Motors pension plan calls you and wants to know what you're buying that week, you tell him," Nadig said. "The ironic thing is this big institutional market has this great customer interaction, but the tradition in the U.S. retail mutual fund market is all about creating as much distance as possible between the professional money manager and the person whose money is being managed."

Top 10 lists

Many of the established funds do disclose their top 10 holdings more frequently. Invesco Funds, for example, updates its funds' top holdings about 10 days after the end of each month and posts it on its Web site. Vanguard also updates top 10s monthly.

But Fidelity Investments actually reduced its disclosure three years ago. Spokeswoman Anne Crowley said the firm found that others were trying to capitalize on its monthly revelation about each fund's top 10 holdings.

Then Fidelity began disclosing the top holdings quarterly because company research showed there was little demand among shareholders for the information, she said.

OpenFund, which launched last August, recently wrote an open letter to the Investment Company Institute asking for a study of the issue, saying that infrequent and delayed disclosure hurts shareholders because they might make incorrect assumptions about whether the fund is appropriate for their goals.

With so little timely information, OpenFund argued, unscrupulous managers could take advantage of investors.

OpenFund, by the way, is reaping the publicity, but its fund performance is not great. After a 91 percent rise last year the fund is down almost 21 percent so far this year.

The ICI's response to OpenFund was to invite the company to make a presentation to an established ICI committee on SEC rules.

"The fund industry is dragging its heels on what ultimately is not a very important issue to them," says John Rekenthaler, director of research at Morningstar. He co-signed the OpenFund letter, along with Thomas O'Hara, chairman of the National Association of Investment Clubs. "There is no pain or cost to disclose more frequently."

Improved analysis

Of course, more frequent disclosure would help firms like Morningstar better analyze funds.

Fidelity's Crowley notes that those calling for changes in the rules "are not completely disinterested parties wanting information," she said. "We believe our best stock picks and our proprietary information should be used for the benefit of our shareholders and not for people who want to know because they might want to buy the individual stocks themselves or because they have a particular product" to sell.

Rekenthaler said that although the topic had been discussed for a while, he didn't expect any changes soon.

He noted that disclosure rule changes hadn't gone over easily.

The industry, for example, fought a requirement to name its portfolio managers and disclose their backgrounds. The rule finally was adopted in 1993.

OpenFund's Nadig says the fund got its share of copycats and criticism, as well as pats on the back from its Internet public.

It's not always comfortable to operate out in the open.

"It takes a strong will, but I think anytime you open something up it makes you better at what you do," he said. "There are an awful lot of smart people out there who have pretty good ideas."

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