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Updated Tuesday, December 4, 2012 at 06:25 AM

Chuck Jaffe: My 2012 wish list for shareholders

By Chuck Jaffe
Syndicated columnist

Your Funds

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 only require these kinds of disclosures 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.

While there’s a nearly endless list of ideas and improvements that would help shareholders, I’d settle for just a few upgrades a year.

With that in mind, here is my wish list for the 2012 holidays — realistic, easily accomplished things I want fund companies to give shareholders — made in the hope that if fund companies don’t do the right thing, some day they will be forced to do these things:

1. Stop selling mediocrity.

If a fund’s biggest asset to the sponsor is that marketers can sell it — rather than deliver superior performance — it is 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.

2. Tell investors how sister funds do — or don’t — work together.

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.

3. 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’s a simple column added to the chart on fees; show the fund’s costs and then the averages for actively and passively managed funds in the same category or peer group.

4. Show manager records, relative to the same benchmarks used for the fund.

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 cannot 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.

It gives investors a better idea of the manager’s abilities, and their record tells a career-long story, even when some stinker they ran in the past is killed off with its record buried.

Fund companies have these numbers; it’s how they judge managers and decide if they deserve to keep their job. Give us the data and let us decide for ourselves (and on team-managed funds, give us the record of the team).

5. Pay directors with fund shares, and disclose which funds they choose for their compensation.

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 — a sad truth investors can only recognize by reading deep into fund documents — but it would tell investors which funds in the family that directors feel most comfortable with.

That information is so valuable that it might get shareholders — or their financial advisers — to look deep into the disclosure documents.

6. 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, investors are immediately alerted as to what has changed and what they might want to look at.

7. Declare what my fund really means to the manager.

We’d like to believe the fund we own is the most important task the manager works on. Read a fund’s “statement of additional information” — it’s the second part of a prospectus, that funds don’t actually send you — and you’ll see that many fund bosses run other funds, hedge funds, private accounts and more.

What shareholders really want to know is how much money the manager (or team) runs, and the percentage of those assets that the fund represents, as well as how much of the manager or firm’s income is from our fund versus the other activities.

When a fund is a small part of the manager’s responsibility and/or compensation, it probably shouldn’t be a big part of our portfolios.

And while we’re improving disclosure about managers, let’s put the disclosure of a manager’s holdings in a fund into a one-line boldface sentence right below their bio; it should be in the part of the prospectus that shareholders are sent, rather than buried in the back.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070. Copyright, 2012, MarketWatch






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