MarketWatch columnist Chuck Jaffe offers some gift ideas that mutual funds should give their shareholders this year.
Dear fund-company bigwigs:
You’re coming to the end of what may be the most-trying year ever for mutual funds and, by most objective measures, you have failed at your mission, falling short of the investment objectives you word so carefully in prospectus documents, the benchmarks you use to frame performance, and the expectations of your shareholders.
You can’t make that up to investors this holiday season, or next year. For people who have lost faith in funds, you may not be able to make it up to them ever.
But that doesn’t mean you can’t do something good for the shareholders who have stuck with you. With that in mind, here is my holiday wish list of things you should give them, but typically don’t; some energy and effort on these little scores would leave a better taste in the mouth of your customers.
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This holiday season, I am hoping fund companies will give me:
• Waivers for fee increases caused by losses and shrinkage.
Many fund firms set expense ratios based on assets under management, so that they might charge 1.25 percent if the fund has $100 million in assets, but a flat 1 percent if assets cross $200 million. The idea is to reduce costs as a fund becomes successful and grows.
Well, couple a year of lousy results with investors heading for the exits, and a lot of funds have fallen back, shrinking to the point where they’re adding insult to injury and increasing costs on shareholders who have stuck it out.
If a fund’s poor performance has caused more than half of the asset shrinkage, give investors a break and hold the line on costs. It’s the least a fund company can do.
• A declaration of why fund managers did not go to cash in 2008.
After a year like 2008, fund managers need to justify their existence. Many investors use actively managed funds hoping that managers can protect them against ugly market conditions in a way an index fund can’t.
That didn’t happen this year.
Most managers will cite a mandate to be “fully invested,” or will talk about a long-term outlook suggesting that they buy low now to sell high later.
Whatever the reason, they need to say something, specifically addressing why they provided little or no downside protection. No shareholder letters about “challenging conditions” or some similar tripe, just a note saying why management stayed in the game even as daily results made it clear a fund could not achieve its investment objective that way.
Tell us how and why you made it or blew it, which will give those shareholders who stuck it out a fair chance to decide if you deserve another chance. Failing a plain-talk explanation, you don’t.
• Meaningful discussions of how news affects my fund, especially if my fund takes an oversized move.
Managers shouldn’t keep shareholders in the dark; when a fund takes a violent swing, management should say why.
The subprime mortgage crisis showed (again) that the last people to know that a market issue is hitting home are fund shareholders.
As a result, several big ultra-short bond funds — SSgA Yield Plus, Schwab YieldPlus, and Fidelity Ultra-Short Bond, for example — got hammered because they held a big slug of asset-backed securities tied to the performance of the housing market.
At some point, when the funds took an oversized move, management should have shot out an e-mail — in real time — to say what was going on.
If managers want to calm investor nerves, they will communicate with shareholders whenever something out of the ordinary happens to the fund.
• The end of 12b-1 fees.
The 12b-1 fee is supposedly for sales and marketing costs, but it primarily functions as a trailing commission for the adviser who brokers the initial purchase.
It is even applied to some funds that have closed to new investors, so that sales and marketing have stopped. It’s the “gift that keeps on taking.”
Advisers deserve their due, but shareholders deserve complete honesty — and not blurry numbers — when it comes to fund expenses.
Regulators have talked about killing the 12b-1, but haven’t gotten it done yet.
Fund companies should recognize that it’s intellectually dishonest to charge a regular fee for owning a fund that they separate from the core expense ratio; they should end the practice rather than waiting for regulators to do it.
• A quick guide to whether the manager has skin in the game.
Funds disclose a manager’s investments in the “statement of additional information,” (SAI) or Part II of the prospectus.
That’s the part no one reads (funds don’t send it out, and direct customers to their Web sites instead).
But the first part of the prospectus include manager bios, and funds should add a line 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 — a factor most consider comforting — even if they never dig through all the details.
In the end, what investors want (besides performance) is additional information that fund firms already have.
If you can’t guarantee performance — and this year has proved you can’t — at least give them enough details so that they feel like your partner in an investment venture, rather than someone who just strapped in for the ride.
Yours in the spirit of the season,
Chuck Jaffe is a senior columnist at MarketWatch columnist. He can be reached at firstname.lastname@example.org or Box 70, Cohasset, MA 02025-0070.