Updated: May 3, 2013 12:14PM
Originally published: February 27, 2003
Wall Street is eager to ink a $1.5 billion settlement with several state attorneys general over conflict-of-interest issues regarding research and public stock offerings. But mutual fund investors have not seen similar scandals erupt.
Certainly some mutual funds owned shares in now scandal-tinged companies like Enron and WorldCom. Fund analysts may have relied too heavily on research from Wall Street’s “sell side.” But there have been no headline cases of fund managers profiting at their shareholders’ expense.
Even so, federal regulators have proposed some changes in the way mutual funds do business.
Some investors argue that it’s their money in those mutual funds, so they should have a say in how the shares are voted. High-profile proxy contests like last year’s Hewlett Packard-Compaq merger put this issue in the spotlight.
Every year proponents of shareholder democracy put proposals on the agenda at corporate annual meetings. Some are substantive, dealing with corporate governance issues. Other resolutions are arguably “social” in nature.
The SEC passes judgment on which shareholder proposals must be included in the ballots, which otherwise typically are used to ratify the election of directors and the approval of accounting firms.
Most mutual fund management companies post their proxy-voting guidelines on their Web sites or send them to fund shareholders along with their statements.
Those guidelines typically deal with issues such as staggered boards, “poison pills,” and repricing of options, and not on environmental or workplace issues. But few funds reveal their specific votes on the ballot of each company in which they hold shares.
Mutual fund managers are leaning against the proposal to disclose their voting. They don’t want to be the target of protests or pressure, pointing out that it’s their job to maximize value for all fund shareholders--and not all shareholders have the same concern over proxy issues.
The other big mutual fund issue before regulators is more two-sided. It’s the question of how frequently funds must disclose their stock holdings.
Currently, funds must make that information public every six months, although many funds issue quarterly updates. In this era of computer technology and Web sites, why not just post holdings every night? Certainly the fund manager takes that list home with him or her to disturb a good night’s sleep.
The obvious reason is that more frequent publication of holdings would make it impossible for a manager to accumulate a substantial stock position quietly.
If you knew the hottest small-cap fund manager was buying stock in XYZ Corp. at $7 per share, wouldn’t you be tempted to buy a few shares for yourself? Soon the price would be $10 or $20. And you can bet that online companies would spring up to charge you a fee for an “early warning” e-mail! That kind of activity would do away with the advantages of professional management.
On the other hand, markets thrive on free disclosure of information. And what’s more important information than who’s buying and who’s selling? Daily disclosure would truly create an efficient marketplace. Or else it would spawn subterfuges as yet unimagined. Not to mention the impact on the nation’s trees--as many shareholders would still receive their updates by traditional mail. Even if done only monthly, the additional costs would be substantial. Look for an industry compromise for more frequent disclosure to resolve this issue, at least for now.
The Savage Truth is that mutual funds have been an efficient way for investors to participate in both the ups and downs of the stock market. It was more fun on the upside.
But when you invest in a large-cap growth fund or a mid-cap value fund, that fund manager is expected to put all your money to work in the stocks in that category. Some fund managers make better stock choices than others. But in a bear market, all equity categories decline to one degree or another. It’s not the stock mutual funds’ fault. You decided where to put your money.
And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.