Updated: May 3, 2013 12:14PM
Originally published: December 11, 2006
Does your mutual fund manager have your best interests in mind? Are you paying too much in fund fees, even inside your 40l(k) account? Ask yourself those questions as you approach your year-end investment review. The answers could be just as important to your investment success as your asset allocation and mutual fund performance. And now, you can easily get information about those important issues.
The question of alignment of fund manager interests with the interest of fund shareholders is easily resolved if you look at Morningstar’s “Stewardship Grades.” The feature on morningstar.com has been in effect for nearly two years, and is offered as part of the $135 annual Premium Membership service.
I wrote about these ratings when they were introduced after the mutual fund “scandals” of 2003. These stewardship ratings got a big boost with a 2005 SEC requirement that mutual funds disclose fund manager compensation and incentives, as well as how much money they personally have invested in their fund, as part of the annual “statement of additional information.”Paying close attention
Don Phillips, managing director of Chicago-based Morningstar Inc., says that even if investors don’t pay close attention to the fine print, “the very fact that the funds must disclose this information is forcing closer attention to these issues.”
Phillips points out that in the 1990s, many fund managers were compensated based on the amount of assets under management, not by performance. As a result, those managers focused on short-term performance reporting.
Being at the top of a widely reported quarterly performance ranking would attract “hot money,” new assets coming into their fund and a larger bonus for the manager. But that was not in the best interest of the long-term fund investor.
Now, Phillips notes, more managers are incented based on rolling three-year performance records.
Mutual fund trustees have also faced closer scrutiny in recent years. Warren Buffet once derided them as “lapdogs,” individuals paid big bucks for attending meetings, but not working on shareholders’ behalf to reduce fees and costs.
Today, trustees are in the spotlight, which shines not only on their compensation packages, but also on their investments in the funds and the contract renewal process for their advisory agreement.
Morningstar reviews more than 1,200 mutual funds each year, and the focus is on more than just manager incentives. The stewardship grades, which range from A through F, plus accompanying commentary, are based on issues such as the level of fees compared with funds of like size and kind; the absence of regulatory issues; the corporate culture of the fund family and whether it encourages talent retention; and on the caliber of the board of trustees based on factors such as independence, fund investments and how many funds each trustee oversees.
Phillips reports that the ratings, which often are based at least in part on meetings with trustees, generate “a lot of discussion” and result in giving investors a voice and impact, other than just selling their shares.
Sometimes fund shareholders can’t just “walk away” and sell their shares, because they’re held in a company’s 40l(k) plan. And sometimes, especially in smaller companies, those funds have huge (and unnecessary) annual fees and costs that detract from long-term investment results.
If you think your company plan is not competitive, ask your boss or the HR department to go to www.PlanSponsor.com.
On the right column of the home page there’s a place to click to search for an accredited PlanSponsor Retirement Professional in your area. This adviser will help your company benchmark its plan costs and services, and start a search for a better, less costly provider.Grade your own performance
When you get your year-end investment statements, don’t just file them away. Grading your own performance is more difficult than complaining about your fund manager.
But this is the time to face reality, and if necessary to regroup and take a wiser course for next year. You can do it if you’ll take the time and effort. And that’s The Savage Truth.
Terry Savage is a registered investment adviser. Check out Terry’s answers to reader questions at suntimes.com, and click on Business. Distributed by Creators Syndicate.