Rivals’ Ads Are Deceptive, Vanguard Charges : Mutual funds: The inflated yields on ‘loss-leader’ funds are temporary and artificial, the firm says. Competitors call the ads fair.
Nothing attracts a crowd like a good fight--especially when the fight is over people’s money.
Mutual fund giant Vanguard Group on Wednesday dragged some of its archrivals into the ring, accusing them of misleading investors in ads for money market funds.
Vanguard, based in Valley Forge, Pa., said its competitors are failing to make clear that high yields on some of their money funds are artificial and temporary.
In a letter to the Securities and Exchange Commission, Vanguard Chairman John Bogle specifically names Dreyfus Corp. and Fidelity Investments and requests that the SEC staff investigate what he alleges is “a pattern of willful violations” of SEC fund disclosure rules.
Bogle’s fight is over a recent innovation in the fund industry: the “loss leader.” By temporarily running such funds for free--absorbing all or part of management expenses rather than deducting them from fund assets--firms boost the yields that shareholders earn. The goal: lure investors into the fund family with an above-average yield in the hope that they can be sold other products later.
Dreyfus’ Worldwide Dollar fund has grown to $6.4 billion in assets in just over a year as a loss leader. Its seven-day annualized yield is 8.83%, highest of any money fund.
But if Dreyfus charged the industry’s average management fees to shareholders--about 0.7% of assets annually--the fund’s yield could be shaved to about 8.1%.
Bogle’s argument is that loss-leader funds could begin charging fees at any time. Thus, he said, the funds should be forced to advertise prominently what their yields would be with normal fees. Likewise, he argues that a fund should be permitted to advertise an artificially high yield only if it guarantees that fees will be waived for an entire year after the ad runs.
The loss-leader strategy has been so emulated that, of the 10 highest-yielding money funds, nine waive fees in whole or in part. Only Vanguard’s MMR Prime fund does not.
Bogle said his campaign isn’t “sour grapes.” While admitting that he resents seeing loss-leader funds ahead of his, he said Vanguard’s money fund assets have grown faster than the loss leaders.
The issue is fair representation of fund yields, Bogle said.
But Dreyfus Vice Chairman Julian Smerling said his firm “meets all of the (SEC) requirements” in advertising. Worldwide Dollar’s policy is to waive fees through April 15 or until the fund tops $7 billion, whichever comes first. At either point, the waiver would be reviewed, though not necessarily changed, Dreyfus said.
Fidelity spokesman Rab Bertelsen in Boston said his firm’s lawyers “say Vanguard’s arguments have no legal merit.” The yield advertised by Fidelity’s big loss leader, the Spartan Money Market Fund, “accurately represents what the customer is getting,” he said.
To advertise a lower yield would be misleading, Bertelsen said. IBC/Donoghue’s, which supplies money fund yields to major newspapers, agrees: “We would not be amenable to publishing something lower and footnoting it,” said Brenda Malizia Negus, editor.
Fidelity now waives all management fees beyond 0.1% of Spartan’s assets annually. Also, the firm can’t simply raise fees all at once: Spartan guarantees that it won’t charge shareholders more than 0.45% for expenses through May, 1992, and that expenses never will top 0.6%.
Bertelsen scoffs at the idea that investors may not understand that Fidelity will eventually take fees. “Naturally, we would like over time to make money on the fund,” he said. Shareholders “are sophisticated and know what they’ve bought,” and they can exit at any time for a better deal.
The SEC didn’t return phone calls seeking comment.
HIGHEST-YIELDING MONEY FUNDS
Here are the highest-yielding general purpose money market mutual funds for the seven days ended Tuesday. All of these funds--except for Vanguard MMR Prime--boost their yields by absorbing some expenses normally charged to shareholders.
Rank Fund 7-day avg. yield 1 Dreyfus Worldwide Dollar 8.83 2 Laurel Prime MM I 8.72 3 Alger Money Market 8.71 4 Fidelity Spartan MMF 8.65 5 Invesco Treasurer’s MM Res. 8.52 6 Vista Premier Global MM 8.43 7 Vanguard MMR Prime 8.39 8 Evergreen MM Trust 8.37 9 Salem Money Market Port. 8.33 10 St. Clair MMF/Prime Oblig. 8.33 Money market fund average 7.96%
Source: IBC/Donoghue’s Money Fund Report
