How New Settlement Rules Change the Game
Some mutual fund investors will discover that it’s no longer business as usual when they try to buy and sell funds starting Wednesday.
That’s the day when a shortened settlement period comes into play on transactions involving mutual funds and other securities, including stocks, bonds and closed-end funds. The new rule has been dubbed “T+3,” for “trade day plus three.”
In particular, funds that accept phone orders will have to change their policies.
Invesco Funds Group of Denver, for instance, currently accepts phone orders from investors opening non-IRA accounts without first requiring the receipt of money or even a completed account application.
“About 5% to 10% of the business we do on any date is generated in this manner,” says Laura Parsons, an Invesco vice president.
But as a result of T+3, Invesco investors placing phone orders will need to send in their completed application and payment within the new three-day window.
And at T. Rowe Price Associates of Baltimore, the company will end its policy allowing investors to add money to existing accounts through phone orders.
“From now on, you’ll buy the shares on the day your check arrives,” says Steve Norwitz, a T. Rowe Price vice president.
Other direct-marketed fund companies, such as Fidelity Investments of Boston, already refuse to act on phone orders unless a person has submitted payment. These firms will be unaffected by the new rule.
One side effect of the new rule will be to further discourage cold calling, where brokers generate orders by phone from people they have never met before. Such sales efforts have been on the decline anyway, however. “For cold-calling brokers, T+3 will present problems,” says Greg Ellston, director of investment services at brokerage Rauscher Pierce Refsnes in Dallas. “If people don’t want to buy over the phone, they could say they won’t have time to pay for the purchase, and that would be a valid excuse.”
T+3 was adopted by the Securities and Exchange Commission to cut the amount of unfinished business in the pipeline at any moment. The current five-day settlement period originated in the years before automation became widespread, when stock, bond and mutual fund certificates had to be transferred by mail.
Many fund companies continue to send certificates to shareholders who request them, but the practice is becoming increasingly rare. Certificates have been issued on fewer than 1% of all mutual fund shares, says Don Boteler, a vice president at the Investment Company Institute in Washington.
Investors holding fund certificates as of June 7 will have just three days to return the papers when selling or risk having their transactions nullified. For everyone else redeeming fund shares on that date or later, it will be business as usual.
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Index investing with a heart is the theme behind a new no-load mutual fund from Working Assets Capital Management of San Francisco.
The company has unveiled what it calls a socially responsible index fund, the Citizens Index Portfolio, that invests in 300 large and small corporations with good records on the environment, workplace practices, community involvement and similar concerns. California companies in the target index include Apple Computer, Hewlett-Packard, Mattel, Pacific Telesis, Charles Schwab, Times Mirror and Wells Fargo Bank.
Shareholders in Working Assets’ Citizens Balanced and Citizens Growth portfolios voted May 30 to close those funds and transfer the assets to Citizens Index, which now counts about $100 million. Working Assets ([800] 223-7010) requires a $2,500 initial investment, except for individual retirement accounts, for which there is no minimum.
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Bond mutual funds with 12b-1 fees take above-average risks in an attempt to make up for their higher expenses, reports Morningstar Mutual Funds.
The Chicago research publication says 12b-1 portfolios had higher risk readings than other funds over the last three, five and 10 years. “The great bond bull market of the past decade sheltered investors from many of the penalties of this added risk,” Publisher Don Phillips writes.
During 1994, a rough year in the bond market, funds that don’t levy 12b-1 fees fell just 3.78% on average, whereas those that impose the charge lost 5.27%. Funds with high 12b-1 fees of 0.75% a year or more tumbled 6.4%.
The 12b-1 fee is a marketing-related charge often used to compensate brokers for selling mutual funds.
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FPA Capital, a small-company fund based in Los Angeles, closed its doors to new investors last week when assets surpassed $280 million.
The fund is run by Robert Rodriguez, who was named the top portfolio manager of 1994 by Morningstar Inc. FPA Capital, which charges a maximum 6.5% load, enjoys a superior five-star rating from Morningstar.
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Arthur Levitt, chairman of the Securities and Exchange Commission, chided the mutual fund industry for its lukewarm response to his call for more understandable prospectuses.
Levitt wants fund companies to explain risk more clearly in their disclosure documents, but the reaction among many fund executives has been that it can’t easily be done.
“I find it hard to believe that so creative an industry can be stymied by so basic a question,” Levitt said recently in Washington.
“Even if you cannot yet agree on a numerical or graphical measure of risk, you should at least be able to find concise and understandable words to explain it,” he said, suggesting that fund officials discuss risk in a way that their parents would understand.
