Movement Afoot Toward Fund Disclosure

As tobacco companies face legal and regulatory battles, it is no surprise that some investors might want to unload their shares. For individual stock owners, this is a fairly easy matter of calling a broker.

But mutual fund share owners do not control what managers buy and sell, although funds have to follow their own rules and a handful of “socially conscious” funds will not invest in tobacco.

But an average fund investor who simply wants to buy an equity growth fund that is not heavily weighted in tobacco stocks generally cannot get up-to-date information on fund holdings.

To help such investors, Morningstar Inc., one of the nation’s premier monitors of mutual funds, wants the industry to disclose more frequently what securities the funds hold.

Just 10% of the 7,300 funds in Morningstar’s database report every quarter, the research group said in a nationwide study. With today’s volatile markets, critics say, quarterly reporting is a minimum disclosure to protect investors.

Yet funds are currently required to file reports with the Securities and Exchange Commission only twice a year detailing what securities are owned in the portfolios. Few funds go beyond that, and it’s believed the industry wants to keep it that way.

With existing semiannual disclosure, “the information shareholders must rely on in making investment decisions is hopelessly old and out of touch,” said Amy Arnott, a senior analyst at Chicago-based Morningstar.

“Indeed, it’s impossible for an investor to put together a well-thought-out portfolio without knowing what kinds of securities comprise each fund,” Arnott said.

The SEC said its hands are tied. For instance, the commission doesn’t have the “statutory authority” to request that funds make quarterly filings, said Robert Plaze, associate director in the SEC’s division of investment management.

“Congress would have to pass a law requiring companies to report information more regularly than semiannually,” Plaze said.

There has been no formal proposal to change the frequency of the financial reports, said John Collins, a spokesman for Investment Company Institute, the industry’s trade group in Washington.

“The fund industry doesn’t want more frequent reporting in the public domain,” said Geoff Bobroff, an independent industry consultant in East Greenwich, R.I. “There would be added costs and this would create competitive disadvantages since rival managers would know how you’re investing.”

Fund companies often argue that the cost of printing and mailing quarterly or monthly reports would cut into shareholders’ returns, Arnott said. That might have been true 10 years ago, but improvements in technology have made cost much less of a factor, she said.

Firms could provide monthly portfolios at a low cost by filing them directly with the SEC’s Electronic Data Gathering, Analysis and Retrieval system, Arnott said.

Concerns about competitive issues could be resolved by building in a lag time of 15 days or longer to prevent market-timers from causing unusual gyrations in stock prices, she said.

Although it’s true many investors don’t have the inclination to know exactly what securities their funds own, the lack of such information hardly fosters the kind of trust that helps build the long-term relationships that benefit investors and fund companies alike, Arnott said.

“Shareholders don’t passively sign over their assets; they actually own the fund itself,” Arnott said. “This crucial--but often overlooked--distinction means shareholders have an owner’s right to know what’s in their funds.

“By giving shareholders access to updated portfolios and insight into the reasoning behind them, fund companies can foster an ongoing education process that helps build a more informed, loyal shareholder base,” she said.