How What You Don’t Know Could Hurt You
Mutual funds won’t tell you what’s in their portfolios today. There’s no money in it for them, and they don’t have to do it.
Investors have lived with this situation since the beginning of mutual fund time, largely without complaint. But it poses a major complication for anyone trying to keep track of investments--especially when sorting out exactly how diversified he or she really is among several funds.
Funds have always been a grab bag--you purchase a sack of goodies without seeing what’s inside. Of course, investors get to see what their funds’ holdings are twice each year, and some funds offer snippets of portfolio detail--asset allocation, for instance--as often as once a month.
We deserve better.
Today, thanks to the Internet, funds can disseminate portfolio information at virtually no cost and on a daily basis. Although the Securities and Exchange Commission doesn’t want to force more regular disclosures, it is clear that the agency would have no problem with a fund posting its holdings on a daily basis.
GIT Investment Funds does just that, and some other shrewd marketers will probably follow suit in some form, but the vast majority of the industry does not want this to happen. I have spent several weeks talking to a lot of upset executives who don’t even want me putting this idea in your head.
“If people use this information the wrong way, it would hurt more people than it helps,” says Jon Fossel, one of the more rational industry voices. He is chairman of Oppenheimer Funds and a former chairman of the Investment Company Institute, the industry trade association. “It might be for shareholders’ own protection that we don’t, although I’d give the portfolio out if there were ways in which it could benefit most shareholders.”
Why don’t funds want to make more frequent disclosures?
First, competition.
In an open environment, a fund manager might have a tough time making a move on a certain stock if other funds--and the market in general--knew what he or she was up to right away. But a six-week lag between portfolio information updates should answer that concern for all but funds investing in the thinnest of asset classes.
The competition issue also involves “protecting the franchise.” One fund executive said that if investors could track the fund closely, they’d do it themselves rather than buy the fund. (Earth to funds: Investors with enough money to buy dozens of stocks and the time and inclination to manage them actively don’t need you guys, with or without a list of your holdings.)
Then there are folks who, like Fossel, worry that investors might hurt themselves with regular portfolio data, noting that it could lead to short-term thinking and long-term mistakes.
That’s a point well taken but misplaced. Heck, the average investor barely examines fund holdings today. He or she isn’t going to hop on to the Web to check out portfolio changes every day. No, the average investor will use this information in the form of new tools that could be offered by the likes of Morningstar and Value Line. With improved portfolio data, those firms can develop more useful, up-to-date risk and volatility measures.
Today, some investors try to figure out what a fund owns through “factor analysis,” which is like shining a light on a brown bag to determine what’s inside. There are services that rank funds based on how well they follow their own objectives. But when you have to make the determinations based on old data, success will be mixed.
Indeed, all current risk measures result in snapshots only of the surface because they can’t explore the depths of portfolios to look at, say, the aggregate price-earnings ratio or other fundamental data. Better portfolio reporting would make some such analyses more practical.
Big institutional investors demand, and get, current information on portfolios in order to crunch these very numbers. Though not fair, it’s legal.
A consistent stream of data would also make funds more accountable. If they buy something dumb--Orange County bonds on the eve of the community’s bankruptcy filing--they would have to answer for it, rather than bailing out before the next disclosure and hoping no one notices. Posting portfolio data every six to eight weeks would also discourage “window dressing,” the practice of frivolously gussying up a portfolio with fashionable hot stocks right before the disclosure date. Fund executives say it doesn’t exist; traders know differently; investors are in the dark.
Fund executives have told me repeatedly that no one has ever asked for more regular disclosure.
But over time, increased information would make it easier for everyone to be more comfortable in making buy-sell decisions. It’s time funds opened the bag and let us out of the dark ages.
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Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.
