Mutual Funds
Recent articles:
• The real Wall Street rip-off? Fat fund fees, 9/16/2003
• Don't let crooks manage your money, 9/9/2003
• Mom-and-pop investors cheated of 'billions', 9/4/2003
More...
| | Mutual Funds
He runs the fund -- but does he invest in it?
One way to find good mutual funds is to look for those where insiders own shares. Trouble is, the SEC doesn't require this information be made public.
By Timothy Middleton
Is it smart to invest in a fund that has the personal fortune of its manager at stake? You bet.
Warren Buffett has got $38 billion of his own money in Berkshire Hathaway (BRK.A, news, msgs), says Tim Medley, a financial adviser in Jackson, Miss., That gives a very clear signal about aligning investors interests with his. To me, this is very important.
It's not, unfortunately, particularly important to the mutual fund industry, nor those who regulate it. The uproar of the moment is over funny-business funds that let private clients, such as hedge funds, exploit their portfolios for mutual profits.
But I believe the two are linked. Managers who are playing with their own money as well as ours can be inept, but they wont be corrupt. So while it can take some doing to find out if your manager is also your fellow shareholder, its worth the effort.
Of course it would take a lot less effort if the Securities and Exchange Commission, the National Association of Securities Dealers and the Investment Company Institute made detailed disclosure of this information mandatory. Fat chance: Medley says hes never even heard the issue raised.
The current rules are absurd. They ought to be changed. Until that happens, however, you have to look out for yourself. Heres how to do it.
The road map
The first place to check for insider ownership is the fund company itself. If telephone order takers know a companys policy on managers investing in their funds, thats a good sign: It means eating their own cooking is a fundamental element of the corporate culture.
At Longleaf Partners Funds, for example, an excellent boutique based in Memphis, Tenn., company policy requires all employees to limit their investments strictly to the companys funds. Longleaf is proud of the rule and every employee knows about it.
If you're told there's such a rule, ask to see it in writing. Davis Selected Advisors thinks the issue is important enough that it publishes a brochure that states: Directors and employees of Davis Advisors have collectively invested more than $2 billion alongside our clients. We remain the largest group of shareholders in our investment products.
You want it in writing because to err is human. When I contacted Rainier Investment Management, a small shop in Seattle, I was told they had the same rule as Longleaf, but that wasnt quite true. Jim Margard, the firms chief investment officer, subsequently explained that his firms employees are free to invest in outside mutual funds, although in the firms retirement plan they're limited to their own or a group of index funds.
My original information was misleading because the firms principals believe strongly in eating their own cooking, but dont impose that view on employees. Every dollar of my equity investments is in Rainier mutual funds, Margard says.
The most authoritative source of information on this subject is a mutual funds prospectus, because it's vetted by the SEC. But the agency's rules are extremely loose. It's more concerned with fund managers trading ahead of their customers for their personal accounts than eating their own cooking.
No pressure to speak up
So funds can choose whether to discuss the issue. The prospectus for Muhlenkamp Fund (MUHLX), for instance, says: Ron Muhlenkamp's long-term investment assets and the entire Muhlenkamp & Co. pension plan are invested in the Muhlenkamp Fund.
If the prospectus doesnt say anything, insiders still may be putting money in their funds. Vanguard Group has never published a formal disclosure on the issue, but the companys retirement fund is invested strictly in Vanguard mutual funds, and directors of all Vanguard funds have invested at least $100,000 in the complexs funds.
Similarly, the prospectus for Turner Funds -- which runs to hundreds of pages, by the way, meaning this kind of research is a bit arduous -- is silent on the firms policy, but its a good one for shareholders.
Turner employees can own only mutual funds, no individual securities, because managing a personal portfolio could distract from managing one professionally. And, says Robert Turner, the firms founder and chief investment officer, I do not own any mutual funds that are not our own mutual funds.
The SEC doesnt require that funds disclose whether their managers invest in them; a spokesman says its sufficient that managers have to account to fund directors for their personal investments.
It does require that directors make some disclosure, but its not particularly meaningful. The categories of share ownership begin at less than $10,000 and end at more than $100,000. But managers basically only have to check a box for one category or another. There's no detailed information about the exact amount they've put in. So in Turners case, he has invested more -- presumably a lot more -- than $100,000 in numerous individual funds. But to learn whether its a token amount or substantial wealth, you'd have to call him.
Don't ask, don't tell
The SEC doesnt ask about ownership by fund-company employees because the fund companies dont want it to. Most big complexes have no policy at all; T. Rowe Price Group (TROW, news, msgs) doesn't, for example. Fidelity Investments, which didnt return calls for this story, switches fund managers around frequently as future superstars are groomed. It would be no surprise if many of them didnt own their own shares.
By itself, the knowledge that the fund manager is eating his own cooking doesnt guarantee investment success. Garrett Van Wagoner, the brightest high-tech star manager of the 1990s, invests in his funds, but they're ruined shells of their former selves nonetheless.
The flagship, Van Wagoner Emerging Growth (VWEGX), has seen its assets shrink to $85 million from $1.47 billion at the end of 1999. The fact that Van Wagoners own fortune has gone the way of his shareholders is cold comfort to the rest of them.
But when choosing funds, I find it comforting to know that my hired investment gun is aiming at the same target I am -- the preservation and enhancement of our mutual net asset value. So as Im considering the myriad components of an investment decision, insider ownership is important to me, particularly in this unethical age.
Maybe somebody at the SEC will begin to think so, too.
At the time of publication, Timothy Middleton didnt own any of the securities mentioned in this article.
|
