atch out, you may no longer know who it is who is managing your money. This is the warning provided to fund investors in the Wall Street Journal today. The paper reports that a number of fund firms have dropped the practice of listing managers responsible for their funds, instead listing team management. The paper takes aim at some prominent fund families and warns individuals to follow the practice of institutional investors in closely watching turnover at firms.
The article takes direct aim at Van Kampen Investments
and Putnam Investments
as examples of bad practice. Its author is kinder to MFS
and praises American Funds
for its practices.
Van Kampen is a target because earlier this year it told shareholders that fund managers "may change without notice at any time." The fund firm cited an attempt to reduce mailing costs as a reason for the change (a pretty weak excuse in our view). The article also notes that Van Kampen switched its funds to team management last summer and has a less than shareholder friendly quotation from a Van Kampen spokesperson.
"We will assess the importance of the change in the eyes of the shareholders" and will divulge changes "when we think it is appropriate," says Connie Kain, a Van Kampen spokeswoman.
The article reports that Putnam Investments still reports the team leader of team managed funds in regulatory filings, but notes that the firm dropped the practice of listing all lead managers on funds. Shareholders can still receive more detailed information on the Putnam Web site. Still, the paper faults Putnam for not informing shareholders of when team members change or the role of each team member. Putnam's Steve Oristaglio, deputy head of investments, responds in the article by saying that the disclosure best reflects the management structure of its funds.
The article rebuts Putnam by quoting Kelley Stebel, a Morningstar analyst, saying that change in practice happened at a time when Putnam has "had poor performance, suffered investor withdrawals and fired some fund managers." The article fails to point out that Morningstar is one of the primary beneficiaries of increased disclosure by funds since the Chicago firm packages and sells the information.
"It's like the Wizard of Oz -- you can't tell who is behind the green curtain," Ms. Stebel says. "The party line from Putnam is that all these people are running the fund, but how much each one is contributing is up for debate. Nothing positive for shareholders can come out of this change."
MFS Investment Management gets both negative and positive publicity in the article. The paper notes that the firm failed to disclose the management team of its Massachusetts Investors Trust in its latest annual report. But then follows up by reporting that the firm reversed its decision after hearing negative feedback on the move from its sales force. In response, it is retaining the names in sales literature and will add them to future filings.
Lastly, American Funds gets kudos for naming the managers of its funds despite their being team managed.
"We've got individuals who have almost total control over a portion of a portfolio," says Stuart Strachan, senior counsel at Capital Research. "So who they are is important."
Besides highlighting the practices of select fund firms, the paper also attempts to explain to investors why it is important that fund managers be identified.
It turns to pension consultants, including Frank Russell and Callan Associates, to make the case. Frank Russell analyst Paul Greenwood notes that he would like any major change brought to his attention. Greenwood adds that change is not necessarily bad.
Callan's Anna Oakley is quoted as saying it is "critically" important to know the identity of the portfolio manager. Morningstar's Gabriel Pressler is also cited.
Gabriel Pressler , an analyst at Morningstar Inc. in Chicago, says that when funds cut back their disclosure of manager changes, "they certainly are not treating investors as shareholders."
By not explaining why fund firms make the change, the article may imply to investors that the fund firms mentioned have something to hide. Van Kampen certainly did not help its cause with its silly-sounding explanation for the change.
We are surprised that the article failed to mention the motivation of many fund complexes to not reveal the portfolio managers identities. In at least some cases, the decision is made so that the fund, rather than the fund manager, will be the branded item that the fund firm is selling. Making the marketing fund focused rather than personnel focused helps fund firms hold down compensation and means that turnover is less disruptive to operations. Both are plusses for shareholders. It also allows for a more consistent product. Of course, American Funds has been successful in all of these areas and still reveals the team member identities.
We last saw articles such as this one during the mini-bear market in 1994-95. When performance turns down, fund companies are less likely to use managers to market their funds and may be tempted to hide behind team management to avoid disclosing embarrassing personnel shifts. During down markets reporters are also tempted to seek out the negative in funds and this issue is an easy one.
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