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March 29, 2006
When Push Comes to Shove, You Lose....Again
Here they go AGAIN! Fund managers -- despite having been slapped on the wrist for everything from condoning market timing to lack of disclosure on how they are compensated -- are once again putting the interests of their corporate masters ahead of your interests.
If this wasn't such a critical issue, it would actually be funny, because of course we shouldn't expect the industry to behave (outside of a few mavericks) in a responsible way. But really, it is sad that they are so predictable.
The issue I'm talking about is how fund managers vote their proxies. As an stockowner, you periodically receive annual reports, proxy statement and proxy materials either through snail mail or e-mail. By voting your shares, you exercise your right as a shareholder to have some decision-making power -- however small -- in the companies you invest in.
The issue is much larger for fund managers, because most funds own thousands of shares of stock; some 10s or 100s of thousands of shares. So while your 100 or 500 shares is but a tiny fraction of shares outstanding, fund managers, especially from mega-fund complexes with other funds that own shares in the same company, have quite a bit of clout.
So have they chosen to exercise their power on behalf of corporate responsibility that would benefit the fund and the fund's shareholders? I'm speaking of measures that curb excessive executive compensation and perks and other corporate management pork, driving more profit to the bottom line. And more profit for the bottom line is eventually more profit that can be reinvested in the business or paid out to shareholders in dividends, benefiting the fund and ultimately fund shareholders.
No, of course they haven't. Most continue to fall in line with rubber-stamping boards, despite the clear benefits that their funds and their shareholders would receive.
Now why is this? Gretchen Morgenson in Sunday's New York TImes points out that fund managers don't want to bite the hand that feeds them. Well, maybe not specifically them, but that feeds other divisions of the mega-financial services complexes that own most fund companies today. If you vote your proxy against the management of Mega Drug Company, Inc., Mega Drug isn't likely to hire your affiliated brokerage arm to underwrite its next offering of stock or bond issue.
A shareholder rights' foundation, the Investors for Director Accountability, is hoping to change all this, according to Morgenson, by pushing fund managers and other institutional investors to vote against such rubber-stamping boards of directors. I wish them luck in their uphill battle to level the playing field in the interests of fund and corporate accountability. I just wish I was more optimistic about the outcome.
Posted by Amy Buttell Crane at 10:30 AM | Comments (0)
March 21, 2006
New Approaches to Rating Funds
Forget the Stars -- they're so yesterday. There are other ways to evaluate funds and their performance that give you a different perspective on the age-old question: how is my fund performing?
Here's a quick cruise through a couple of different ways of sizing up fund performance, plus a summary of BetterInvesting's approach.
A study published by professors at the University of Michigan at Ann Arbor and the University of British Columbia took the portfolios of 2,500 funds and compared them to their own historical selves. This approach benchmarks a fund to it's past self, comparing the current fund portfolio to returns of its past holdings.
The goal here is to evaluate a portfolio manager's skill at picking stocks minus the costs of trading. Critics pick at the methodology because it appears fixated on short-term results, but the authors defend their approach as focused method of evaluating stock picking skill. The authors are in talks with several potential users of their methods; look for it debuting at a fund web site near you before too long.
A second method is an approach employed by the Canadian Shareowner's Association (www.shareowner.com)in its Mutual Fund Study Guide. This tool uses data to construct a Stock Selection Guide-like Visual Analysis graph and expected return profile on individual US and Canadian mutual funds. The caveat here is that few funds produce a nice looking visual analysis graph; and those that do may not be the same fund that looked so good due to changes in the fund's portfolio.
The tool also tries to help investors get a grip on expected returns and risks involved in purchasing shares in particular funds as well as whether the fund is overvalued. The tool is helpful when evaluating a fund manager with low turnover and a consistent investing approach because you can see what type of companies he or she invests in and what the returns are projected to be and whether the portfolio as a whole is fairly valued or overvalued.
BetterInvesting takes a different approach. The mutual fund tools offer a way to evaluate, compare and track a fund over time based on its most important variables: portfolio, management, performance and cost. Members of BetterInvesting's Mutual Fund Resource Center get access to the tools with data automatically supplied by Standard & Poor's.
If you're already a member of BetterInvesting with access to the stock data service you can add mutual funds to your membership for a mere $30 a year extra. Yes, this is shameless self-promotion, but so what? It's a great value for the price. I should know -- I helped build it ;).
Posted by Amy Buttell Crane at 09:34 PM | Comments (0)
March 14, 2006
Not for Tree Huggers Only
If you're not a particularly environmentally-oriented soul, it's easy to dismiss socially responsible investing as a passing fad. NOT. At $2.29 trillion in assets and growing, socially responsible investing -- otherwise known as SRI -- represents a lot more than investing in companies that have a modicum of environmental sensitivity.
In fact, SRI isn't just about putting your money wherever your mouth might be. Sure, if you're against big oil, it's easy to find a mutual fund that doesn't invest in those companies. Likewise, if you favor companies that co-exist willingly with unions and are known for promoting women and minorities to leadership positions, there are other funds for you. But beyond investing according to your principles, SRI investing also promotes corporate accountability above and beyond screening out the companies that don't fit its particular investment mandate.
Many SRI funds actively press the boards of directors of the companies they invest in to adopt shareholder friendly policies, including limits on executive compensation, elimination or scaling back of golden parachutes and expensing stock options. SRI funds also press corporate boards on issues of social responsibility -- including such vital issues as global warming -- and this is nothing new. In fact, it was SRI funds and other activists that pressured corporate boards and more mainstream funds in the late 1980s to stop investments in companies doing business with South Africa, a movement that helped spur change in discrimination laws and practices there.
In addition to screening and shareholder advocacy, many SRI funds actively do good by investing in needed projects in their own communities. Known as community investing, funds and other groups that engage in this practice direct some of their investable dollars towards underserved communities and populations right here in the U.S.
If you're interested in learning more about SRI or in finding a fund that helps you put your money where your mouth is, check out the Social Investment Forum at www.socialinvest.org . The social investment forum is a national non-profit that promotes socially responsible investing.
Happy Hunting!
Posted by Amy Buttell Crane at 08:20 PM | Comments (0)
March 07, 2006
Breaking Up is Hard to Do
Not only is breaking up a relationship with a spouse or partner difficult, but many times it is just as tough to cut the tie with an investment, even if it is one that you don't like.
In fact, I'd say the worse you feel about a fund that you own, the more likely it is that you'll put off selling it. This seems counter-intuitive, but that is frequently the way it is.
Many investors would rather do just about anything -- including being audited by the IRS -- than sell even a money-losing investment. We don't like to admit that we are wrong or that we made a mistake, so we put off making a decision on selling, not realizing that continuing to hold a particular investment is making a decision every day to keep it.
I'll 'fess up -- I've had my share of losers -- both funds AND stocks, and have had trouble facing reality and taking the loss on the chin. As far as funds go, my biggest loser was an aggressive growth fund that a broker sold me in 1997, which went up an eye-popping 100 percent in 1999 and which I didn't manage to part with until 2004. I did end up still making money, but obviously much less than if I had just ditched the thing when it started to go bad.
And as for stocks, I owned some doozies, including Tyco, WorldCom and Enron. I did get out okay with Tyco, although I did hold it too long and I did salvage something from WorldCom -- if you can call getting $2 a share on stock I had an average cost basis of $20 on salvaging -- but I lost everything that I put in on Enron.
In my defense, many smarter and more savvy investors than I were taken in by the massive frauds perpetrated by the executives at theses companies. But still, the warning signs were there -- including the terrific debt loads -- and I didn't heed them, at least not soon enough.
So what are the lessons here?
Here are a few red flags that you need to pay attention to when considering whether to sell shares of a fund you own:
* Change in management at an actively-managed fund
* Merger into another fund
* Change in investment objective or strategy
* New or higher fees
* Sustained rise in the turnover rate
* Continual poor performance vs. a comparable index fund
What I mean by this, is that you need to check into any of these issues and find out what is going on and if you don't like it or if it isn't in the best interest of fund shareholders, seriously consider selling. You need to look at tax issues if you hold shares in a taxable account, but if a fund is really a turkey, all the rationalizing in the world isn't going to turn it into a silk purse when it is actually a sow's ear.
Posted by Amy Buttell Crane at 07:22 PM | Comments (0)
