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HEADLINE:
Solve The Mutual Fund Mess: Get Naked
By: Dan Ackman
Forbes.com. November 21, 2003
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EXCERPT: Three years ago I reported on a mutual fund group called Stockjungle.com. Its funds were tiny, but it got some attention because it used the Internet to post its portfolios instantly so investors in the fund could know at any time how their money was being invested. I'd forgotten about Stockjungle, which is now defunct, it seems, because it couldn't get enough investors to make managing the fund economical--especially since it charged very low fees. But in it were the seeds of ideas that might do more to improve the mutual find industry than anything being floated in Congress. (See: "A Cub Mutual Fund Roars Like A Lion.") The idea of a mutual fund is that investors who have money but lack time or insight pull their funds so that they might be "managed" by "professionals" who have time and, in theory, insight. The joke is that most of these professionals do less well than the stock market averages. The more recent joke is that at least some of these professionals are corrupt, trading in and out of their own funds, or allowing certain investors who have more money than mutual fund investors to do so. Part of the reason professional managers can charge high fees is that there is a mystique about them. That mystique was traditionally maintained by the fact that they would only disclose their investment holdings on a quarterly or perhaps monthly basis. Stockjungle was one of a handful of so-called naked funds. It would post its holdings on its Web site continually for all to see. If it owned Dell (nasdaq: DELL - news - people ) or Microsoft (nasdaq: MSFT - news - people ), you knew it. If it sold those shares and bought Apple Computer (nasdaq: AAPL - news - people ) or Oracle (nasdaq: ORCL - news - people ), you could know that, too. Before the Internet, sharing knowledge so rapidly was practically impossible. But now it's easy, and mutual funds should do it. If all mutual funds posted their holdings on a daily basis, all manner of nonsense would likely decrease. If fund managers bought or sold shares at the end of the quarter to hide embarrassing bad picks, as some do, we'd know. If managers traded in and out of minor holdings with no apparent purpose, except perhaps to generate commissions, we'd know that, too, not just by divining a statistic about share turnover, that funds do disclose, but because we'd see the trading. Stockjungle went bust and its ideas were never picked up by Morgan Stanley, Citigroup or the others because most people kept their money with the big players out of trust or inertia, as they still will. But if we are to have regulatory reform, we shouldn't put faith in more directors. We allow the trading masses to be watchdogs on managers by requiring the funds to go naked. The bill just passed by the House of Representatives monkeys with the corporate governance of mutual funds, it requires more disclosure of fees and it adds generally to the regulatory burden on funds.
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