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| 2003
News and Press Releases |
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HEADLINE:
How Is Your Fund Manager Getting Paid?
By: Russel Kinnel -- Morningstar.com
SeattleTimes.com. November 30, 2003
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EXCERPT: Since the Securities and Exchange Commission decided to require disclosure of fund-company proxy votes earlier this year, it's time to get down to the good stuff. Proxy disclosure is an entitlement of shareholders, but there are more important things that will directly impact fund investors' bottom lines. Next on the SEC hit list may be manager-incentive disclosure. A manager's incentives tell you a lot about how a fund will be run. How so? Managers whose bonuses are tied to 12-month returns will run their funds differently from managers whose bonuses are tied to three-year returns. Likewise, those whose incentives are based on pretax returns will naturally pay little heed to after-tax returns. And managers compensated for asset growth are less likely to push to close their funds. If you own stocks, you can learn what the CEOs are paid, how many shares they own, what their bonuses are based on and how their option packages work. The SEC decided long ago that this is material information for a stock investor, and you can be sure that fund managers scour it closely. A similar disclosure for mutual-fund managers would show what percentage of their salaries they can earn in their bonuses and how all the mechanisms in their incentive packages work. Then, managers should disclose how much money they have in their funds. When managers believe in their funds, they tend to invest quite a lot. However, if they don't, then that can be a valuable signal to stay away. For instance, this information is required with closed-end funds, and we saw some trendy funds that invested in Russia and Vietnam in which the managers hadn't invested a penny. Similar information for open-end funds might have spared some unfortunate Internet-fund investors from the dot-com bubble. In addition, managers who can earn more in their bonuses than they have invested in their funds are likely to be bigger risk-takers. Further, we've seen that fund managers with truly large sums of money in their funds tend to act as stewards of capital. They're loath to suffer absolute losses, they focus on the long term, and they try to minimize the tax liability because they'll probably get hit with a bigger bill than any of their shareholders. Some in the fund industry have said that revealing how much managers have in their funds would confuse investors. "You wouldn't expect a manager of a short-term bond fund to have all his money in it, would you?" they ask. Of course not. Someone who bothers to look at this figure no doubt is aware that there's a difference between core funds and peripheral offerings.
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