Get to know your fund directors and how they work

Mutual Funds

They're required by law to represent you and your interests

April 04, 1999|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

Thanks to the historic bull market in stocks and bonds, most mutual fund investors -- or, more precisely, most investors representing most of the money in mutual funds -- have had few reasons to complain, let alone call Ghost Busters.

Aside from a few gremlins, the mutual fund industry has been scandal-free, thanks in part to the intense interest in business by the public and the financial press.

A reader of a recent column challenged the notion that it's practical for an individual investor to have a direct relationship with a fund manager or even with a representative of the company that provides a retirement savings program, such as a 401(k) plan, at a place of employment.

I don't disagree, but I'm always amazed at the willingness of people to entrust thousands of dollars and possibly their retirement income to anonymous institutions and toll-free telephone numbers.

Recently, the Securities and Exchange Commission and the mutual fund industry have been highlighting another potential contact you should know: the independent directors of your mutual fund.

Mutual funds are investment companies, each with its own board of directors. Each Fidelity fund or Vanguard fund is a separate company that hires Fidelity or Vanguard for investment advisory and distribution services.

At many funds, the majority of the board comprises individuals who are not associated with the advisory firm under whose name the fund is sold. Frequently, independent directors make up the board's nominating committee to perpetuate their independence. They meet apart from directors affiliated with the adviser and have their own legal counsel. If your fund board lacks these characteristics, it's behind the curve.

Independent directors of mutual funds are unlikely to be bomb-throwers or Ralph Nader-type consumer advocates. But they are required by law to represent you, the shareholder of the fund.

"What the shareholder expects us to do is to allow them to sleep at night," said Dawn-Marie Driscoll, a lawyer and consultant on business ethics based in Fort Myers, Fla., who sits as an independent director on 30 Scudder fund boards.

The Investment Company Institute, the trade association for mutual funds, recently named Driscoll and five others to a committee to develop "best practices" guidelines for fund directors.

She said there are many aspects to running a fund company that go well beyond gathering more assets and achieving newsworthy investment returns -- the two goals foremost in the minds of the many fund managers.

Roy Weitz, publisher of the http: // Web site, which critiques mutual funds, says the fact that fund directors rarely fire a fund adviser or replace a fund manager with someone from outside the adviser's organization proves that independent directors are too beholden to the fund adviser.

Weitz rates two of Driscoll's Scudder funds -- Large Company and Growth and Income as "three-alarm" poor performers relative to an S&P 500 index fund. Both, however, are rated four stars by Morningstar -- its second-highest rating. "In the corporate world, [directors] are absolutely focused on share price and a lot of the ball game is to drive the share price up," Driscoll said. "For a lot of funds, that's not it. You can always drive the share price up by doing risky things. A lot of funds' style is to be a bit conservative. We don't want to be in the top 10 percent [of fund performance], and if we are, we ask questions. What is the portfolio manager doing that they have these numbers?"

As a director, she has confronted the increased use of financial derivatives, the explosion of technology, the Year 2000 problem and the increasing consolidation of fund advisory firms.

"It's not as simple as whacking the fees or terminating the managers," said John Brennan, chairman of the Vanguard Group fund complex. "The question is: Do directors have the tools to be an aggressive advocate for fund shareholders? We need to challenge our complacency about the system."

Pub Date: 4/04/99

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