THE MUTUAL fund industry came out swinging last week at the Investment Company Institute general membership meeting in Washington.
The problem was that it didn't hit anything.
Industry leaders droned on about how they represent shareholders and small investors, about how they have done everything right for those investors and how they are tired of being the scapegoat for politicians and critics who want to blame funds for everything wrong in the market.
"We're terribly concerned about shareholders, their perceptions of the market and their expectations," ICI chairman Paul Haaga said at a news conference spent mostly in pumping up fund industry achievements.
"Terribly concerned" is an apt description, because while the fund business has been devoid of an Enron-like scandal and collapse in its seven-plus decades, it consistently overlooks smaller issues that pain investors every day.
For proof, consider the agenda for the biggest industry meeting of the year.
The focus was how the industry deserves to be trusted based on what amounts to ancient history rather than current events. Between glad handing, back slapping, lashing out at critics and having sessions designed to maintain profitability and market share in a tough market, there was no time for sessions that might have actually had trickle-down benefits for the average fund investor.
If I were King of the Fund World, the big honchos would have had a different program, one designed to show how they could align their interests with their shareholders rather than with the profit margin target of their corporate employer.
In more than a decade of attending the fund business' biggest executive meeting, I've never seen these subjects in the program, but I'm hoping ICI might back up its pledge to be the shareholder's friend by including some next year:
Manager pay: Why disclosing it is smart. A lot of industry critics want to know how much a manager makes. It's far more important to know what that manager is making that money for.
Show me a manager whose bonus is based on topping the one-year performance charts and I'll show you a fund that risks short-term volatility to swing for that fence. By contrast, a manager compensated for consistent, above-average returns over three or five years is likely to run a fund that is steady and solid.
Forget the requirements: Send 401(k) customers their reports. Industry leaders have acknowledged that one problem with the retirement savings market is that investors get prospectuses and annual reports when they enroll, but not thereafter (at least without going to the benefits office to request them).
Allowing investors to own funds without so much as seeing the documents that might help shape their expectations is silly.
Cutting costs: Good for shareholders and you. Nothing sells like performance. Expense ratios cut into returns, and yet more than half of the funds carry costs that are north of the offensive line (which for me is in the neighborhood of 1.15 percent on a stock fund, well below the industry average of 1.4 percent).
If fund companies can't simply start cutting costs to improve performance they should at least look at tying their fees to performance.
Accepting responsibility for losses. You know the industry is "terribly concerned" about shareholder expectations when it blames disappointments on the declining stock market and poorly allocated investor portfolios, rather than acknowledging that funds played a huge role in pumping up investor hopes and in failing to recognize the problems that professional managers presumably get paid to spot.
The fund biz is not responsible for the three-year bear market, nor does it have the kind of crooks and frauds evident in the corporate world.
But if the industry wants to regain the trust leaders say it deserves, stop throwing out the "no scandals in decades" card and acknowledge that funds could have done a better job.
How to run funds a mother could love. Fund executives need to view their issues as if they had no corporate strings attached, as if they were a knowledgeable investor shopping for their mother.
If they would not want Mom in high-cost, unresponsive, hard-to-categorize, below-average issues, they shouldn't let their fund company offer them.
Chuck Jaffe is senior columnist for CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.
