Three readers' questions deserve detailed answers

Your Funds

Your Money

November 27, 2005|By CHARLES JAFFE | CHARLES JAFFE,MARKETWATCH

Sometimes, addressing the concerns of the fund-investing public leaves a few open questions.

Here are three - with answers - that readers shared after some recent columns:

In your column on calculating the cost basis of funds, you didn't cover my problem: The funds I bought about 20 years ago were sold, and the firm that runs them now says it doesn't have my original cost information. My tax preparer says that if I sell and can't figure out the cost, I should just use zero. That doesn't seem very tax wise, so how do I come up with a cost basis?

You might start by canning the tax preparer, as "use zero as your basis" guarantees that you not only overpay taxes and lay out the absolute maximum for your original investment, but you double-pay taxes for any annual distributions you've reinvested over the past two decades.

Internal Revenue Service rules require a "good-faith estimate" of cost, something that can be defended and justified. Technically, in the case of an audit, Uncle Sam will want some confirmation from the firm or your original purchase slip.

But even Uncle Sam would not presume that you got the shares for nothing. What's more, making a sound good-faith estimate will not make you audit bait.

If you know how much you invested and the year in which you first bought the fund, the management company should at least be able to provide the average price for that year, plus a distribution history since then. That information can become the foundation for developing that good-faith estimate of your cost. (For more information on fund distributions and taxes, check out IRS Publication 564, which you can find online at the www.irs.gov Web site.)

Moreover, keep pushing the fund firm, going up the ladder from phone reps to supervisors. The firm has a responsibility to help; I was flooded with notes from readers whose firms were unhelpful buffoons over establishing cost basis from the 1980s, but the truth is that most requests can be accommodated if the shareholder is patient and persistent and doesn't take "no" for an answer.

Your story on fund proxy statements didn't go into my situation, which I bet happens to people a lot. I got a call from someone who wanted to take my proxy vote by telephone. The problem was that I didn't have the ballot and had no idea what the vote was for. When I asked them to send another copy, they said they couldn't do that. So I stuck it to them and just voted by phone against everything the board wanted. How's that for a proxy voting strategy?

It's awful, but not for the obvious reason that it is best if you read a proxy before voting on it.

Whenever management hires a proxy solicitor, it isn't having a tough time getting "yes" votes, it's having trouble reaching a quorum, collecting the minimum number of votes needed for the election to count. Votes typically go the board's way, provided there's a quorum.

This is a fairly common proxy solicitor trick. Solicitors are not required to send a fresh proxy; if this upsets an investor and results in all "no" votes, it still helps them accomplish the job of getting out the vote.

A "no" done in spite gives management precisely what it wants, the votes needed to make the election stand. To spite the fund, if that was the reader's intention, abstain from the vote.

Likewise, several readers said they routinely vote against every proxy question because they suspect that management is up to no good.

If you believe management is doing something nefarious, don't worry about voting your proxy. Vote with your feet and take your money elsewhere.

In your column on star managers and new funds, you never gave a ticker symbol for David Winters' new fund. What is it?

When the column ran, the Wintergreen fund had no ticker symbol. Last week, it got one: WGRNX.

The last time I wrote about a star manager with a new fund and had so many requests for the ticker, it was Ryan Jacob opening his Jacob Internet (JAMFX), and the people who got in early were slaughtered when the market turned.

My column suggested that investing with Winters isn't likely to produce the wild swings seen in Jacob's fund, but it stopped short of being an endorsement or a purchase recommendation. There's no denying that Winters is a terrific manager, but the new fund has a high expense ratio and no new issue is a sure bet, even with a good guy at the helm.

jaffe@marketwatch.com

Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA. 02025-0070.

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