Funds' hiring of outside managers is far too rare

ON THE MONEY

Your Money

December 11, 2005|By GAIL MARKSJARVIS

If you invest in mutual funds, the directors who oversee your funds are supposed to be your advocates, making sure your money is handled well so it grows as much as it possibly can.

They should be putting your interests above all else, devoting themselves to you instead of to the firms that run your funds. But with billions of dollars at stake, the reverse tends to happen.

You get slighted, while directors focus on pleasing the business people who recruited them to the board in the first place.

That's why a recent decision by the directors overseeing the Clipper Fund is being proclaimed a watershed for the $8.5 trillion mutual fund industry.

"It's a potential sea change in mutual funds," said Christopher Davis, a Morningstar analyst.

In an unusual move, the directors for the Clipper Fund put shareholders first, as they turned the $6.6 billion mutual fund over to a different investment management company.

The change was put into motion when the longtime managers of the Clipper Fund announced recently that they would be leaving the fund at the end of the year.

Typically, when managers move on, the assets of the fund stay where they are, and new managers are hired within the same company to handle the money. That may be good or bad for investors, depending on the quality of the investment expertise there. But financially it's always the best move for the company that holds onto the mutual fund because it keeps collecting fees, often millions of dollars.

This time, however, as the Clipper Fund needed new managers for the fund, the directors decided they would not do what usually comes automatically. They would not leave the fund and its millions of dollars in fees where they had been in Pacific Financial Research, part of parent company Old Mutual Capital Inc.

Instead, the directors did what they are supposed to do: They looked for the best investment managers for the fund, managers who would keep selecting value stocks along the same lines as shareholders have come to expect. They turned to acclaimed manager Christopher Davis at Davis Selected Advisors and will send the fund there at the end of the year.

"The board really defied the wishes of its parent company," said Morningstar's Davis, who is not related to the Davis Selected fund manager. In other words, Old Mutual planned to hold on to the Clipper Fund, but the directors had ideas of their own, a costly decision for Old Mutual.

Besides moving managers, the Clipper directors also helped investors in the fund by reducing fees, taking the annual investment advisory fee from 1 percent of assets to as low as 0.65 percent.

That's a significant change for investors. If a person invested $10,000, left it in the fund for 20 years and earned a 10 percent annual return, the lower fees would leave the investor with about $3,000 more than with the higher fees.

Morningstar's Davis is hoping that other mutual fund directors will follow the Clipper example. If they do, he said, there will be fewer poor funds providing inferior investment returns and charging excessive fees.

In a recent report, Merrill Lynch analyst Guy Moszkowski said he expects just that. He studies companies that manage mutual funds and said their profits might be affected if fund directors feel the pressure from the Clipper decision to move funds and reduce fees.

gmarksjarvistribune.com

Readers may leave messages for Gail MarksJarvis at 312-222-4264.

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