Does Your Fund Company Put You First?

Morningstar recently laid out a few ways to tell if your fund company is putting you first.  Corporate culture is key when it comes to how you’re treated as a shareholder.  Are the fund boards independent enough of corporate management to really stand up for the rights of shareholders?  Are fund managers compensated in such a way that aligns their interests with that of investor or do they make out like a bandit regardless?  Do fund managers and key executives invest significant amounts of money in the funds they are responsible for or do they not have any skin in the game at all?  Here are the four key areas they came up with.

Do Current Shareholders Get Top Priority?

As a shareholder, I want my interests to come first.  If there is ever a conflict between serving my interests or the interests of the mutual fund company, I want  to come first.  One obvious example of this is asset bloat.  Since fund companies are compensated as a percentage of their assets under management, it is in the interest of the fund company to gather as many assets as possible.  However, bloated funds tend to perform poorly relative to their peers and so it isn’t in the best interests of fund shareholders for fund companies to pursue asset growth at all costs.  Two fund companies with excellent records for closing funds to new investors before asset growth becomes a problem are Vanguard and Dodge and Cox.  Morgan Stanley, on the other hand, has a poor record in this regard.  Closing off funds before they become to popular for their own good is a sign of good ethics and integrity.  I would think long and hard before ever investing in a Morgan Stanley fund for that reason.

Manager Retention Rates

Good firms retain good managers for long periods of time.  If a firm is ethical in its dealing with employees and shareholders, it’s more likely those employees will stick around.  Dodge and Cox is especially well-known for attracting and retaining top talent.  Furthermore, their funds are managed by teams of managers so even if one of the veteran money managers leaves or retires, there is always somebody ready and able to take over those responsibilities.

Stick To Core Competencies

A firm’s new-product pipeline can tell you a lot about what their priorities are.  Do they tend to release trendy, narrowly-focused niche offerings or broadly diversified core funds?  Vanguard and T Rowe Price are both good examples of fund companies who keep the best interests of the investing public in mind when releasing new funds.  While both do offer sector funds, they don’t market them excessively and indeed have both been leaders in low-cost target retirement funds, which greatly simply retirement investing for the financial dunces among us. 

Similarly, fund companies should predominantly stick to what they’re best at.  There’s nothing wrong with diversifying, but if a company traditionally known for fixed-income products suddenly jumps feet-first into the international small-cap value equity pool, you may have a problem.  Developing core competencies takes time and effort and it is unlikely to appear overnight.  Fidelity, for instance, has long offered a large line-up of decent actively-managed mutual funds.  While they do offer a limited number of index funds, they have wisely chosen to leave most of the indexing market share to Vanguard.  It’s simply not what they’re best at.

Do They Communicate Honesty With Fund Shareholders?

Does your fund company take the time to discuss its strategy in detail?  Do your active fund managers spell out their investment thesis on a few of their largest positions?  Do they admit obvious mistakes or do they pass the buck and blame losses on “market conditions?”  I want a fund manager willing to admit their mistake and learn from it.  If your manager seems unable to do so, it doesn’t bode well for the future.