It already can be hard to find out what stocks your mutual fund owns, and industry proposals made Tuesday wouldn't make it any easier, several analysts and investor groups said.
The Investment Company Institute, the fund industry's main trade association, urged the Securities and Exchange Commission to reject pleas for more frequent filings of portfolio holdings--which now are mandated twice a year. It also asked the SEC to consider streamlining the data that must be detailed in shareholder reports, meaning fewer specific stock holdings might be listed.
"It would be a grave error for the commission to mandate more frequent portfolio holdings disclosure by all funds," ICI General Counsel Craig Tyle wrote in a letter to Paul Roye, head of the SEC's division of investment management. "The risks of harm to fund shareholders far outweigh any potential benefits."
The ICI argued that even under the current semiannual filing system, traders can "front-run" the strategies used by fund managers to the detriment of fund holders. By purchasing stocks that funds are gradually building a position in, front-runners can drive share prices higher with their bids, forcing fund managers to pay more than they would otherwise, the ICI said. By selling ahead of funds, front-runners can drive down the prices managers get when they sell.
More disclosure also would allow "free-riders" or "piggy-backers" to capitalize on fund managers' proprietary research and investment strategies by mimicking their trades without paying for them as shareholders do, the ICI said.
And the ICI said streamlined reports enhanced with charts could be more useful than the current disclosure format, which it called too arcane for many investors.
The reports might list only holdings that constitute at least 1% of a fund's assets and, at a minimum, its top 50 holdings, rather than all investments, the ICI said. Diversified stock funds typically own 100 or more stocks.
But the ICI said the simplified reports could be coupled with charts showing sector weightings and other characteristics. Shareholders still could request a full investment schedule if they wanted one, the ICI said.
Some investor advocates quickly denounced the ICI's proposals.
"In the electronic age, there's no excuse for doing less [instead of] more," said John Markese, president of the American Assn. of Individual Investors, a Chicago-based group.
Mercer Bullard, founder and chief executive of Fund Democracy, a Chevy Chase, Md.-based company that calls itself an advocate for investors, scoffed at an ICI assertion that shareholders are not demanding more frequent disclosure of fund holdings. He said more than 10 groups, including the Consumer Federation of America and the Financial Planning Assn., have joined Fund Democracy in petitioning the SEC to require monthly disclosure.
The SEC is expected to issue at least a preliminary report on the petitions as early as this summer. Major regulatory rulings have been on hold pending confirmation of a new SEC chairman, and congressional hearings for nominee Harvey Pitt start Thursday.
"What the industry is really afraid of is uniform reporting standards that would create a paper trail enabling people to analyze what fund managers are really doing," said Don Phillips, managing director of Morningstar Inc., which covers the industry. He noted that portfolio data can be as much as 8 months old because companies have a two-month window in which to file their semiannual reports.
The current semiannual reporting rule is based on funds' fiscal years, so holdings as of a specific date are hard to compare across different fund companies, Phillips said. That could change if monthly or quarterly reporting were mandated.
With the average stock fund now turning its portfolio over nearly 100% a year through stock trades, it can be hard for investors or their financial advisors to construct a well-diversified portfolio of funds, Phillips said. Funds that trade rapidly may look vastly different from what their shareholder reports indicate. A growth stock fund may have completely dumped its technology stake, for instance.
For investors, "portfolio overlap"--owning the same stocks in more than one mutual fund--would be easier to detect with more frequent disclosure, supporters of the petitions say.
"The biggest mistake I see is someone who owns 10 funds and eight of them are basically the same if you look closely at the holdings," Markese said.
Phillips downplayed the effect of front-running, noting that three out of four fund companies already reveal their full portfolios voluntarily to Morningstar monthly or quarterly.
But the ICI said some of its members already are complaining about front-running and piggybacking. It pointed to trade-tracking Web sites such as B4Utrade.com, which touts a service called Institutional Piggyback.
Though critics of the ICI say academic research has yet to quantify the supposed front-running and piggybacking problem, the trade group said it retained an educator to analyze the potential effects of stiffer disclosure rules. "The total return that shareholders receive would likely be lower than under the current standard," wrote University of Maryland finance professor Russ Wermers.