Too Much Disclosure? Debate Over Mutual Funds Misses the Point

This country certainly needs greater disclosure about what corporate executives are doing with our money.

Last week, reports revealed that former Tyco CEO Dennis Kozlowski once spent $1 million of shareholder money on a birthday party for his wife on Sardinia. That would have been nice to know.

But in post-scandal eras, the pendulum of reform often swings too far in the opposite direction. Rigid regulation can quickly replace lax oversight. And lately, calls for the mutual fund industry to give greater disclosure are starting to go a little too far.

Not to sound like a shill for the money management business, but mutual funds already tell you enough to make a solid decision about whether to buy, hold or dump a fund.

Mutual fund companies are required to release the complete holdings of their funds twice a year. Many fund firms disclose their holdings more often. Oakmark, for example, releases quarterly reports for its funds, which include all the holdings of each fund. Some firms only reveal their portfolios twice a year -- and that bare minimum is plenty.

Fund managers will tell you that they aren't intentionally keeping shareholders in the dark. They simply want to prevent some investors from trading with or against them. Another defense you'll hear: More frequent disclosure of holdings will cost a lot more money.

Maybe. Maybe not. Both of these points are the subjects of heated debate.

But this debate is largely beside the point. A fund shareholder doesn't need to see all of the fund's holdings more than twice a year. Ask yourself: If a fund tells you every stock it owns every month -- or every quarter -- what are you going to do with that information?

Proponents of more frequent disclosure might say, "Why not disclose and let the investor decide?" Here's the thing: If you've done your research -- checked the fund's expenses, its past performance, its manager's history and the risk levels -- and picked a good fund, then you don't need quarterly disclosure. Trust your manager unless continued underperformance dictates otherwise.

Some proponents of more frequent fund disclosure will argue that investors deserve to know what's going on with their hard-earned money.

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Well, you can find out every day -- just look at a fund's performance. Mutual funds price their shares at the close of every trading day. You can assess the risk of a fund looking at its short-term performance. If the fund swings far more violently than the broader market or its peers, that fund might be riskier. And you always know the expense ratio of a fund. That number tells you exactly how much money won't be going in your pocket in the future.

Also, some funds disclose their top 10 holdings more frequently, which tells you plenty about how much risk a manager is taking on. If more than one-third of its assets are in its top 10, that's a fairly concentrated mix that could be volatile.

Looking at a fund's portfolio every six months is enough to see if the manager sticking to his style and investing your money prudently. A fund's overall style or composition probably won't change much over a few months.

And even if you notice that a fund manager is altering his style -- maybe shifting from growth stocks to more value-oriented names -- that fund doesn't necessarily deserve to get the boot. You're paying a manager to pick great stocks and navigate rough markets. Why second guess the professional?

During the market rout of the past few years, Tom Marsico nimbly shifted his growth funds -- such as (MGRIX Quote - Cramer on MGRIX - Stock Picks)Marsico Growth -- out of tech and into more defensive sectors like -- well, defense. Some of his picks were not classic growth stocks. But his strategy saved shareholders lots of money. Selling simply because of a so-called change in style would have been a mistake.

"You're giving your money to a manager because he purportedly knows more than you," says Bob Olstein, manager of the (OFAFX Quote - Cramer on OFAFX - Stock Picks)Olstein Financial Alert fund. "It's not to get ideas or be a Monday morning quarterback."

Olstein only reveals the complete holdings of his fund twice a year. "That's plenty," he says. "But I do write my shareholders every quarter to tell them what's going on and what we're thinking. We give them performance, talk about what we're doing and our thoughts about stocks or the market."

The idea is to make investing easier. And frankly, more frequent disclosure of a fund's holdings will only make it more confusing.

Fund companies could, however, figure out a better way to present the information they're already required to reveal. Better disclosure -- not more frequent -- is what the industry needs to work on.