The Morningstar Conference: Disclosure Takes Center Stage

CHICAGO -- Fund companies aren't too interested in telling you what's in your funds, but pundits won't let the issue die.

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In a Round Table kicking off the 2001 Morningstar Investors Conference in Chicago Monday night, Morningstar Managing Director Don Phillips and Director of Fund Research Russ Kinnel both urged fund shops to be more proactive in telling investors what stocks and bonds are in their coffers -- an issue also near and dear to our hearts at TheStreet.com.

Funds are only required to disclose their holdings twice each year in shareholder reports. This infrequent disclosure makes it tough for investors to know how diversified or undiversified their portfolios might be. But fund shops routinely argue that more frequent disclosure would give rogue traders and other funds the chance to trade ahead of them, potentially reducing their returns.

As he did in the same forum last year, Phillips argued that disclosing holdings monthly with a few weeks lag isn't a threat and would help investors. He went so far as to call the fund companies' argument "absurd."

Beyond telling investors what they own, Kinnel argued for fund companies to tell them if they factored tax ramifications into their portfolio management. Funds are required to pay out their realized gains, after losses, to shareholders. These distributions are taxable and can be a headache for investors who aren't investing in a tax-deferred account.

"Each fund should disclose its policy on taxes -- just whether they factor them in or not," Kinnel said. "There are still a lot of managers at big fund shops who don't even know what their tax position is."

Last year, fund companies distributed a record $325 billion in taxable capital-gains distributions, topping the $238 billion they paid out in 1999.

Finally, Phillips took on the issue of fair pricing -- where fund companies estimate the current value of foreign or illiquid securities in their portfolios. The problem is when a fund company's estimate is wrong, the fund's share price can plummet when the error is corrected.

"You can have two funds pricing the same security differently," Phillips said. "It happens every day."

An example is the Heartland Funds debacle. We saw last year where a muni fund's net asset value dropped more than 70% in one day when its holdings turned out to be less valuable than the fund company thought.

What can help protect investors from being blindsided from issues such as these? More frequent portfolio disclosure, of course.