What's the Big Secret About Mutual Fund Holdings?

Carol Tyler and Robert Markman are both active mutual fund investors. But they might as well live on different planets when it comes to the treatment they get from fund companies.

Tyler, a software manager for an East Coast technology company, couldn't find out what a fund is currently buying and selling if her life depended on it. Like other individual investors, Tyler only has access to a portfolio that could be as much as 6 months old.

"It's too old to be useful," says Tyler, who likes to see if a fund is faithful to its investment objective and if its holdings overlap with the rest of her portfolio.

Markman, though, has keys that fit the kingdom door. A Minneapolis money manager who handles about $700 million in mutual fund investments, Markman has enough clout with fund managers to usually get a far more timely look at how his clients' money would be invested.

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"Sometimes it could be yesterday's portfolio and sometimes it could be last month's," he says. "If I don't get specific stocks, I'll get a sense of what they're generally doing -- lightening up in a certain area, for instance."

Individual investors can only yearn for Markman's access. When it comes to full portfolio disclosure, the best that fund customers can usually count on is a quarterly report. But most fund companies, including the large ones, play it even closer to the vest, releasing complete holdings only twice a year in accordance with a decades-old securities law. More frequent disclosure, they say, would tip off other traders and make it more difficult to get the best prices for their trades.

"We feel this policy really helps us maximize the portfolio managers' ability to deliver performance ... and that's where our priority has to lay," says Shelley Grice, spokeswoman for Janus, which has a twice-a-year disclosure policy for the full portfolio but lets investors see its top 10 holdings monthly, although with a lag of 30 days.

What's the big deal? Not knowing where your manager is investing can lead to some lousy surprises because you're essentially blindfolded. Remember when Foster Friess suddenly and quietly moved 70% of (BWIX)Brandywine out of tech stocks and into cash toward the end of 1997? Shocked shareholders found out after the fact in a shareholder report. They ended up sitting on the sidelines during an ensuing tech rally, and then Friess hopped back into tech just in time for some volatility in 1998.

More frequent disclosure would've given some investors a chance to decide for themselves it they wanted to tag along for those kind of drastic market calls. But Brandywine shareholders aren't the only ones in the dark.

Of the 10 fund companies with the most assets under management, only four report more frequently than every six months. Four of the top five stick to the minimum requirement. The only exception is the $325 billion American Funds, which issues monthly reports.

How the Biggest Funds Stack Up Only seven of the top 25 largest fund companies allow investors to examine their full portfolios more frequently than twice a year, the minimum requirement.
Company	Complete Portfolio	Top Holdings	Holdings Disclosed Most Frequently
Fidelity	Twice a year	Quarterly	Top 10
Vanguard	Twice a year	Monthly	Top 10
American Funds	Monthly	Monthly	Top 10
Putnam	Twice a year	Quarterly	Top 10
Janus	Twice a year	Monthly	Top 10
Franklin (1)	Quarterly	Monthly	Top 10
AIM	Twice a year	Monthly	Top 20
T. Rowe Price	Quarterly	Monthly	Top 10
American Century	Quarterly	Monthly	Top 10
American Express	Twice a year	Quarterly (2)	Top 10
MFS	Twice a year	Quarterly	Top 10
Oppenheimer	Twice a year	Monthly (3)	Top 5
Morgan Stanley Dean Witter	Twice a year	Quarterly	Top 10
Merrill Lynch	Quarterly	Every two weeks (4)	Top 10
Van Kampen	Monthly	N/A	N/A
Pimco	Twice a year	Monthly	Top 10
Alliance	Quarterly	Monthly	Top 10
Smith Barney	Twice a year	Monthly (4)	Top 10
Dreyfus	Twice a year	Monthly	Top 10
Evergreen	Twice a year	Quarterly	Top 10
Prudential	Twice a year	Quarterly	Top 10
Invesco	Twice a year	Monthly	Top 10
Kemper	Twice a year	Quarterly	Top 10
Federated	Twice a year	Quarterly (5)	Top 10
Bank One	Twice a year	Quarterly	Top 10
(1) Franklin's Templeton and Mutual Series funds release full and partial holdings on varying schedules (2) Discloses Top 10 monthly to Morningstar (3) Given to monitoring services only (4) Disclosed through brokers (5) Monthly disclosure in limited cases N/A: Not applicable

In the age of the Internet, with technology feeding investor demand for information, that's not good enough, critics say. "That rule dates back to when you couldn't afford to mail out a report every day," chides Jonas Max Ferris, co-founder of Maxfunds.com, a Web site that tracks no-load stock funds.

On the hopeful side for investors is that some funds are loosening up by releasing lists of top holdings on Web sites, often monthly, or giving regular portfolio updates to Morningstar, the fund monitor. Also emerging is a small group of entrepreneurial funds with even looser policies. One, OpenFund, lets investors view active trading on its Web site, while Montgomery Asset Management is taking steps such as posting weekly trading commentaries by the managers of its new line of Stock Solutions funds.

Funds sticking to minimum observance of the law argue that frequent disclosure hurts the very people it is intended to benefit: shareholders. Because funds sometimes take weeks to build positions in a stock, they argue, giving the public timely portfolio updates would tip off the market to their intentions. Traders then could buy the shares ahead of the fund -- a practice called front-running -- and drive up the price.

While acknowledging the front-running peril, critics say funds could release complete holdings more frequently than six months, or even quarterly, and still protect themselves. And they wonder if the industry isn't really concerned that frequent portfolio updates might reveal questionable trading practices, including so-called window-dressing to boost performance and increase management compensation.

"The reticence [about disclosure] is that they do a lot of trading close to the quarter-end to have good stocks in the fund, and they don't want to tell you what they're doing," says Joel Davis, a senior financial planner with American Express Financial Advisors in Portland, Maine. "Funds are still a black box to a lot of people."

Objections to more frequent disclosure aren't confined to the mutual fund world. Some investment advisers also think it's a poor idea. The reason: Investors would lose a desirable long-term focus and resort to fund trading. What's more, they say, the advantages are overblown.

"Candidly, my clients could care less," says Miami-based financial planner Bob Mooring. "That's what they pay me for. I personally don't think much about it. I think it's more interesting to people who are trading stocks and are looking for ideas."

Adds Syl Marquardt, research director for John Hancock Funds: "The key differentiator is always performance. That kind of disclosure is not even a close second."

Attempts to loosen reporting requirements have encountered stiff industry opposition. Congress must approve any changes, and the industry has resisted efforts by the Securities & Exchange Commission to intervene. An agency spokesman said the SEC is "always considering" regulatory improvements but currently has no recommendations on disclosure.

"The SEC ends up in the middle of this great debate," says Barry Barbash, former director of investment management at the agency. "When I was there, and I'm sure it's the case now, it's an issue you think about often. The problem is, the SEC authority in this area is very circumscribed."

But appeals for more frequent disclosure are growing, driven in large part by the rise in online trading and wider access to market information. The consensus among advocates supports monthly disclosure of portfolios, perhaps with a lag to account for sensitive trading.

"Quarterly online [disclosure] is a reasonable idea," says John Rekenthaler, Morningstar's research director. "Relatively few funds have massive turnover from quarter to quarter. [But] the reality is that for 99% of the fund managers out there, you could have the information monthly."

"I generally tell clients it's not necessary to provide elaborate or overwhelming information," adds Burt Greenwald, a Philadephia-based mutual fund consultant. "But at least a quarterly communication is important to build up trust and credibility."

Whatever the standard, some observers think that the industry ultimately will loosen up.

"I think the issue eventually gets decided in the marketplace," says Barbash. "What I said four years ago when I was at the SEC was that the coming of the Internet and other trends would make it incumbent on companies to put out the information. People in the industry who have resisted this are going to have to re-evaluate their position. I think it's a fact of life."

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