Jilted Funds Should Stop Playing the Blame Game

The way to lure investors back from stocks and index funds is by sticking to your style and controlling costs.
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So all of a sudden, the most popular guy in class is sitting home on Friday and Saturday night. Enter the new Mr. Cool -- just a little more exciting, fun and, admit it, a lot better to brag about at parties. And just to add insult to injury, the former Mr. Popular's girlfriends are also after that boring guy who packs his lunch because he's frugal.

What does the fallen hero say about all this? Couldn't be his fault -- uh-uh. He didn't get cocky or complacent. No, blame those fickle girls instead.

Don't worry, I'm not reliving my high school days (heaven forbid!), but this is the most apt analogy I have for what's going on in the mutual fund industry. Yep, many fund firms -- namely, those specializing in active funds -- sound a lot like jilted and jealous ex-boyfriends.

It's no secret that many of us, even longtime fund fans, are shifting to stocks. Certainly sexier these days. (After all, what would you rather talk about to your neighbors -- that struggling value fund or

America Online

(AOL)

?) Much of the new money that isn't headed straight to Wall Street goes to a small number of highflying funds -- or to index funds (that's the boring, cheap guy in my analogy.)

Why not skip the middleman, ask investors? Or if only funds will do, why not go with ones that take less money via expenses and make more in returns?

The numbers are hard to ignore. In the past five years, just 4% of actively managed U.S. diversified funds outdid the

S&P 500

. Of course, it's not fair to compare all these funds to the S&P. It's far from the proper benchmark for many. But that's what investors are doing nonetheless. And as attention spans shrink and expectations grow, it's probably what they'll continue doing.

In the face of this, what does the industry do? First, it blames those capricious investors. Then, it tries to imitate the chart-toppers that are proving so irresistible these days.

That's just not good enough, guys.

Sure, it's easier to follow the leader. But maybe you could do more than give your fund a facelift. Why not use this opportunity to clean up your act a bit?

Stick to your style.

You think investors are capricious? They're nothing compared to fickle funds. Small-caps out of favor? Chase the bigger ones. Cheap stocks getting cheaper? Forget value and go for growth. In the past year alone, more than 50 U.S. diversified funds switched their

Morningstar

category to large growth.

Your competitors have it all over you on this one. Index funds that mirror their market don't change unless the index does. And individual stocks don't often morph from one sector to another either.

Pay attention to what your customers are paying.

I know, I know, the

Investment Company Institute

says fund fees are down. (Do we expect otherwise from the industry's trade group?) But even it admits that even though distribution costs, such as sales loads, declined, operating expenses are up.

And face it -- your competitors look pretty cheap by comparison. Online trading continues to bring down the price of some stock buying, and index funds have a clear cost advantage as well. (The average expense ratio of U.S. index funds is 0.6%, while the average ratio of U.S. actively managed funds is 1.5%.) There are a lot of things out of your control: the market's direction, investor sentiment. But you can control costs and pass those savings on to shareholders.

Give us the real goods.

I often say that you don't go to a typical fund prospectus or annual report for ABCs, but for CYAs. There is so much legal mumbo-jumbo in many of these documents that it's tough to glean the bits of important information buried within. (And why not tell us about things we now have to look for elsewhere -- like performance among your peers?)

Not all of you do this. I like

Oakmark's

shareholder reports -- always count on those folks to be candid. And

Tweedy Browne

is frank and fair, too. But most of you have a long way to go in this department.

Listen, I don't advise investors to shift to stocks if you don't make some of these changes. Nor is this by any means a defense of those investors who really are just chasing yesterday's performance.

But I am saying that, like that disappointed boyfriend losing his popularity, you've got to do better than just blame the ones leaving you behind.

Mailbag

My

column on the

Mutual Series

funds attracted a lot of mail. Thanks, as always, for your feedback. I want to share one letter in particular, from Rob Friedman, Mutual Series' chief investment officer.

"I disagree strongly with two comments," he writes.

"1. You say performance lagged since Michael Price pulled back. Michael did not pull back until Oct. 31, 1998. After the sale to

Franklin

, he saw the need to acknowledge our impact on the funds. But he did not step away; in fact, he kept his name on all the funds as PM (portfolio manager), retaining ultimate accountability for cash levels, allocations, number of positions. He acknowledged who his key stock pickers were but remained the ultimate PM.

"2. You imply that without Michael, CEOs don't call! That's completely wrong; we were the stock pickers who dealt with the companies. CEOs call

Fidelity

and

Putnam

, et al. because they want to speak with the contact that knows the company. Michael has his many contacts. We all have ours."

My response: In the first case, you are technically correct. Michael Price stepped down officially at the end of October. But it's no secret he started handing over day-to-day control long before that. Yes, his name was still on the portfolio, but I think it's fair to look at your history during the handover. Perhaps I should have said, "Since his successors have been the key stock pickers." Same difference, I say.

And on your second point: I did not at all imply that CEOs don't call. When I wrote, "No computer screens flashing, or CEOs calling," I was careful to say this was true in Price's former personal office which

is

empty -- not in Series headquarters. In any case, I was making fun of the formula a lot of writers follow when reporting on your funds. In just the next paragraph, I say, "Scratch that lead." Rob, you are one of the most interesting fund managers I talk to. (Anyone who can mention the best movie of all time,

Orson Welles'

Touch of Evil

, in the first five minutes of a conversation can't be all bad.) But I think you need to give me some credit.

Boss Talk

And finally, just because you hear so much sports-speak on this site, let's skip the

NBA

talk and discuss for a minute the much more important game last weekend: getting

Springsteen

tickets.

When I was a teenager, I considered it a rite of passage to stand in line for hours, often overnight, to buy them. It was a sign of allegiance to The Boss. The longer you waited, the better fan you were.

I was all set to do the same on Saturday for his New Jersey concerts. I had my water bottle, beach chair and, of course, my 1984 Born in the USA tour T-shirt. But at the last minute, somehow the idea of standing for hours with a toddler on one hip and infant on the other seemed a bit much. A sign of the times? Or of my age?

Anyway, here's a survey: What's the best Bruce song? (Anyone who answers "Dancing in the Dark" is permanently banned from the site.)

Brenda Buttner's column, Under the Hood, appears Thursdays. At time of publication, Buttner held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While she cannot provide investment advice or recommendations, Buttner appreciates your feedback at

TSCBrenda@aol.com.