The Investment Company Institute in Washington quietly posted a report on its website this month rebutting charges that pension plan expenses are lower than mutual fund expenses.
But critics say the ICI's analysis in nothing more than fuzzy math.
They say the report is an ill-conceived attempt to blunt criticism from New York Attorney General Eliot L. Spitzer. Earlier this month, Mr. Spitzer testified in a hearing before the Senate, where he criticized fund companies for charging more to manage mutual funds than pension funds.
Charges of obfuscation
The ICI report never mentions Mr. Spitzer, but it does take to task a widely quoted academic study published in 2001.
Using data on 1,343 domestic-stock funds from Morningstar Inc. in Chicago, the study purports to show that mutual fund boards approved an average annual advisory fee equal to 0.56% of investor assets in 1999 - double what public pension funds paid the same fund companies.
The institute, however, says in its report that the study "miscalculated mutual fund expenses by including more than portfolio-management-related expenses."
Even critics of the mutual fund industry say the ICI may have a point - although the authors of the study vehemently deny it.
"We're right, and they're wrong," says John P. Freeman, a professor of legal and business ethics at the University of South Carolina, and co-author of the 2001 study.
"These people like to obfuscate, and they like to hide things," Mr. Freeman, a former lawyer with the division of investment management at the Securities and Exchange Commission, says about the ICI. "It's all about protecting the [fund] sponsors to the detriment of fund shareholders."
Not everyone agrees, but industry critics say the institute is overreaching when it states in its report that the expenses borne by mutual funds for portfolio management are roughly the same as those incurred by public pension plans.
apples and oranges?
"I think the way they present this rebuttal is a little disingenuous," says Roy Weitz, editor of the Tarzana, Calif.-based newsletter FundAlarm.com.
The reason the ICI's report is misleading, he says, is because it claims to show that expenses incurred for portfolio management are roughly the same in mutual funds and pension funds by comparing the portfolio management fees of pension plans and the subadvisory fees incurred by mutual funds that are subadvised.
The ICI claims in its report that such a comparison is the only fair way to evaluate management expenses because a mutual fund's own management fee typically covers services that don't necessarily have to do with picking securities. That is not the case with the management fee of a pension fund.
A mutual fund subadviser, however, primarily provides security selection, trading and reporting services, the ICI report states.
But comparing mutual fund subadvisory fees with the cost of managing a pension fund proves next to nothing because most funds aren't subadvised, Mr. Weitz says.
If the ICI really wanted to compare management expenses, it should have gone to the trouble of pulling those expenses out of the management fees charged by mutual funds rather than saying it was too difficult because those fees include other expenses, he says.
"This just strikes me as more of the type of foot-dragging they typically engage in and have engaged in forever on issues of importance," Mr. Weitz says of the ICI.
Several fund industry critics note that the ICI's position on this topic is similar to its position with regard to fund expenses. The institute has repeatedly said fund expenses are coming down, a position that at times has clashed with the findings of others in the industry.
Setting the record straight
Of course, the ICI has its defenders.
They say the ICI report comparing pension plan and mutual fund expenses is a good attempt to set the record straight by addressing the problems of the 2001 study, written by Mr. Freeman and Stewart Brown, a finance professor at Florida State University.
"I think the comparison [the ICI] is making is a good one," says Laura Van Zandt, director of mutual fund distribution research at Financial Research Corp. in Boston.
She says she believes a legitimate problem that arises when you compare mutual fund and pension expenses is that a mutual fund's management fee can include much more than the cost of actually picking securities. Using subadvisory fees gets around that, she says.
Mr. Freeman, however, says he and Mr. Brown attempted to get at the real expense of picking securities, though he admits they did have trouble "deriving" the data.
But even if the 2001 study is flawed, Don Phillips, a managing director with Morningstar, says, he believes there is enough evidence to support its conclusion - namely, that pension plan expenses are lower than mutual fund expenses.
"There's ample evidence in the fund industry where the same manager will work for two different parties at very different fees," Mr. Phillips says.
One of the most widely cited examples is that of Alliance Capital Management LP in New York, which reportedly charged the Florida State Board of Administration's pension fund far less for the services of a large-cap manager, Alfred Harrison, than it did investors in the Alliance Premier Growth Fund Inc.
Mr. Weitz says he believes that such examples need to be discussed and debated. The ICI's new report on the issue, however, does nothing to further that debate, he says.
"This is a case where if they were really serious about reform, they might have done a little more careful analysis and acknowledged the fact more explicitly that there clearly are cases where mutual funds are overcharging for exactly the same services that they provide pensions," Mr. Weitz says.