The Mutual Fund Directors Forum is hoping to rally the troops in an effort to stave off what it thinks is an attempt by the Investment Company Institute to eliminate the watchdog role played by mutual fund directors.
Directors, particularly independent ones, are critical to keeping fund fees down and to making sure that conflicts of interest inherent in money management don't harm investors, Susan Wyderko, executive director of the Washington-based forum, wrote in an e-mail to members Jan. 18.
Her comments came after Paul Schott Stevens, president and chief executive of the Washington-based ICI, recommended in a Dec. 7 letter to the Department of the Treasury that the United States adopt "a streamlined investment company structure that reflects the 'economic reality' of a collective investment fund (i.e., that the investment company is an investment product established by its investment adviser/sponsor)."
In a letter to ICI members Jan. 14, he reiterated the recommendation.
Many in the industry believe that Stevens' letter means that the ICI supports a legislative change to allow investment managers to offer a pooled-investment product in the United States, similar to European collective investments, in a transferable-securities model that isn't subject to oversight by an independent board, Ms. Wyderko wrote.
"We have no desire to attempt to parse the meaning of the language in the ICI's letter or otherwise become involved in a debate over the meaning or intent of the ICI's recommendation," she wrote. "However, in light of the continued debate over the role of independent directors, the forum's board of directors believes that this is an opportune time to reiterate the forum's view that independent directors are central to the success of the United States fund industry and that they provide significant value to the tens of millions of Americans who rely on mutual funds to invest for their retirement, for their children's education, and for their other hopes and dreams."
With regard to current mutual funds, however, the ICI isn't recommending that boards be abandoned.
"We suggested a thorough consideration of an alternative model, an additional form of fund that could be more competitive," said Mike McNamee, an ICI spokesman.
Nevertheless, the ICI's call for a new fund structure is unnerving, especially since it appears that in the waning days of the Bush administration, calls to do away with fund directors are getting louder, said C. Meyrick Payne, a senior partner at Management Practice Inc., a Stamford, Conn., consulting firm for independent fund directors.
FULL-TIME TRUSTEES?
The American Enterprise Institute, a Washington-based think thank, has been particularly vocal.
The institute last year released a book, "Competitive Equity: A Better Way to Organize Mutual Funds" (AEI Press), by Peter Wallison and Robert Litan, suggesting that funds would be more competitive if they operated without boards and instead relied on full-time trustees to look out for the interests of shareholders.
Both the book's authors and the ICI claim that the United States is losing market share in part because of its mutual fund structure.
Global fund assets exceeded $24 trillion as of last June, Mr. Stevens wrote in his letter to the Treasury Department. Of that total, the share represented by U.S.- registered in-vestment companies steadily declined to 47% in mid-2007, from 66% in early 1999.
Meanwhile, the European fund structure has grown, Mr. Stevens wrote.
Such growth, however, hasn't benefited European fund shareholders, argued Russell Kinnel, director of fund research at Morning-star Inc. of Chicago.
"European funds cost much more and have much less disclosure," he said.
The average cost for the Class A shares of 1,668 U.S. stock funds last year was 1.3% of assets, Annett Larson, senior research analyst at Morningstar, said in a 2007 interview
(InvestmentNews, April 16).
Although an exact comparison wasn't available, she estimated that the average cost for 1,681 stock funds domiciled in the United Kingdom was 1.7% of assets.
The ICI recently came out on the winning side of a campaign to eliminate the tax advantages that exchange traded notes had over exchange traded funds and mutual funds.
Given recent efforts to strengthen the role of mutual fund directors in the wake of the mutual fund trading and market-timing scandals that broke in 2003, however, it seems like a stretch to think that the ICI will end up on the winning side this time, Mr. Payne said.
David Hoffman can be reached at [email protected].
