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Industry Says Target-Date Naming Proposal Misses Mark

Plus, Oppenheimer mandate changes, and more.

Morningstar Analysts, 08/30/2010

This week marked the deadline for public comment on the SEC's proposed rules regarding target-date fund advertising. With all of the comments in, there seems to be broad consensus on a key issue: No one likes the idea of inserting "tag lines" in target-date funds' names to emphasize their asset allocations at the target date. The industry argues that the proposal ignores key factors such as the longer-term effects of asset allocation and the impact of different subasset classes.

As Morningstar reported in June, the Commission has proposed new rules aimed at reducing investors' confusion about target-date funds, including requiring those that have retirement dates in their names to highlight the funds' asset allocations on those dates, as well as including graphic representations of the target-date fund's asset allocation over time.

Fund families and organizations including the Mutual Fund Directors' Forum, Vanguard, Fidelity, Manning & Napier, Russell Investments, BlackRock, Wells Fargo Funds Management, the Investment Company Institute, and T. Rowe Price, among others, also submitted letters to the SEC regarding the proposed target-date rules. Read Morningstar's letter here.

Vanguard writes that the proposed tag line won't aid investors' understanding: "In fact, such disclosure would be potentially confusing, as most TDFs (target-date funds) within the same fund family will disclose the exact same asset allocation at the target date ... this disclosure would not enable investors to distinguish one TDF within a fund family from another." Manning & Napier favors more disclosure of funds' glide paths and the underlying investments but "does not support, and strongly disagrees with, requiring asset allocation taglines in the name of a target date fund." Fidelity also recommends eliminating this rule, writing that "Investors would be better served by disclosures describing how a target date fund is intended to be managed over time, not simply at a single future point in time." T. Rowe Price fears that the tag line's prominent position after the fund's name might cause undue focus on that date and "unintentionally mislead investors about a target date fund's asset allocation over time."

Oppenheimer Modifies Main Street Mandates
Oppenheimer is changing the mandates on two of its Main Street funds, Oppenheimer Main Street Opportunity OMSOX and Oppenheimer Main Street Small Cap OPMSX. The Main Street funds were taken over in May 2009 by Mani Govil and his team, who came over from RS after achieving great results with RS Large Cap Alpha.

Opportunity technically has the freedom to range across the market-cap spectrum, but in practice it has been a large-blend fund with only a slightly smaller average market cap than the team's flagship fund, large-cap Oppenheimer Main Street MSIGX. Opportunity will still be able to roam but will now hold only about 35 stocks instead of 65, to make it more distinct from Main Street (which also holds about 65).PAGEBREAK

The $3.3 billion Main Street Small Cap will become Main Street Small- & Mid-Cap and change its benchmark to the Russell 2500 from the Russell 2000. Also, Benjamin Ram is being promoted to co-lead portfolio manager alongside lead manager Matthew Ziehl, with Raman Vardharaj remaining as the third manager.

Oppenheimer made a similar move a few years ago. After Oppenheimer Small Cap Value's asset base ballooned to more than $5 billion, it changed the name to Oppenheimer Small & Mid Cap Value QVSCX and raised the upper limit of market caps that it could own.

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