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Better Practices in Bond-Fund Disclosure

We take a look at how some companies are handling this area.

Eric Jacobson, 06/12/2012

Expecting things to change dramatically in the wake of the financial crisis would have been admittedly naive. You might have thought that with the depth of pain suffered by some shareholders, though, and the industry reputations that were badly damaged, we would have seen a few more changes to the way bond mutual funds communicate with their owners.

In practice, improvements have been few and far between. Some fund managers have argued that the events that marked the peak of the financial crisis in 2008 were akin to a 100-year flood and that it's unlikely that we'd see such dislocations again in our lifetimes. That logic suggests that more detailed expositions and disclosures about risk aren't likely to be any more valuable in the foreseeable future.

But while the crisis is now starting to fade into history, the daily machinations of Europe's debt crisis are a fair indication that risk still lurks. More important is the observation attributed to Mark Twain that "History doesn't repeat itself, but it does rhyme." Even if the next rough patch in the bond market doesn't look like the last, it's still likely to be plenty painful. Whether it's a spate of rising market yields that many observers have been waiting for or some unexpected shock to the system, it's a near certainty that some funds will be caught by surprise.

It would be great if investors weren't. One way to keep that from happening would be to make sure that funds' marketing and disclosure materials actually tell shareholders something useful about what they own, rather than limiting them to the basic accounting reports that regulators demand. We laid out a handful of ideas for better disclosure in a column from 2009, most of which had to do with simply telling investors more about what they own and the inherent risk factors in their portfolios. This time around, we thought it might be interesting to laud some of the better practices that we've come across. None of these are examples of perfection, but they do at least show some effort at providing better information to investors.

JP Morgan Funds--Morningstar analyst David Falkof is a big fan of the materials that JP Morgan makes available. For one thing, the firm puts out a variety of reports for its funds that include customized data most relevant to each portfolio. We also favor the monthly conference calls that manager Bill Eigen holds for JPMorgan Strategic Income Opportunities JSOAX. That fund is pretty complex and uses a lot of hedge fund techniques, but Eigen and JP Morgan have worked hard to make sure that investors know what he's up to.

Wells Fargo Funds--Morningstar's Sarah Bush likes the way that Wells Fargo's muni funds use their quarterly reports to provide deep detail on how they're positioned and how they have performed, through the lenses of duration, yield-curve positioning, sector allocation, quality distribution, and issue selection.

Artio Funds--Sarah also likes the fact that the Artio Funds slice and dice their portfolios in multiple ways in monthly fact sheets, detailing how they break down by currency, country, credit quality, and security type, for example, and including comparisons to benchmark indexes. She's also complimentary of the fact that Artio provides detailed perspective via its regular commentaries.

MFS Funds--Morningstar's Shannon Kirwin is partial to the way that MFS breaks down municipal portfolios in its quarterly reports. In particular, she likes the way the firm sorts out its funds' holdings by specific sectors rather than higher-level, and less useful, groupings. Many fund companies share this information with us in interviews or provide customized reports upon request. Often, however, portfolio summaries available to the public are simply broken down by state in their standard disclosures. That can be a useful and important lens through which to view a fund, but it's by no means the only one.

PIMCO Funds--Given their size and level of complexity, there's almost always room for improvement when it comes to disclosure for PIMCO's funds. The firm has done a better job in recent years, though, especially in terms of putting out reams of monthly portfolio statistics to help investors better understand what's under the hood. PIMCO has also made publicly available its Quarterly Investment Reports on individual funds, which were at one time reserved only for institutions.

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Eric Jacobson is Morningstar's director of fixed-income research and an editorial director for mutual fund content.
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