Skip to Content
Fund Spy

A Call to Action for Fund Boards

Federated, Strong, and Alliance boards need to put fundholders first.

The silence is deafening.

Some fund boards have had little or nothing to say to the shareholders they represent. For instance, about 10 weeks have passed since Spitzer first announced he was investigating market-timing arrangements at Strong. Yet the company and the fund board still haven't told shareholders what happened and which funds were affected. All the board has said is that Dick Strong is no longer its chairman.

Then there's Federated. On Oct. 22, the firm informed fundholders that there may have been late-trading or market-timing in their funds. Three weeks later, fundholders still haven't been told which funds were involved or what happened. Its board hasn't yet said a single thing.

How can anyone charged with representing fundholders refrain from telling them what occurred? No doubt board members know which funds were affected. Although it's certainly possible that Federated hasn't completed its investigation, the board could still let investors know what has been discovered so far. Strong, on the other hand, has had time to complete a very thorough investigation, yet its board has nothing to say about which funds were harmed and the extent of the damages.

Strong's Special Challenge
Given that Dick Strong, the head of Strong Capital, is facing an investigation into his own trading, the Strong board should feel compelled to act. Refraining from comment is an understandable response for someone under investigation, but not for those charged with serving fundholders. Strong's personal defense strategy shouldn't dictate what owners of Strong funds are told. The Strong board ought to go public and tell fundholders exactly what has happened and how it's going to remedy the situation.

The board should also determine whether Strong is the right person to lead the firm out of this mess. Presumably most of his time will be taken up defending himself and the firm. He hasn't yet been charged, much less found guilty of anything, but that doesn't mean he should potentially take the funds down with him.

It will be awfully difficult to regain investors' confidence and prevent outflows while Strong is at the helm. Already, pension funds and 529 plans are mulling whether they should pull out. In fact, Oregon's 529 plan fired Strong Capital on Thursday. Generally, corporate leaders under fire have stepped down. Even Martha Stewart resigned her position as CEO of Martha Stewart Living Omnimedia.

At this point, Strong ought to do the same and allow someone else to handle day-to-day management of the firm.

Thus, it would also be prudent for the board to begin searching for replacement advisors, so if the situation continues to worsen, good options will be at the ready. Fund boards, after all, are responsible for selecting advisors. The Investment Company Act of 1940 envisioned that this power would keep fund advisors at arm's length from the fund boards. It hasn't worked out that way, but that doesn't let boards off the hook.

For background reading on Strong, I'd suggest a column I wrote on its trend-chasing way back in 1997, before it even got around to launching an Internet fund. For something more recent, check out this excellent Joe Nocera and Andy Serwer piece in Fortune

A Wake-up Call for AllianceBernstein's Board
Nearly as upsetting as the market-timing news at AllianceBernstein is news that expenses have continued to go up to the sky. At some point, expense ratios reach a level at which producing adequate long-term performance is nearly impossible, and many AllianceBernstein funds are there.  AllianceBernstein New Europe’s  expenses are now a ridiculous 2.54%. In fact, one third of AllianceBernstein funds have expense ratios that are more than 2.00%. I wouldn't hire Warren Buffett at that price. (By the way, Buffett's salary at Berkshire Hathaway would be roughly equal to a 0.01% fee.) 

Besides hiring advisors, boards are charged with setting fees, so these appalling costs fall squarely on the shoulders of directors. For starters, they could lower management fees to the 0.42% that AllianceBernstein charges to run  Vanguard U.S. Growth (VWUSX). Then, they can move on to eliminating revenue-sharing deals that raise costs and create an uneven playing field for investors. (Revenue sharing is the practice of passing along incentives to brokerage offices that meet sales targets. This can bias brokers toward certain fund companies when they should be selecting the best funds available--regardless of incentives--for their clients.)

It's also worth noting that one of the independent members of the AllianceBernstein fund board is only sort of independent. David Dievler was a senior vice president at Alliance Capital until 1994.

What Fundholders Can Do
Voting with your feet is the most obvious and effective way to send a message, but it's not the only way. You can call or write the fund board members and ask for action. You'll find them listed in the fund's statement of additional information.

Bogle on Boards
A couple of years ago, I asked Jack Bogle what fund directors should do. And his first response was: "Something!" I couldn't agree more. Click here for Bogle's complete comments.

Sponsor Center