Fund Companies Falling Short on Stewardship

If you step back and think about it, it's not hard to be a good steward of capital. Mutual funds simply have to care for fundholders' capital the same way they'd want their own money to be run: with sensible strategies, fair prices, and reasonable, straightforward explanations as to why things go well--and not so well. Some funds--those that receive As for corporate culture as part of Morningstar's  Stewardship Grades for funds, for example--seem to have an easy time putting shareholders first. But other firms have apparently lost sight of their mission. What follows are examples of recent fund moves that are disrespectful to the shareholders they're serving.

RiverSource Slaps Seligman Funds with Extra Fees
In November 2008, J. & W. Seligman announced that it had agreed to be purchased by Ameriprise, owner of the RiverSource mutual funds. Some good things can come from a fund merger, namely lower expenses that result from economies of scale, but Seligman shareholders are getting slapped with an extra charge. In a January 2009 prospectus update filing for the Seligman funds, the firm announced that it was sticking the funds with a one-time charge of approximately 0.16% per fund relating to a change in transfer agents (up to a fund's expense cap). RiverSource undoubtedly wants to use its own transfer agent, which is reasonable, but why should shareholders pay for the change? Often the surviving fund company picks up any non-recurring charges relating to a fund company merger/acquisition.

Even more troubling is the fact that RiverSource hasn't said when, or if, its own transfer agency's services and corresponding charge will provide a real, tangible cost savings to fundholders. The filing says only that the expected expenses will generally be lower, but even if those reductions don't materialize, fundholders will still pay the one-time charge upfront. The disclosure also says that RiverSource's "relatively lower fees and expenses are expected, in the long run, to offset the Non-Recurring Charges." In other words, at some point between now and infinity, fund holders will break even, and then--maybe--cost savings will be realized. We think shareholders are owed a more-detailed explanation.

American Century Axes Peer-Beating Subadvisor
Just last month, American Century announced that it was changing managers on  American Century International Bond . The press release contained the usual praise for incoming managers John Lovito and Federico Zamora, experienced skippers who previously worked at Lehman Brothers and are now on the American Century payroll. That's fine--the new duo is likely up to the task. Only one line was devoted to the previous managers, though, saying that the fund was formerly subadvised by JP Morgan Asset Management. No indication was given as to the reason for the change, nor why the previous management team's top-quartile three- and five-year returns through December 2008 weren't good enough. Maybe American Century didn't want to push the press release to two pages, but shareholders deserve an explanation as to why they're better off in a fund run by Lovito and Zamora than they were when the successful JP Morgan team was at the helm.

Hypocrisy Stings Oppenheimer
In May 2006, John Murphy, president of OppenheimerFunds, gave the welcoming remarks to the annual ICI General Membership Meeting. (For a full transcript, click here.) The theme was "Creating Shareholder Value" and two of his suggestions were a) "Offering competitive investment returns at an appropriate level of risk," and b) "Supplying clear, concise, and relevant information and tools that investors need to make informed investment decisions."

We wish Murphy had followed his own advice. In 2008,  Oppenheimer Champion Income  lost a nearly inconceivable 78% and sibling  Core Bond (OPIGX) declined 36%, primarily because the bond funds took on plenty of risk. Specifically, the managers bought complex, off-balance-sheet swap contracts that created a leveraging effect on the funds. When the market for both bonds and the derivatives became increasingly illiquid as the credit crisis unfolded, the funds got slammed. Not only did the managers fail to appreciate the risks they were taking, but Oppenheimer also did a terrible job communicating the risks of this exposure in shareholder reports and Web commentary. Longtime fixed-income head Jerry Webman has stepped in to try and right the ship at both offerings, but the damage has already been done. (My colleague Eric Jacobson discusses Oppenheimer's bond funds in more detail here.)

Want to find out how the management behind your funds cares for fund shareholder capital? Premium subscribers can check out our Stewardship Grades for mutual funds  here.