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Rekenthaler Report

Word Doctoring

The fund industry is counseled on messaging.

Say What?
Now here's an intriguing headline: "Invesco Reveals Worst Words to Use with Investors." (The article from Ignites is behind a paywall, sorry.) What's more, the source of Invesco's insights was research from a firm where my former college roommate, the (in)famous Frank Luntz, once worked (maslanksy + partners, formerly maslansky luntz + partners. One needn't agree with Frank's politics to acknowledge that the author of the term "death tax" is a master at messaging and that his former firm probably has a knack too. What Orwellian language did the consultants suggest for fund companies?

Not much--at least as publicly disclosed by Invesco, the findings are noncontroversial. But they are useful. Consider the tricky item of informing fund investors about what they pay. A test audience was asked which it would least enjoying paying: fees, commissions, charges, or costs. Respondents were 9 times more likely to say fees rather than costs. After all, the first three items sound like mechanisms for boosting fund-company profits. Also, they are arbitrary. A fee, commission, or charge is set at the level that a fund company desires. Costs, on the other hand, merely imply what the fund company must recover to pay its bills.  It's only fair that the companies be able to recoup their costs of operation, no?

Another subtlety was the perceived difference between "straightforward" and "transparent." The two words are often used interchangeably, but per Invesco's research they should not. Respondents greatly preferred the word straightforward. If they were told that fees--oops, costs--were presented to them in a straightforward fashion, they tended to believe that statement. If, on the other hand, they were told that the costs were transparent, they figured that something might be hidden. (Transparent is redolent of a magic trick. "See, a clear pane of glass, there's nothing behind here ...")

The most useful advice for Morningstar writers and *cough* daily columnists is to use more words to explain an idea rather than to slip into jargon. The given example is "managing longevity risk," a phrase that almost nobody in the test audience understood or liked. When reworded as "making sure you have enough money as long as you live," the audience was much happier.  A good lesson, that. Not that I will always have the discipline to remember and follow it, but I'll try.

Squabbling Over Money Funds
The SEC's recent proposal for reforming money market funds has cleared its first hurdle of internal approval, but, as I expected, it is far from being enacted. Even after several years' worth of discussions, there's nothing resembling a consensus on best practices for money funds. For example, earlier this week two former fund executives, Robert Pozen and Terry Hamacher, penned an Opinion article in The Wall Street Journal that stated support for the first of the SEC's two proposals (requiring prime institutional money funds to float their net asset values rather than fix them at $1.00 per share) but rejected the second (a liquidity requirement, and potentially a gate and redemption fee). In contrast, the official fund industry trade organization, The Investment Company Institute, rejects the first proposal and supports the second.

When even the insiders aren't agreeing, it's going to be very hard to build acceptance among a broader audience.

The Tough Questions
Morningstar's Christine Benz spots me. "Why do fund companies charge more for a new fund when there's no extra investment work?," she asks. I ask her what she means. She tells me of a fund company that is launching a global fund. The portfolio will splice the fund company's existing U.S. fund with its existing foreign fund. Thus, there will be no additional investment expenditures. However, the new fund's expense ratio is not lower than that of the existing funds, which after all have already hired investment staff. In fact, the new fund charges more.

Oh, Christine. Those are not charges. Nor are they fees. They are costs. Just because you can't see what the fund company spends, doesn't mean that the costs aren't there.  After all, the risk oversight committee still needs to oversee that new fund, and a portfolio manager must review its trades, and … [Waves hands animatedly, while slowly backing out of the room.]

Alright, I don't have much of an answer. Nor do I have a response for Christine's query of why small-company funds have higher management fees than large-company stock funds, even as the small-company funds tend to be assigned the firm's junior researchers. Ask the hard ones of somebody else, Christine.

Nice Accessories, but What About Those Towers?
I asked Wednesday if readers could guess which of my family's two wireless carriers was superior, Verizon or T-Mobile. As I explained, my wife constantly mocks me for being unable to connect with the Net and sometimes unable to make phone calls as well. Which carrier does she have, and which do I have?

That was an easy one for Morningstar's Laura Lallos: "It must be T-Mobile, because I can't even make a call from my own apartment." Spot on, Laura. At a company meeting yesterday, I watched with fascination as a coworker sent texts, received emails, and surfed the web. (Her identity will be carefully protected.) Meanwhile, I had not even a ghost of a whisper of a signal. Her carrier? Verizon.

Sigh. Look, T-Mobile, the pink lady is great, fun ads, cool accessories. But please build some phone towers, thanks.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.