Originally created 07/30/01

Of mutual interest

NEW YORK -- Things aren't always what they seem, particularly when it comes to mutual fund names.

Take the Stratton Growth Fund - instead of looking to the tech stocks usually associated with growth funds, its biggest positions are in financial issues.

Or the AIM Value II fund, which focuses on reasonably priced stocks with strong earnings prospects. Its two biggest holdings as of June 30 were Charter Communications, a cable/broadband services provider, and Tyco International, an electronics manufacturer, not exactly the kind of companies usually found in the value sector.

Fund names and portfolios are often hard to sort out. So the Securities and Exchange Commission announced a new rule earlier this year designed to make fund names jibe more closely with the stocks they hold.

Specifically, the new rule requires that a mutual fund whose name suggests a focus on a particular type of investment - such as mid-cap or Asia-Pacific stocks - put at least 80 percent of its assets into that kind of investment. Previously, the informal minimum was 65 percent.

But critics say the new requirement doesn't go far enough, noting that it doesn't go into effect until July 2002 and affects only a limited group of funds. Specifically, the critics are concerned that the SEC rule excludes value and growth funds, including the Stratton and AIM portfolios, on the grounds that those terms describe investing methodologies that have no singular definition.

"Value and growth are really more strategies. You're trying to pick a stock that's relatively cheap when you're looking for value, but what's cheap can be in the eye of the beholder," said Susan Nash, associate director of the SEC's division of investment management. "The same is true of growth."

"Investors might look at our name and think we'd own growth stocks, but that's not how we do it. We try to achieve growth in total capital by pursuing the value stock route," said Jim Stratton, founder and manager of the Stratton Growth Fund. "You could get a different argument from a fund that had a value name but used cheap growth stocks."

The SEC isn't getting into the business of defining investment styles, either. That's up to the fund companies. A small-cap fund, for example, would have to put 80 percent of its portfolio in investments that matched the definition of small-cap set forth in its prospectus.

The rule also applies to funds with regional, geographic or tax-planning claims, as well as funds suggesting that a company or its shares are guaranteed or approved by the U.S. government.

That doesn't satisfy Mercer Bullard, a former SEC lawyer, who believes tighter regulation is needed.

"In the real world, people do judge a fund by its name," said Bullard, who has since founded Fund Democracy, a shareholders' rights group. "We need to protect investors from misleading names and this doesn't go far enough."

He's also unhappy with the 18-month waiting period before implementation, saying it is too long. Nash said the lag time is needed to give fund companies time to change names or adjust their portfolios.

Other advocacy groups are more upbeat about the rule.

"This is a good step in the right direction," said Bill Patterson, director of the AFL-CIO's office of investment, one of several groups that petitioned for the rule change.

The SEC estimates that about 500 funds - of the current 7,200 it expects to fall under the new rules - currently fail to comply with the requirement. Some will readjust portfolios to match names, while others will look for new monikers.

The message for investors is simple, said Robin Thurston, director of research at Lipper Research.

"It's important to look at a prospectus, but beyond that, investors need to look at the holdings, what the fund owns," Thurston said. "It's like buying a car. You need to open the hood and look underneath."


Trending this week:


© 2018. All Rights Reserved.    | Contact Us