Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, June 22, 1990 TAG: 9006220816
SECTION: BUSINESS PAGE: B-2 EDITION: METRO
SOURCE: Cox News Service
DATELINE: LENGTH: Long
These look-alike accounts, which mirror public mutual funds trade-for-trade, reap all the financial rewards of investing in mutual funds, but at less cost.
Liquidation of the private accounts conceivably could drive down the value of the mutual funds they mimic, according to industry professionals and regulators.
The mutual fund industry has made no apparent effort to tell small investors the look-alikes exist, and there are no regulations requiring disclosure.
Consumer advocates acknowledge that mutual fund companies have every right to manage these private accounts, which are made up mostly of company pension money. But, advocates insist that when the private accounts are clones or near duplicates of public funds, the public should know about them.
"The bottom line is that there should be disclosure of any factor that can affect the value of an investor's portfolio," said Ken McEldowney, a vice president of the Consumer Federation of America. "The small investor is already at a considerable disadvantage relative to the institutional investor. And the hiding of large buys and sells behind the wall of private look-alike funds denies individual investors valuable information that they need to know."
What's private, what's public
A look-alike account holds the same stocks or bonds in the same proportions as the public fund does, and when the public fund makes a trade in a certain stock or bond, the look-alike follows suit, often simultaneously.
The mutual fund industry says its lucrative private account business has had no adverse impact, over more than a decade, on the mutual funds that small investors buy. Indeed, some in the industry claim the private accounts may bolster the value of the funds they mirror.
"We don't see how any money we manage privately can have more than a minuscule impact on our public mutual fund side, when compared with the collective actions of money managers all over the world," said Jane Nelson, spokeswoman for the T. Rowe Price investment management firm. "We're out to help our shareholders, not to hurt our shareholders. We're not going to shoot ourselves in the foot."
Regardless of whether look-alike accounts affect public funds, one way or the other, public investors should be told about them in fund literature, consumer groups and some experts contend. After all, the mutual fund industry flourished in the 1980s, partly because of a widespread belief that the deck on Wall Street is stacked against individuals in favor of big institutions - like pension funds.
By not knowing about these look-alike accounts, small investors are making investment decisions in the dark, said John Markese, director of research for the Chicago-based American Association of Individual Investors.
The lack of information, he said, could cause investors to get into a bigger fund than they wanted to buy into.
"A lot of people avoid mutual funds simply because of size," he said. Many small investors, he explained, buy mutual funds they think can outperform the overall stock market, and shun the larger funds, which they see as reflecting the entire stock market. But if a lot of private look-alike money is shadowing a public fund, some small investors may fail to achieve their investment goal.
The public also needs to know about the look-alike accounts to determine what large, sophisticated institutions think about particular funds, said Michael Wilkinson, president and chief executive of Lowry Associates, an Atlanta-based pension consulting firm.
For example, if the institutions in look-alike accounts lost confidence in a fund, they could bail out and the general public would never know, said Wilkinson. But if a lot of money was taken out of a public fund, which has to report its assets, small investors could correctly assume that many institutions cashed out, he said. The small investor could then follow suit.
`A spit in the ocean'
Liquidations of look-alike accounts are extremely rare, mutual fund officials said. And even when they occur, they have little or no effect on the value of the public fund, the officials said. That's because the private account is generally much smaller than the public fund, and selling out usually is "like spitting in the ocean," Wilkinson said.
The nation's biggest mutual fund company, Fidelity Investments, offers private investors four different stock look-alike accounts, said Frederick Reynolds, a senior vice president of the Boston-based firm.
Private investors, generally company pension funds, need at least $25 million to set up a look-alike account of their own or they can join a pool of other institutional investors for a minimum of about $1 million, he said.
Fidelity manages about $11 billion worth of private accounts, and a "significant portion" is in look-alikes, he said. Look-alikes mimic Fidelity's $4.8 billion Equity Income Fund, its $340 million Growth Company Fund, its $400 million Asset Manager Fund, and its $45 million Overseas Fund, Reynolds said.
He said the pension funds that set up the clone accounts are conservative investors and seldom liquidate. "It is not an every day, week or month occurrence."
Fidelity has actively marketed the look-alike accounts for more than a decade, he said, suggesting the clones are hardly a secret. Reynolds also said the public doesn't need to know the accounts exist: "I think this is a non-issue."
"Fidelity as well as other organizations offer a wide range of investment products to a wide range of different markets," he said.
While figures are not kept, Wilkinson estimated that up to $50 billion is invested in look-alike stock accounts, compared with about $245 billion in public stock funds. Other industry experts quibbled with Wilkinson's number, some saying it was too high and others too low.
In general, mutual fund officials, industry analysts and investment bankers said the public does not need to know about the look-alikes because their investments are not in danger. But consumer representatives disagreed.
"It is a conflict of interest for them to judge it," said Markese. "Most individual investors are not aware of the existence or the magnitude" of clones.
"For every large fund, dealing with large stocks, it may not be a problem," he said. "But if they are dealing with small stocks, there may be a problem. They should publish those figures."
Gene Gohlke, associate director of the division of investment management for the Securities and Exchange Commission, said liquidations of clone accounts could affect public funds. He added that he doubted that would happen, or had happened.
Indeed, he said, the private accounts, by investing in clones that mirror public mutual funds, could bolster the value of the public funds. But he said the SEC has no way to measure the benefit or adverse effect of look-alikes. And he added that the agency would have no problems as long as mutual fund managers act in the best interests of both their public and private customers.
Private accounts are an important business for Fidelity and other mutual fund companies. Big investors who set up clone accounts essentially reap the rewards of the research, development and management of the mutual funds, for which public investors pay.
But that's capitalism, investment bankers, analysts and Gohlke said. Bank trust departments and brokerage houses commonly reduce fees to lure well-heeled investors.
"There is nothing more going on here than a little bit of price discrimination, so that institutions with large amounts can get a better deal than retail customers," said Jeremy Duffield, senior vice president for The Vanguard Group of Investment Companies. "There is not anything more complicated than that in the whole story."
by CNB