Mutual funds hoping to build investor loyalty have often used the stick, but seldom the carrot.
Redemption fees and other penalties to discourage fund switching and short-term investing are common. But rarely does a fund sponsor go beyond boilerplate shareholder reports, written by lawyers, to try to make fund investors feel as though they are a part of the investment process.
A peek at a typical prospectus or semiannual report is a singularly uninviting experience. Most mutual funds' World Wide Web sites are not much better. Stock picking is shrouded in mystery, with jargon and hype but scant specifics.
A few fund companies, however, attempt to break through the shroud.
Ralph Wanger's clever comments to holders of the Acorn funds (www.acornfunds.com) are a distinct attraction to owning them. (Wanger's first-quarter report includes a satirical offering about his computer inadvertently capturing a Barron's article from January 2003 when his office turns the computer clocks ahead to test for year 2000 compliance.)
Strong Investments Inc. uses the Internet to relay text and videos of fund managers discussing their investment strategies and presenting question-and-answer sessions between investors and fund managers.
Another shareholder-friendly idea, notable for its simplicity and clarity, was inaugurated a few months ago by Thornburg Value Fund and Thornburg Global Value Fund. Manager William Fries regularly posts on the fund company's Web site (www.thornburg.com) the names of the stocks he has bought and his evaluations of the companies.
Mutual funds are supposed to report at least their top 10 holdings every six months, but many fund managers find this requirement onerous. Their complaint: Why should we tell everyone about the specifics of our brilliant strategy? This is a shortsighted view that makes it easier for a fund investor to pull the plug on a fund at the first sign of trouble.
"I just like people to be informed about what is in the portfolio," Fries said. "This is a way for [shareholders and their financial advisers] to know more about us. Disclosure has always been a pet peeve of mine. I think more disclosure is better than less."
The Thornburg Value Fund holds about 40 stocks. The portfolio comprises a highly diversified mix of domestic and international companies that fit Fries's unique definition of value investing.
Essentially, Fries likes to buy stocks that are out of favor, whether the condition is transitory or more long-standing. He studies his companies well and enjoys talking about them. Investors can follow his reasoning as the fortunes of the companies and the mutual fund evolve.
A disclaimer at the beginning of notes on stocks says, "These comments are not buy or sell recommendations on the stocks." But Fries said many of his funds' shareholders like to buy shares directly along with him, another step toward fund loyalty.
Of course, investors should be aware that no information on a stock is posted until after Fries has taken a position in it. The company notes are upbeat, providing a rationale for Fries's decision. The notes include a link to the company's Web site, when available. But the notes are not public relations statements by the companies.
For example, the note on aircraft maker Boeing Co. includes this observation: "In recent years, effective competition from the European consortium, Airbus, along with problems fulfilling production on time and within budget, have curtailed profitability and damaged the company's reputation."
The note on Chicago-based Bank One Corp. has useful information not readily available, such as Bank One's plan to spend heavily this year on marketing in an effort to boost revenue in subsequent years.
"I have no reason to be mysterious about what's in the portfolio and about how we describe the company," Fries said.
His funds' small size, in terms of the number of companies owned and the total assets of the funds, makes the notes on companies manageable. Larger funds with hundreds of stocks might have administrative problems maintaining a bulletin board of company notes.
Moreover, news that a major fund group, such as Fidelity Investments Inc., has taken a position in a stock often prompts a rush of me-too buying well after the time when the fund group purchased its shares.
"We're not so big that we have any kind of material impact," Fries said. "We remove the stock as soon as we know we're going to sell it. We're not going to have anything out there [on the Web site] where we're selling the stock at the same time we're putting something out that may be viewed as favorable."
Fries began to publish his analysis of his funds' portfolios, including a lot of quantitative information based on immediate market conditions, as a service to brokers selling the funds. Now the company notes are available to anyone, regardless of whether they are a Thornburg investor or a financial adviser.
"We try to write them in a style that is comprehensive, that captures our unique feeling about the company," he said.