Big Fund Companies to Disclose ‘Valuable’ Metric to Retail Investors
In a development that could prod further demand for low-expense-ratio index funds by retail investors, BlackRock Inc., Dreyfus Corp. and 12 other large fund companies have agreed to publish on their websites the overlap between stocks held in their actively managed equity funds and the funds’ benchmark indexes.
The decision follows an investigation of mutual fund fees and disclosures at the companies by the New York Office of the Attorney General. It found that an investor on average would pay almost four-and-a-half times more in annual fees for an actively managed fund than for a comparable index fund that is passively managed.
“NYOAG wanted to understand if a fund’s fees reflect a fund’s opportunity to outperform the benchmark, as measured by the degree of overlap between the holdings in the fund and the holdings in the fund’s benchmark index,” the department’s investor protection bureau wrote in the report. “When deciding how to invest their savings, investors should have all of the information they need to be able to make fully-informed choices.”
Until now, most fund companies provided “Active Share” data on the asset-weighted overlap between active funds and benchmark indexes only to institutional investors. Of the 14 fund companies reviewed, only Fidelity Management & Research Company made the comparative data available to retail investors, while J.P. Morgan Chase & Co. did so for most of its relevant equity funds, according to the study.
The study, under the direction of Attorney General Eric Schneiderman, described Active Share as a “valuable” assessment metric for investors, and recommended that all mutual fund families provide Active Share it to all stock fund investors. It acknowledged that the overlap data are “only one measure of active management” and do not account for stock research and selection, trading turnover and other factors that play a part in total returns.
The securities industry does not appear ready to quickly adopt Schneiderman’s suggestion that all equity funds disclose the data, which is not required by the Securities and Exchange Commission.
“Mutual funds are among the most transparent, fully disclosed, and analyzed investment products in financial markets today,” Paul Schott Stevens, chief executive of the Investment Company Institute, the principal fund company trade group, wrote in an e-mail. “As even General Schneiderman’s report acknowledges, ‘active share’ is not relevant for many funds or investors. To ensure that mutual fund investors receive uniform disclosure wherever they are located, we strongly believe state authorities should not arrogate to themselves the authority to impose inconsistent disclosure requirements.”
Schneiderman, a Democrat, included in the report a dig at ongoing efforts to dilute the Department of Labor’s fiduciary standard rules for sales of investments in retirement accounts.
“The Trump administration and Congress have taken steps to roll back federal investor protections that heighten the duty of care owed to investors and address conflicts of interest; federal courts have recently reached inconsistent decisions about the validity of those federal protections; and, although the U.S. Securities and Exchange Commission has said that it will propose a rule to address these issues, it has not yet done so. In light of this uncertainty, it is particularly important for Americans saving for retirement to have all of the information they need to be able to make decisions about their investments and to evaluate investment advice they receive.”
The 12 fund firms that agreed to post Active Share information quarterly on equity funds, in addition to Fidelity and J.P. Morgan, are: AllianceBernstein LP; BlackRock, Inc.; The Dreyfus Corporation (a subsidiary of BNY Mellon); The Capital Group Companies, Inc. (American Funds); Columbia Management Investment Advisors, LLC; Eaton Vance Management; Goldman Sachs Asset Management, L.P.; JP Morgan Chase & Co.; OppenheimerFunds, Inc.; Nuveen, LLC (a subsidiary of TIAA); T. Rowe Price Associates, Inc.; USAA Asset Management Company; and The Vanguard Group, Inc.
Most agreed to post the data beginning this spring.