Funds and the Feds

By Shannon Zimmerman –
Well, it appears that hell has finally frozen over. Beginning early next year, the Securities and Exchange Commission will require mutual fund managers to disclose their personal stakes in the funds they run. They’ll put the kibosh on the widespread practice of “directed brokerage,” too.
For savvy fund investors, this is all terrific news. Clamping down on directed brokerage — a clear conflict of interest that involves fund companies channeling trading business and higher commissions to brokerages that push their funds — is both welcome and long overdue. And the new disclosure rules are even more encouraging. Why so? When it comes to gauging whether or not a fund’s stock-picker-in-chief is conducting his business with your interests at heart, few details are more important than whether he “eats his own cooking.” If the guy plunks down his money next to yours, after all, his interests are your interests — and starting next year the relevant facts and figures will be available for all to see.

But wait, there’s more: The new rules also require fund companies to reveal how they compensate their managers. That’s another great leap forward. Being able to take the measure of a manager’s financial incentives will provide yet another important clue as to just how shareholder-friendly a fund shop really is.
Kick me hard
Of course, some fund companies haven’t required a swift kick in the pants from the SEC to do right by their shareholders. For example, the employees of Southeastern Asset Management, the Memphis-based shop responsible for the fine Longleaf fund family, are the largest shareholders in the firm’s funds. And Marty Whitman, the force of nature behind Third Avenue Management, didn’t need the commission’s regulatory encouragement to let his shareholders know that he was a shareholder, too.
In a letter Whitman wrote to Third Avenue investors earlier this year, the manager detailed exactly how many shares he and his wife own of each of his shop’s funds. And lest anyone think there was any monkey business behind his massive investment, Whitman went on to note that he had “acquired these shares for cash, priced at NAV at the date of purchase.”
Just like you would, in other words.
Fan boy
Given that kind of commitment and candor, it’s no surprise that I’m a big fan of both operations. It’s also no coincidence that the funds they offer are all high quality. For example, though it runs with a compact portfolio, Longleaf International — a wide-ranging fund that recently had significant sums invested in the likes of Australia’s News Corp. (NYSE: NWS) as well as U.S. companies such as Yum! Brands (NYSE: YUM) and Fairfax Financial (NYSE: FFH) — has put most of its competition to shame since its 1998 debut. And on the domestic side of the ledger, Longleaf Partners, a value-oriented fund that recently counted Walt Disney (NYSE: DIS), FedEx (NYSE: FDX), Comcast (Nasdaq: CMCSK), and General Motors (NYSE:GM) among its top holdings, has notched an annualized gain in excess of 14% over the last 10 years.
That mark surpasses the S&P 500’s by a significant margin, and other winning attributes at the fund include a modest expense ratio of just 0.90% as well as the fact that the fund doesn’t carry a load or a 12b-1 fee. Turnover has been remarkably low, too, a trait that attests to the management team’s prudent buy-and-hold investment philosophy.
Now for the bad news: Unfortunately, both of those Longleaf funds are currently closed to new investors. Not to worry, though: Each of Third Avenue’s funds is open for business. Indeed, as you know, we’ve recently profiled two of our favorites from the shop in Champion Funds. Both are stone-cold Champs, superior funds that sport seasoned managers, reasonable price tags, strong track records, and a demonstrated commitment to shareholders.
And as with Longleaf, if a manager at Third Avenue eats your retirement, he’ll likely be eating his own as well. How comforting is that?
What’s cooking?
Longleaf and Third Avenue aren’t the only ones whose managers invest in the funds they run. In fact, most of the funds we’ve focused on so far in our newsletter hail from firms with reputations for eating their own cooking. To this point, though, separating those who do from those who don’t has required the kind of detective work one usually associates with choice episodes of Quincy and Barnaby Jones. (Or maybe that’s just me.)
That’s no longer the case, though. At least, it won’t be in the not-so-distant future. Thanks to the SEC — yep, you read that right — investors are going to have easy access to one of the most salient issues they should consider before taking the mutual fund plunge.
Source: Motley Fool

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