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Guest Column: Roy Weitz on Fund Jargon He’d Like to See Junked Article published Dec 21, 2005 (Ignites.com)

In the nine years that I’ve been publishing FundAlarm, I’ve come to know and dislike a number of common phrases associated with the mutual fund industry — many of which deserve to be permanently retired.

Whether used in press releases or shareholder reports, or by academics or other observers of the mutual fund scene, these terms are clichés that provide little value.

Here’s a list of the top seven phrases I would like to see thrown on the junk pile in the new year:

“We are sorry to see Joe Manager leave ABC Fund, but his departure will have no effect on the operations of the fund.”

If a manager can leave a fund without causing so much as a blip, then what was he doing in that position in the first place? What value did the management company provide in exchange for its advisory fee and why didn’t the directors of ABC Fund detect this managerial cipher long ago, and fire him?

The departure of a manager can be unsettling for both fund company and fund shareholders. There’s no need to compound this sense of unease by feeding shareholders pure public relations spin. Fund companies should level with shareholders when a fund manager leaves.

Shareholders will appreciate being treated like adults, and — surprise! — shareholders treated like adults will probably make the adult decision to stick around and give the new manager a chance.

“Your fund generated a positive return for the year, but still trailed its benchmark.”

This phrase is typically found in the annual report to shareholders. In the 1950s and 1960s, fund managers might have been able to placate investors merely by pointing out that they earned a “positive return.”

These days, investors are too sophisticated to dine on such a meager bone. Today, index funds are inexpensive, readily available and widely publicized. An actively managed fund simply has no reason to exist if it can’t consistently outperform its index or benchmark.

A fund manager who sends the message that it’s acceptable to underperform the benchmark is a fund manager who’s looking to be replaced, and who richly deserves her fate.

“The mutual fund industry is highly competitive. If an investor doesn’t like what’s happening in one fund, there are thousands of others to choose from.”

This phrase is typically found in an op-ed piece or commentary by someone who opposes new mutual fund regulation.

On the one hand, we'd like to embrace this stirring affirmation of consumer choice and free markets. On the other hand, this statement is pretty much nonsense. Participants in 401(k) plans don’t have “thousands” of funds to choose from, since they are permitted to invest only in the limited number of funds available through their respective plans.

Investors outside of retirement plans theoretically have greater choice, but it’s certainly not a “free” choice. That’s because real-world investors often have significant, embedded capital gains in their fund accounts. These investors can indeed jump to any other fund, as the head-in-the-clouds commentators assert, but only at a significant tax cost.

Bottom line: If competition is defined by unfettered consumer choice, the fund industry is one of the least competitive industries in the financial sector. That means more regulation and more disclosure — not less — are still in order.

Here are the remaining four in lightning-round format:

“It was a challenging year for picking stocks.”

It almost always is.

“We’re raising the management fee of XYZ Fund but, even after the increase, our management fee will be lower than the average for funds in our peer group.”

Imagine, for a moment, the derision that would greet this kind of pricing strategy in any other industry. Also consider the logical problem: If everyone below the average raises management fees to the average, then the average will go up. And if everybody below the new average raises fees again, the average will go up again. And so on, and so on, all the way to infinity.

“Joe Manager has left to pursue other opportunities.”

Hmm, wonder if he was fired or if he's joining a hedge fund?

“Joe Manager has left to spend more time with his family.”

Fired.