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A Very Full Agenda for Mutual Funds Trustees Belies Current Criticism |
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Written by John Winthrop, an Independent Trustee of the Pioneer Funds, argues that recent criticism by the fina
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No attempt to list the growing issues confronting independent trustees today can be complete. Over the past year we have seen that even the list of "hot button" items can be elusive. Those of us in the trenches know that our duties are more complex than our counterparts on traditional company boards. A brief review of some of the issues confronting independent trustees of mutual funds might be helpful in giving substance to these general comments:
- Investment Performance - Few, if any knowledgeable, independent trustees would say they are responsible for performance. After all, the investors purchased the fund because of the manager's reputation, not that of the trustees. However, trustees are responsible to see that the investors have the best possible chance of earning a competitive return. This means that they have to constantly monitor the resources and capability of the management company, each portfolio manager and his or her supporting team. In cases of consistently poor performance, the trustees may have to demand changes from the management company - or in extreme cases, even terminate the relationship.
- Disaster Recovery and Money Laundering - With the unthinkable tragedy occurring in September 2001, the trustees have oversight responsibility and must make sure appropriate disaster recovery plans are in place. Similarly, the need for a management company to know its customer base has never been greater - a particularly challenging task for mutual fund managers and trustees alike. Even demographic and economic profile studies are rarely initiated and omnibus accounts are frequently used in the asset gathering process. Nevertheless, the trustees must ensure that a money laundering policy is in place that satisfies the regulatory authorities.
- Code of Ethics and Governance - These subjects have always been of interest to independent trustees, but in a post-Enron environment they must be classified as critical issues. Management companies and trustees stand ready to pounce on any conflict of interest matters in today's world; so is the SEC. Years ago women, African Americans and other minority groups were rarely seen on mutual fund boards. That has changed for the better. Independent trustees must establish their own reasonable compensation level, form their own committees, identify appropriate schedules for meetings, and select qualified individuals to add to their oversight body. Retirement policy has been and is being established by many boards. In like manner, board evaluation procedures are being put in place.
- Audit Committee Charter - Another governance issue is to create a roadmap for the audit committee. This list of assignments includes many duties - a number of which must be ratified by the full board. Deep and up-to-the-minute financial expertise is required. The independence of auditors, legal counsel and even trustees themselves must constantly be monitored.
- Contract Review - This item remains the most important task for all independent trustees. The full burden of protecting shareholders through this annual review process rests with them, and, while they may and should have independent counsel, virtually none is blessed with their own support staff. In large families of funds it is vitally important to allocate expenses properly among funds in a fair manner. The allocation process covers management fees, 12b-1 fees, custody of the fund's investments and shareholder transfer charges as well as less obvious expenses such as ICI dues, insurance expenses, professional fees and Board expense. In addition, the profitability of each fund and the overall complex to the manager must be analyzed and compared.
- Brokerage Allocation, Best Execution and Soft Dollar Review - The commission dollars of each of the funds must be reviewed on a regular basis. This reduction in shareholder return creates an additional "hurdle" above and beyond the expenses discussed above. The trustees must verify that these dollars benefit the shareholders of each fund in the complex. In like manner, getting the best possible price on purchases or sales of fund investments is important. Trustees must be convinced that shareholders are treated fairly and that all trading activity is in compliance with regulations.
- Valuation Issues - Particularly in emerging market funds and those funds investing overseas, many events can cause disruptions in the pricing of stocks or bonds. Procedures for dealing with unpredictable events must be created and consistently acted upon to make certain shareholders, buying or selling, are treated in an equitable manner. The trustees must ensure that each valuation decision be fully documented.
- Style Drift - Potential shareholders should always read the prospectus of any fund they are considering. Of course, this does not always happen. But knowing that each fund has its investment objective and style described clearly in the prospectus, trustees are charged with the responsibility of ensuring that the investment advisors stay on course (today, there are often many different advisors and sub-advisors involved in any one complex). A technology fund should not begin investing in insurance stocks; a value fund should not slide into a growth stock bias. Trustees are ultimately responsible for guarding against "style drift".
- Credit Analysis - Years ago investment advisors paid too much attention to income statements and not enough attention to the balance sheet. The bear market we have seen in recent years has educated all of us to consider the source of earnings with care. The implication for trustees is to ask questions about the credit review process for all kinds of investments. This can and should be done without micromanaging any portfolio. It is the investment process that must worry the fund trustees.
This list is neither all-inclusive nor the final word on independent trustee responsibility. The road ahead for independent trustees promises mountains of paperwork, the necessity of good judgment, and an understanding that there are not always easy answers.
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