Mutual Funds: Portfolio Structures, Analysis, Management, and Stewardship

CHAPTER 2

Mutual Fund Regulation and Issues

CONRAD S. CICCOTELLO, J.D., Ph.D. Associate Professor and Director of Graduate Personal Financial Planning Programs, Georgia State University, Atlanta, Georgia

 

 

 

I recall attending a symposium at the Wharton School at the University of Pennsylvania in 2002. The symposium topic was delegated portfolio management, and I was to present a paper on mutual funds along with several other academics during the one-day conference. In attendance were invited academics, practitioners from mutual fund management firms (such as Vanguard and Fidelity), and some members of the financial media. Our lunchtime speaker was Jason Zweig, a well-known and insightful columnist from Money magazine.

During lunch, Jason presented the situation of a high-technology sector open-end fund that had $50 million in assets. That fund then had a spectacular year of performance, with a return of 100 percent on its asset base. Then, almost overnight, $2 billion of new capital flowed into the fund. The next year the fund returned a -75 percent on its asset base. Jason then asked the crowd (rhetorically) what the two-year average performance of the fund would be. Taking the simple average of the two years’ returns would give (100 + (-75))/2, or 12.5 percent per year. This is what the “time-weighted” average performance would be and what disclosure of the fund’s performance would indicate.

Jason next argued that such a measure was misleading, given the value implications suggested ...