Q. With all the news about institutional investors dumping mutual funds implicated in scandals, how concerned should I be? Some of the names mentioned in the press hold significant positions in our stock. Thus far, our stock appears unaffected but if institutions continue to move out of these funds and the firms in turn continue to sell their own shares, I assume our stock price will suffer.
A. Amid the barrage of negative news about irregular trading, it’s important to keep perspective. The mutual fund universe has 95 mn investors and $7 tn of their investments. Within that universe, only 15 or so high-profile open-ended mutual funds are implicated in regulatory investigations.
IROs with whom I’ve spoken about institutional investors dumping mutual funds with significant positions in their firm’s stock say they have yet to feel the impact of those redemptions on stock price.
Several factors may be influencing this. Generally, funds have a 5 percent ceiling on assets in any one stock. The redemption process is fund-specific and takes time as redeemed funds go into a transitional account prior to rebalancing. Also, the current market momentum would lessen any potential impact due to high market inflows.
My advice is to be knowledgeable but not overly concerned. Take the time to identify as best you can those mutual funds holding large positions in your stock, but focus your efforts on getting your company’s message out and reassuring investors of your company’s commitment to sound corporate governance.
Q. It seems like US regulators are engaged in a kind of turf war to see who can nail mutual fund managers fastest. If the SEC does, in fact, require mutual funds to disclose information on fees, how will that help IR professionals? And will we ever be able to exert any influence over the investment decisions of these short-term holders?
A. The fee debate is emerging as one of the biggest issues of the mutual fund scandal. The key will be who (from the SEC, state regulators, Congress and mutual fund companies) decides what constitutes a reasonable fee and how the rules will change.
It’s likely that fees will drop and funds will have to disclose more information about what investors are paying in direct and indirect fees and taxes. Cutting fees will certainly benefit equities and will likely reduce the profitability of the fund industry, at the same time as increasing returns to fund investors. In other words, it will hurt Wall Street but help Main Street.
From an investor standpoint, however, mutual fund fees are weighed against results – and many are willing to pay more for better results. For IROs, mutual fund fees shouldn’t have a bearing on whether their company’s stock is held in a higher or lower fee fund group. As for short-term holders, the best way to exert influence may be to market your firm’s performance and strategic growth platform so effectively that your stock is preferred as a long-term core holding.
