Stewardship: Care, Guidance, Concern.

Sometimes readers may feel that the subject content of these articles does not apply to investors here in Bermuda, but the investing world becomes smaller every day. For instance, if you invest with any local investment firm, your assets may actually be custodied with a US brokerage firm. Your mutual fund holdings, while sold under an offshore brand, may be managed by a US or global mutual fund shop.

Thus, many of the issues affecting US mutual fund holders may also affect you. Ongoing with the last round of scandals regarding market timing in the United States, Bloomberg reported that both Dublin, Luxembourg and other offshore investment centres were reviewing their registered mutual funds for irregularities.

Are Mutual Fund and

Brokerage Fees Excessive?

John Bogle emphatically thinks they are. For those of you not familiar with the name, John Bogle is the Father of the first US Index Fund formed in 1979. He is also former CEO of the Vanguard Corporation, the second largest mutual fund company in the world with 16 million shareholders. He has authored a book, 'The First 50 Years of Investing'. A man whose personal crusade for individual investors rights has transcended two decades, Mr. Bogle was the Keynote Speaker at the January 2004 American Institute of Certified Public Accountants Personal Financial Planning Technical Conference, ironically, held in Las Vegas Nevada USA.

This four day continuing education conference is the most intense gathering of US Certified Public Accountants who are also qualified financial planning practitioners. The debate about fees amongst the attendees ranged from how a financial advisor should be charging a client for investment advisory services (and any other planning advice or products) to absolute disgust for the ongoing fee manipulations by various brokerage firms and mutual fund shops. As front-line representatives to the investing public, CPAs take their ranking as number one holders of the public trust very seriously.

Failure of trust

and dreams destroyed.

When an investment professional as a fiduciary fails the public trust, you don't get a second chance, he warned. Mr. Bogle, lean and diminutive in stature, but a towering evangelist in the defence of stewardship over salesmanship and professional investment standards over business pressures, delivered a blistering assault on the "greed over need" mentality of mutual fund companies. Holding forth for more than an hour in front of 1,500 qualified professionals, he cited year after year and case after case of lack of regard for the trusteeship of other people's money and the failure of advisors to meet the needs of the individual investor.

The Stewardship Quotient.

Mr. Bogle has developed a 12-point mutual fund rating system, ranking good companies with a score of 3 and the worst with a zero. As in ordinary life, those mutual fund companies with the lowest scores were not deemed investment-worthy.

1.Management fees and expense ratios. Lower fees reflect a high stewardship score and a higher return. In these cases, you get what you don't pay for.

2.Costs matter. High turnover of asset holdings correlates with low mutual fund returns.

3.Sector funds. He does not like them. They are created by the mutual fund industry for trading purposes, i.e. making a market in order to sell it.

4.Herd mentality. When whole markets are overlooked, too narrow a focus becomes an obsession of performance; managers are lured into placing billions on a speeding train.

5.Advertising ? who is paying and is it misleading? Perception today - short term is everything and nothing.

6.Who pays for shelf space? Are the funds individual or wrapped? Is there an incentive to sell them pushed by the broker-dealer or fund supermarket?

7.Sales commissions. How high? How deserving? How many trailers paid out of the fund year after year to the broker/dealer firm? Again, costs hurt performance.

8.Redemption rates ? some international funds exhibit more 100 percent turnover annually. Market timers showed redemption rates staggeringly higher than that. How do you find that out? Review the mutual fund balance sheet cash flow statement and break out net redemption fees.

9.Mutual fund size limitations. Nothing fails like success! The larger the fund, the less nimble it becomes. Large trades roil the markets.

10.How good are the managers? Experience counts. Purchase no mutual fund where the manager (or team) has not been there at least 5 years - 15 years are preferable.

11.Inside ownership of fund shares. Eat your own cooking - just how much personal money does the fund manager have in the fund? All insiders must be required to invest in the mutual fund. It is true, when it's your money, you're more careful about results.

12.Organisation of the mutual fund company. Are they small privately owned, publicly owned or a conglomerate subsidiary? Which do you think cares the most about the small investor?

While some detractors felt John Bogle had a conflict of interest since he still espouses to passive low-cost index funds (which Vanguard sells), there is absolutely no questioning his sincerity and integrity. A recent Wall Street article written about his mission to effect change within the industry implied that he was concerned that he would be forgotten, that his message of doing the right thing, operating a business with immunity to pressure and fidelity to trust would be ignored.

Modest man, he has no idea that his record will be lodged in history as one of the ethical pioneering investment giants of the last century. Now 74 years old, having lived eight years with a heart transplant, who could forget him? Unlike the Tin Man in the Wizard of Oz, John Bogle possesses a heart of gold. He is more visible than ever and still fighting for mutual fund investor shareholder rights.

Do as he says, demand the facts and insist upon full disclosure.

@EDITRULE:

Martha Harris Myron CPA CFP? is a Bermudian, a Certified Financial Planner?(US license) practitioner, VP and Manager, Financial Planning at Bank of Bermuda. She also holds a NASD Series 7 license, and formerly owned a US financial services practice meeting the needs of 400 individual and corporate clients.

Confidential Email can be directed to marthamyronnorthrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.