Fund Advisers Research Articles

Eta® Analysis of Portfolios: The Economy Matters

The authors introduce a macroeconomic factor model, the Eta model, and its various applications. The underlying message regarding the Eta model, be it for replication, wealth maximization, or wealth preservation, is that “the economy matters.” The core feature of the Eta model is its replication methodology, from which portfolios could be customized to fit the risk–reward preferences of investors with respect to the economy. They then evaluate the portfolios against the Dimensional Fund Advisors Core Equity 1 Portfolio, which adopts the methodology promoted by the Fama–French three-factor model. <b>TOPICS:</b>Factor-based models, portfolio construction, performance measurement

All advisers to registered investment companies need to evaluate their exposure to CFTC regulation after recent rule amendment

Purpose – The purpose of this article is to explain the implications for registered fund advisors of the February 9, 2012 final amendments the Commodity Futures Trading Commission (CFTC) made to its Rule 4.5 exemption from commodity pool operator (CPO) registration for registered funds.Design/methodology/approach – This article explains how amended Rule 4.5 will be applied to advisors and sub‐advisors of registered investment companies and the managers of foreign corporations controlled by registered investment companies. The article also describes the expected impact of the CPO compliance regime under a proposed harmonization of CFTC CPO regulation with Securities and Exchange Commission regulation of registered fund advisers.Practical implications – All registered fund advisers should conduct a review of each of their registered funds' portfolios, investment strategies and marketing materials to evaluate their status as CPOs by the compliance deadline. Advisers who cannot comply with the amended Rule 4....

Why Do Hedge Funds Avoid Disclosure? Evidence from Confidential 13F Filings

We study a sample of Form 13F filings where fund advisors seek confidential treatment for some, or all, of their 13(f)-reportable positions. Consistent with the hypothesis that managers seek confidentiality to protect proprietary information we find that confidential positions earn positive and significant abnormal returns over the post-filing confidential period. We also find that managers are more likely to seek confidential treatment of illiquid positions that are more susceptible to front-running. Overall, our analysis highlights important benefits of reduced disclosure that are relevant to the current policy debate on hedge fund transparency.

Evaluating the Kaiser Permanente Community Fund's Social Determinants of Health Portfolio

Keywords: Social determinants of health, logic models, equity, Pacific NorthwestIntroductionHealth begins where we live, work, learn and play - long before any clinical intervention is required to treat disease or injury.- Northwest Health FoundationThe concept of the social determinants of health (SDOH) has been widely embraced within the public health community. Research over the past two decades repeatedly demonstrates the relationship between poor health outcomes and socioeconomic factors such as poor housing, unsafe work environments, poor education, social exclusion, poverty, racism, and structural inequity (Krieger, 1994; Marmot & Wilkinson, 1999; Williams, Costa, Odunlami, & Mohammed, 2008; Commission on the Social Determinants of Health, 2008; Centers for Disease Control and Prevention, 2011). Despite this evidence, few community-based health foundations have taken the opportunity to invest in the social determinants of health.Addressing the social determinants of health is a challenge for two reasons. One is that societal conditions have evolved over generations; as a result, problems such as poverty, racism, and social exclusion cannot be mitigated, much less solved, through short-term investments. The second challenge is the long lag time between changes in social determinants and corresponding health outcomes. This delay means that scalable best practices are still largely theoretical (Bramba et al., 2010).BackgroundIn late 2004, Kaiser Permanente Northwest established the Kaiser Permanente Community Fund within the Northwest Health Foundation (NWHF) with a $28 million gift. In 2006, the fund advisors took the bold and strategic step of investing in improvements to the social determinants of health. In order to improve the impact of the fund, key leaders at the NWHF and Kaiser Permanente Northwest made a commitment to continuous learning based on their own experiences and those of community partners. As part of this commitment, NWHF commissioned the Center for Community Health and Evaluation (CCHE), part of Group Health Research Institute in Seattle, Wash., to retrospectively evaluate the first five years of the fund's grantmaking (2005-2009).In this article we present an overview of the Kaiser Permanente Community Fund's SDOH initiative and its theory of change. We then introduce the frameworks and methods we used to conduct our evaluation. In the findings section we summarize the accomplishments of the initiative and grantee success factors. We conclude the article by imparting the lessons learned during and from the evaluation. We believe these lessons will be helpful to other foundations and funders interested in interventions and initiatives focused on social determinants of health.Development of the InitiativeThe fund is based at the Northwest Health Foundation in Portland, Ore. In 2005, the fund invited and funded proposals to advance health equity and promote cultural competency in health care. Although some of the fund's 2005 grantees were already addressing social determinants, the following year, the fund's advisory board and NWHF staffmade a commitment to focus grantmaking on social determinants of health. They believed this refined strategy offered the greatest opportunity to improve community health. A survey of the local philanthropic landscape revealed a significant gap in upstream community health initiatives. The fund focused on determinants as diverse as economic opportunity, public safety, civic engagement, and early education as avenues for long-term health improvements.The fund is governed by an advisory board comprised of six representatives of different constituencies within the Kaiser Permanente system and five representatives from the broader community. Community representatives have worked in a variety of areas, including housing, economic development, public health, and advocacy for social equity. Advisors and NWHF staffjointly develop requests for proposals, outreach strategies, and criteria for selecting proposals that are most likely to achieve sustained community impact. …

Issues in Mutual Fund Revenue Sharing Payments

Revenue sharing payments are mutual fund distribution costs that conflict with continuing shareholder interests by directly reducing fund assets and shareholder returns. The “stated” purpose of revenue sharing payments is to defray broker costs of servicing customer accounts and for marketing and educational support. Revenue sharing payments do this, but more importantly they allow fund advisers to reward high selling brokers of fund shares, and to defray costs. Revenue sharing payments are not separately disclosed in fund expense ratios and for this they have been called the fund industry’s “dirty little secret.” If revenue sharing payments were to be disclosed in fund expense ratios, this would reflect a move from regulatory and fund adviser slights of hand to fee transparency and reality. But, in any case, revenue sharing payments conflict with continuing fund shareholder interests and should be prohibited. Revenue sharing payments include: (1) marketing pool payments, (2) bonus compensation, (3) syndicated distributions (external source), (4) sub-transfer agency fees, (5) networking fees, and (6) “other” revenue sharing payments. In addition, adviser fall-out benefits are agreed broker rebates of so-called “excess” revenue sharing payments to mutual fund advisers. Fall-out benefits motivate fund advisers and fund brokers to make additional revenue sharing payments that benefit both parties, but not shareholders.

Cross Trading and the Cost of Conflicts of Interest of Mutual Fund Advisers

Cross Trading and the Cost of Conflicts of Interest of Mutual Fund Advisers

Mutual Funds and 401(K) Pension Plan Fees, Services, and Performance

Mutual funds are the primary providers of investment management services to 401(k) pension plans. These plans are complex to operate and administer and subject to multiple regulators. Third-party revenue sharing is used to pay some portion of plan service provider costs, other than employer/plan sponsor costs. Sub-transfer agency fees are one type of revenue sharing payments. In providing investment management services to pension plans, mutual fund advisers pay sub-transfer agency fees directly to the plan administrator and service provider. Fund advisers are self-reimbursed by including these payments as management fees in the fund expense ratio charged to plan participant accounts. Employer/plan sponsors create pension plans, select service providers, and determine the investment objectives of plan investments. Plan service provider fees and services include: (1) employer/plan sponsor fees, (2) plan participant account fees, (3) investment management service provider fees, (4) plan administrator and service provider costs, and (5) investment management services provider. The general types of services provided include (1) administrative services, (2) participant services, and (3) regulatory and compliance services. The scenarios under which 401(k) pension plan fees are lower are discussed and specified. Finally, empirical findings concerning how the actions of plan administrators and plan participants affect selection and performance of pension funds and participant mutual fund allocations.

Issues in Mutual Fund Soft-Dollar Trades

Mutual fund use of “soft-dollar trades” has important implications for regulators, fund shareholders, fund advisers, and brokers (broker–dealers). Soft-dollar trades create higher costs and conflicts of interest between fund advisers and their shareholders. This article examines some of the current regulations involving mutual fund soft-dollar trading as well as the resulting costs concluding with suggestions for better disclosure. <b>TOPICS:</b>Mutual fund performance, manager selection, exchanges/markets/clearinghouses

The Financial Crisis and the Response of the United States: Will Dodd Frank Protect Us from the Next Crisis?

In July of 2010 Congress enacted the Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd Frank Act”). The Dodd Frank Act is the primary legislative response in the United States to the financial crisis of 2007-09. It makes wide-ranging and significant changes to a number of aspects of financial services regulation. This article examines the eight most significant initiatives undertaken in the Dodd Frank Act; initiatives which are intended to avoid the next financial crisis, to give regulators the tools to deal with a future crisis when it occurs and to substantially increase the levels of protection provided to U.S. consumers of financial services. The Act creates a new Financial Stability Oversight Council with the broad responsibility to anticipate and to take measures to avoid the next financial crisis. It gives to the Federal Deposit Insurance Corporation the authority to liquidate very large financial services companies in an orderly manner in the event they fail. It creates a new National Insurance Office in the Department of the Treasury to provide limited oversight of our state-regulated insurance industry and, more importantly, to collect information on the risk to the U.S. financial system generated by the failure of the largest insurance companies. It provides for more intensive and effective regulation of credit rating agencies, overseen by a new Office of Credit Ratings at the Securities and Exchange Commission. It imposes registration requirements on hedge fund advisers and provides a process for collecting information on the risks posed to the U.S. financial system by the investment activities of hedge funds. It mandates significant new regulation at the Commodities Futures Trading Commission and the Securities and Exchange Commission over the trading of derivatives, requiring exchange-based trading for some classes of derivatives and for transparency in the trading of customized derivatives not suitable for exchanges. It requires a variety of corporate governance reforms for publicly traded companies, including a “say on pay” (a shareholders’ advisory vote on executive compensation plans), increased disclosures to shareholders, independent board compensation committees and consultants, and board risk committees for large financial services companies. Finally, it creates a major new agency, the Bureau of Consumer Financial Protection, located in the Federal Reserve System with significant powers to protect consumers in their purchases of a broad range of financial products. Each of these eight initiatives undertaken in Dodd Frank is complex and dependent to a significant degree on the promulgation of regulations for its implementation. It remains to be seen if these regulations will reflect the spirit of Dodd Frank’s ambitious and serious approach to avoiding or, at least, to providing the tools to survive the next financial crisis. This article offers a summary and some comments on the Dodd Frank initiatives outlined above. The ultimate effect of the Dodd Frank Act will depend to a large extent upon how it is implemented by U.S. financial regulators.

Cross Trading and the Cost of Conflicts of Interest of Mutual Fund Advisers

Cross Trading and the Cost of Conflicts of Interest of Mutual Fund Advisers

Mutual Fund Soft Dollar Arrangements: Determinants and the Effect on Shareholders

Mutual fund advisers determine the scope of brokerage services, broker participation, and whether to self-produce or outsource brokerage services through soft dollar arrangements. In return for the outsourced research, fund shareholders may expect to benefit from better performance and a reduction in the advisory fee. This study is the first one that (i) uses actual (not estimated) soft dollar fee amounts, and (ii) examines soft dollar arrangements in the context of mutual fund governance. We analyze soft dollar arrangements using a unique survivorship bias-free hand-collected data set of 432 U.S.-based equity funds managed by 129 different advisers. We find that higher soft dollar commissions are associated with lower risk-adjusted performance and higher advisory fees. That is, shareholders’ wealth is adversely affected by the cost of soft dollar arrangements. While we cannot rule out that at least some research paid for with soft dollars is superior, research quality is likely not homogenous, and the cost of obtaining it on average appears to outweigh the benefits. Larger boards are associated with lower advisory fees. At the same time, funds that have boards with higher proportions of members with finance occupations and more highly compensated boards (the variables usually associated with higher board quality) tend to pay higher soft dollar fees. This result may be indicative of the alignment of board members’ interest with those of the fund management.

Primum Non Nocere: The Impact of Dodd-Frank on Silicon Valley

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 in response to the systemic credit crisis of 2008-2009, wisely did not attempt to sweep Silicon Valley venture capital financing activity into its regulatory net. The nature of the investing activities conducted by VC funds were unrelated to the types of financial market activity which gave rise to the credit crisis. Dodd-Frank’s exemption for VC funds from its otherwise universal private fund adviser registration requirement was therefore entirely appropriate.However, SEC implementing regulations under Dodd-Frank contemplated both an affirmative reporting obligation under the Advisers Act on VC funds, and SEC examination authority with respect to VC fund books and records, which the Article argues would impose greater cost and burden on those funds than justified by the nature of their investing activities.As a separate matter, the Dodd-Frank Act mandated that the SEC exclude the value of an individual’s principal place of residence from their net worth for purposes of determining whether the individual qualifies as an “accredited investor.” The Article discusses the implications of this change, arguing that a deleterious impact might perhaps in future be observed with respect to the availability of pre-VC “friends and family” financing for early, seed-stage startups.The Article’s observations and arguments are made on the basis of the Author’s many years of direct experience as a former full equity partner at Silicon Valley’s largest law firm.

Cross Trading and the Cost of Conflicts of Interest of Mutual Fund Advisers

Cross Trading and the Cost of Conflicts of Interest of Mutual Fund Advisers

Second Circuit rules securities fraud claim of mutual fund shareholders relating to affiliated transfer agent arrangements may proceed, but upholds dismissal of breach of fiduciary duty claim

PurposeThe purpose of this paper is to explain a February 2010 US Second Circuit Court decision in Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Management LLC that supported fund investor plaintiffs who alleged that fund advisors accepted undisclosed compensation from a transfer agent to the funds, but affirmed a district court dismissal of a shareholder claim alleging breach of fiduciary duty under Section 36(b) of the Investment Company Act of 1940.Design/methodology/approachThe paper explains the background to the Second Circuit Court decision, including the advisors' hiring of a transfer agent, the advisors' creation of their own shareholder affiliate, the advisors' alleged concealing from shareholders of critical aspects of the new transfer agent affiliate's subcontracting arrangements with original transfer agent, and the earlier District Court decision.FindingsThe Court's opinion emphasized the fiduciary duty and disclosure obligations of investment advisers to mutual funds, noting that CAM, acting through SBFM, owed a “duty of ‘uncompromising fidelity’ and ‘undivided loyalty’ to Funds' shareholders.” The Court agreed with the district court that Section 36(b) does not permit the plaintiffs to seek damages that “inure to their own benefit and not to the Funds'”. As a result, the Court affirmed the District Court's holding that the Section 36(b) claim must be brought derivatively.Practical implicationsThis case is a reminder that when proposing to provide a service “in‐house” a fund adviser should have a solid business rationale for doing so and should engage in a full dialogue with the fund's board regarding the proposal. Failure to disclose material information regarding such an arrangement could be significant in the context of a Section 36(b) claim, as well as a claim under the Securities Act of 1933 or the Securities Exchange Act of 1934.Originality/valueThe paper provides practical guidance from experienced financial services lawyers.

An Evaluation of Health Benefit Modification in Taft–Hartley Health and Welfare Funds: Implications for Encouraging Tobacco-Cessation Coverage

An estimated one fifth of all U.S. adult smokers receive health benefits through insurance plans administered by Taft-Hartley Health and Welfare Funds. Most funds do not offer comprehensive tobacco-cessation services to fund participants despite evidence that doing so would be cost effective and save lives. This paper examines the decision-making processes of Minnesota-based fund trustees and advisors to identify factors that influence decisions about modifications to benefits. Formative data about the process by which funds make health benefit modifications were collected in 2007-2008 from 25 in-depth key informant interviews with fund trustees and a cross-section of fund advisors, including administrators, attorneys, and healthcare business consultants. Analyses were performed using a general inductive approach to identify conceptual themes, employing qualitative data analysis software. The most commonly cited factors influencing trustees' decisions about health plan benefit modifications-including modifications regarding tobacco-cessation benefits-were benefit costs, participants' demand for services, and safeguarding participants' health. Barriers included information gaps, concerns about participants' response, and difficulty projecting benefit utilization and success. Advisors wielded considerable influence in decision-making processes. Trustees relied on a small pool of business, legal, and administrative advisors to provide guidance and recommendations about possible health plan benefit modifications. Providing advisors with evidence-based information and resources about benefit design, cost/return-on-investment (ROI), effectiveness, and promotion may be an effective means to influence funds to provide comprehensive tobacco-cessation benefits.

What Independent Directors Should 'Request' of Mutual Fund Advisers

The background to this study is the failure of mutual fund independent directors to fulfill their obligations as “shareholder watchdogs,” as defined in the Investment Company Act of 1940. Normative transparency of information is fund adviser disclosure proactively “requested” by independent directors to enable their fiduciary roles as “shareholder watchdogs.” U.S. District Judge Feess’s opinion in a mutual fund case of excessive fees provides a candid assessment of independent director performance. He supports the view that directors are likely to “go along” with mutual fund adviser plans and actions. This view suggests directors are unlikely to “request” normative information required to serve the “primary interests” of fund shareholders. The judge’s opinion includes numerous revealing insights on the performance [poor] of independent directors. These revelations and other relevant issues in the opinion provide case-based support for independent directors to “request” fund advisers to provide normative transparency of information for their analysis. To achieve normative transparency of information Independent directors and advisers of major funds known for shareholder stewardship must strongly, vigorously, and proactively work together to gain approval in Congress and/or the SEC. The outlook is not bright, but the goal is worthy of the challenge.

Negotiating mutual fund advisers’ fees: The Supreme Court has spoken

On 30 March 2010 the Supreme Court decided Jones v. Harris Associates L.P. It has unanimously remanded the case to the lower court with directions concerning mutual fund advisers’ fees. The Court rejected the lower court's holding that shareholders should do their due diligence. It held that the funds’ boards of directors should negotiate the advisory fees, pursuant to Section 36(b) of the Investment Company Act, and should collect the information necessary to do so, following a 30-year precedent of the Gartenberg case. The Supreme Court suggested a somewhat broader inquiry by the board of directors. The fees must be the result of negotiation between the board and adviser.

Jones v. Harris Associates L.P.: The Search for Investor Protection Continues...

Mutual fund investors have been and continue to be without representation in the fee negotiation room. This should come as no surprise since a mutual fund is the creation of its adviser. As a result, mutual fund advisers are handsomely rewarded to the point of excess. This article discusses the conflicted nature of the mutual fund structure, traces the development of law directed at remedying the problems faced by investors, and offers a new approach that is tailored to correct the shortcomings of the industry.

Mutual Funds and the New Total Expense Ratio

This article presents the construct of a <i>New</i> Total Expense Ratio built upon the concept of normative transparency of disclosure that presents the reality of adviser/distributor payments to brokers “behind the mutual fund curtain.” These payments are paid indirectly by fund shareholders by way of fund fee payments. Approval of the <i>New</i> Total Expense Ratio should foster significant prohibitions and changes in the types of huge payments made by mutual fund advisers from fund assets to brokers based on or derived from sales of adviser fund shares. <b>TOPICS:</b>Mutual fund performance, manager selection, risk management

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

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