In his latest Morningstar's John Rekenthaler likened some mutual funds to a grab bag, an assortments of things that have no real value, with the only difference being that almost all of the mutual fund's surprises are disappointing.

One of those disappointments could be the discovery that a security in a fund is worth less than its official price. Almost immediately, the fund's asset price is marked down and investors who bought the day before end up subsidizing those who bought the day after.

Five mutual funds once run by Morgan Keegan [profile] fall under this description, Rekenthaler pointed out. It is always possible that the fox is guarding the henhouse, with mutual fund companies holding securities priced by their own committee instead of price in the open market. Securities priced this way were 60 percent of Morgan Keegan's portfolio.

Rekenthaler doesn't suggest mutual funds be banned from investing in securities that must be priced via the fair-value method, yet he notes that the companies could be more upfront:

But it would be useful for funds to state, upfront, what percentage of the portfolio is fair valued. The figure could be prominently positioned in the prospectus as a range and in the shareholder report as an exact number. Morningstar and other fund researchers could then treat those funds' volatility statistics with the caution that they deserve.

 

Edited by: Casey Quinlan


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