WSJ: Why Don't Fund Firms Publicly Criticize Their Portfolio Companies?
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Wednesday, February 17, 2010

WSJ: Why Don't Fund Firms Publicly Criticize Their Portfolio Companies?

Wall Street Journal Fund Trackreporter Sam Mamudi takes a stab at explaining why fund firms are staying silent on the issue of Wall Street compensation despite being some of the largest shareholders of the banks at the center of the issue.

Fund firms rarely take public stands on management issues, most times preferring to sell their shares rather than enter a public debate if they disagree with management in a portfolio company.

Mamudi picks up on that tendency, observing that MarketWatch (owned by Dow Jones as is the WSJ) asked Pioneer Investments, T. Rowe Price and Lord Abbett & Co. officials for comment on Lazard Ltd's increase in staff compensation to 72 percent of recenue in 2009 from 56 percent in 2008. The increased compensation came in the face of a 95 percent fall in profit, according to the paper.

Not surprisingly, none of the three fund firms would comment on the issue. All three are among Lazard's largest shareholders.

Janus Fund co-manager Dan Riff did discuss the issue on a meta level, explaining that Janus portfolio managers usually choose to talk to management in private rather than discussing the issue publicly or selling the shares. The Janus Fund does not own Lazard shares, according to the article, which may be why they discussed the article with Mamudi.

One source who did comment was Morningstar's director of fund research Russel Kinnel.

"I don't think it's a coincidence that the short-term profit drive of corporate America happened at the same time that mutual funds became the major owners of these companies," Kinnel told Mamudi. Kinnel further attributed fund firms reluctance to pick a public fight with management to a fear that such fights will limit fund managers access to information and potentially cost them investment banking, 401(k) or other business.

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