In the great debate over how much information mutual funds should disclose about the stocks they own, Firsthand Capital Management Inc. has been a model of openness.
The $7.5 billion firm, which manages six funds of various high-tech flavors in San Jose, made a practice of reporting the funds’ holdings monthly on its Web site with a 30-day delay. That’s more disclosure than you get from most other fund firms and much more than the legal minimum of two reports a year.
This policy served nicely to buttress Firsthand’s New Age image under Chief Executive Kevin Landis. The firm’s $4 billion Firsthand Technology Value Fund ranks No. 1 among all 6,659 stock funds tracked by Bloomberg over the last five years, with an average annual return of 53 percent.
In 2000, en route to an impressive 35 percent gain year-to-date, the fund has taken some big swings along with the dramatic ups and downs of computer, telecommunications and other “technology” stocks.
Remember the early spring tech wreck? Firsthand Technology Value fell 39 percent in less than three weeks, from March 27 to April 14.
When you’re riding a fast-moving vehicle like that, it can be reassuring to be able to see what the people behind the wheel are doing.
So it might have raised a few eyebrows when Firsthand changed its disclosure policy this summer, stretching the reporting lag out to two months while continuing to announce each fund’s 10 largest holdings with a one-month delay.
But no storm of protest has erupted, perhaps because Firsthand published one of the clearest arguments I’ve seen for lowering the shades a bit.
Rapid growth has left Firsthand with a much bigger pot to manage, says Jennifer Hayden, the firm’s director of trading, in a newsletter to shareholders.
“It can now take several weeks to buy enough shares of a company’s stock to make up a meaningful position in a fund,” she said. “We are working to ensure that our shareholders get favorable prices on the stocks we’re buying. By publishing the holdings report on a two-month delay, we reduce the risk that others will copy our strategy, and drive up the price before we have acquired our desired position.”
Some fund critics pooh-pooh such reasoning as a song and dance to justify unwarranted secrecy. Internet upstarts Stockjungle.com and Metamarkets.com have sought to capitalize on funds’ lack of candor by offering “naked” funds that disclose all their trades instantly on the Web.
If you look closely, though, even these fund managers acknowledge that the threat is real of “front-running” by investors eavesdropping on what a fund is buying and selling.
This is from the “Main Risks” section of the prospectus for StockJungle’s funds: “Since the adviser intends to post updates of each fund’s holdings and completed trading activity in real time, to the extent practicable, there is a risk that certain investors may use such information to the detriment of the funds.”
Managers at the $300 billion Janus Capital Corp. in Denver, which runs the fastest-growing fund group of all in recent years, say they see evidence all the time of attempts to “front-run” their investment moves. “Clearly there is an effort to do so,” David Decker, who manages three Janus funds, said at a conference of investment advisers in Denver this week. “There are chat rooms all over the place.”
Does this justify a policy of none-of-your-business secrecy at any fund? Absolutely not. If you’re dissatisfied with the information available from a fund, you’re well advised to tell the fund firm so. Pressure from the public goes a long way to prompt many funds to report more frequently on where they put the shareholders’ money.
But it also makes sense not to push this issue too far. Investors pay annual fees to get professional management. If you don’t think this adds any value, maybe you belong in an index fund. If you do think it adds value, then it’s logical to place a certain amount of trust in the manager’s discretion.
Said Hayden at Firsthand, “We’re not paid to share our ideas with the rest of the market.”
Chet Currier is a columnist for Bloomberg News.
