While good, 81-106 requires too much
Tom Stanley’s recent decision to wind down his top performing Resolute
Growth Fund was made, he said, as a result of the burden and expense of
increasing regulation. Specifically, he cites the disclosure required by National
Instrument 81-106 (Continuous Disclosure) as a key motivator to
abandon the traditional mutual fund structure. While we should shed no tears for
Mr. Stanley, I don’t disagree with his decision.
The specific part of 81-106 with which Mr. Stanley took exception is that
requiring all mutual funds to disclose, each quarter, its 25 largest positions.
Stanley’s Resolute Growth only tends to hold about twenty stocks – all of
them rather illiquid.
To be honest, I’m not sure there’s much value in that added requirement.
As an analyst, I’m always in favour of more details as opposed to less. But, I
can’t say that having the top 25 holdings is going to provide me with greater
insight. And in the case of Stanley (and perhaps other funds in similar
positions), it will drive good funds out of the reach of many investors.
I can think of things I’d rather have than the top 25 each quarter. As it
is, most funds already disclose their top 10 or 15 holdings each month to firms
like Fundata, Globefund, and Morningstar Canada. It’s not required but these
are key data providers that many look to when making investment decisions.
I can think of a couple of things I’d rather have instead of this quarterly
More detailed transactions
Funds are already required to file statements of portfolio transactions every
six months. Some fund companies provide more detail than others but I’d love
more information and more standardization for these reports.
For instance, TD Asset Management provides the best detail. TD provides buy
and sell transactions by each trade per day. As an example, you’ll see that a
fund bought 10,000 shares of a particular stock on June 20. Then, they might
show that more shares of the same stock were bought again later that day at a
different price. It’s the most detailed breakdown I’ve seen.
What most others do is simply provide totals for the reporting period.
Instead of the nice breakdown provided by TD, most simply show that a total of
500,000 shares of XYZ Corp. were purchased – no date and no indication of how
long it took to accumulate the shares. And no way to see how far apart buy and
sell transactions occurred in the same stock.
Sometimes the most revealing of details found in the Statement of Portfolio
Transactions are the short term trades that are so quick they don’t show up on
the portfolio statements at a point in time.
Ascertaining the ascertainable
NI 81-106 made my job a little easier in a couple of other ways. For one, it
requires funds to disclose what is called a “Trading
Expense Ratio” – which is the total of all explicit trading
costs as a percentage of average net assets (just like the MER). Adding the two
together gives a more accurate ‘all-in’ expense ratio for funds. The
information was always available but now it’s much more user-friendly. But
this was not a ‘must have’ for me since I could always figure it out. Most
of those investors keen enough to want this information usually know where to
find the details.
More significantly, I look forward to see added disclosures around soft
dollars, which is the practice of paying higher brokerage fees to receive
services in addition to simple trade execution. This is how many portfolio
managers pay for street research. Since many managers boast of how little street
research they rely on; breaking out the soft dollars out of total brokerage fees
will be revealing. But they’ll only be required to do so to the extent that
the soft dollar portion is “ascertainable”. That last part worries me but I’m
still anxious to see how that will look.
Mutual funds are, by and large, heavily regulated investments that offer
quite good disclosure. If the brain-trust at Canada’s securities regulators
wants more disclosure, their focus should be on things like alternative
investments like hedge funds not on added disclosure from an already heavily
regulated class of investment. Not that more transparency isn’t important –
But the muddier class of alternative investments has lots of catching up to
do when it comes to transparency. And when increasingly complex investments are
penetrating distribution channels aimed at retail investors, this is where the
focus should be – instead of scaring some of our best boutique fund companies
away from the retail investors that need them most.
Dan Hallett, CFA, CFP is the President of
Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as
Investment Counsel in Ontario and provides independent investment research to
financial advisors. He can be reached at