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Michael Stolper, an investment adviser and independent dir

May 5, 1995

Michael Stolper, an investment adviser and independent director of Pasadena Group of Funds, notes ``a fair amount of institutional schizophrenia. Directors are often appointed to boards because they have a previous relationship with a fund adviser. But they are supposed to represent this nameless, faceless group of shareholders.″ He admits finding it hard to reconcile these relationships.

As lead trustee of most of Dean Witter’s 86 mutual funds, Mr. Haire says, ``We earn the compensation we receive.″ He doesn’t worry that Dean Witter’s mutual-fund managers are ``not spectacular.″ Why is he complacent? ``Average mutual-fund performance isn’t something that people complain about,″ he observes.

Some believe, however, that fund directors should aim higher. ``It’s patently obvious that the average mutual fund’s trustees have not gone through a rigorous process to select the best possible manager for that fund or to negotiate the best possible fee arrangements,″ says Richard Lannamann, an executive recruiter at Russell Reynolds Associates Inc.

Don Phillips, publisher of Morningstar Mutual Funds, a Chicago newsletter, says he was taken aback by the advice he got before addressing a conference of fund directors at a posh Washington hotel. ``I was told at least three or four times to keep my remarks simple,″ he says.

Yet an industry trade group defends mutual-fund directors. ``At first blush, perhaps it seems like these people just come around the table four times a year,″ says Paul Stevens, general counsel of the Investment Company Institute in Washington. ``Truth be told, it is an enormously responsible and challenging position.″ Mr. Stevens says mutual-fund directors have much more to do than corporate directors because of an ``extensive laundry list″ of responsibilities prescribed by law.

Directors monitor fund-management contracts, securities pricing, distribution, custodial services and brokerage transactions with affiliated people, among other things. Yet skeptics wonder how directors at large fund groups can keep tabs on dozens or hundreds of funds. One partial explanation: Directors serving on many boards simultaneously deal with a lot of matters, such as customer service, that affect a company’s funds.

One crucial job of directors is to oversee the fees that investors are charged. Although the funds’ advisers and brokers want their fees as high as possible, shareholders benefit from low fees, and directors are paid to look out for them.

But what happens in practice? Stock- and bond-fund annual expenses today are 1.22 percent of fund assets, according to Morningstar, exceeding the 1.14 percent annual expense a decade ago. That increase comes despite the industry’s growth, which should bring economies of scale, and a huge rise in the number of competing funds. At Third Avenue Value Fund this year, for example, independent directors approved a big jump in the management fee, to 90 cents per $100 in assets from 71 cents last year. Shareholders ratified the increase even though Martin J. Whitman, the fund manager, acknowledges it ``raised a bit of a stir.″

Says Morningstar’s Mr. Phillips, an investor in the fund: ``You should see the management fee come down.″ The increase is ``the hardest thing in the world to justify.″

Counters Myron Sheinfeld, a lawyer and independent director of the fund, ``The fee schedule is something that was presented and reviewed, and thought to be reasonable under the circumstances.″

Donald Kendall, the 74-year-old former chief executive of PepsiCo Inc., earned $66,000 last year by serving on the boards of 42 IDS Group mutual funds. Dozens of IDS funds, which are managed by a subsidiary of American Express Co., levy so-called 12b-1 fees that the boards must approve each year. Asked whether the review of these fees, paid annually to the brokers who sold the funds, is laborious, Mr. Kendall urges a reporter, ``Why don’t you talk to Bill Pearce″ (president of the mutual funds)? Asked to explain what a 12b-1 fee is, Mr. Kendall says, ``I think you ought to talk to the guy that runs it.″

Mr. Kendall doesn’t own any IDS fund shares even though he has been a director since 1968, according to a recent proxy statement. ``I’ve obviously owned them in the past,″ he says, adding, ``It’s more important for a director of a corporation to own shares than for a director of a mutual fund.″ He says, ``At a mutual fund, you’ve got great restrictions on buying shares.″ Corporate directors can’t sell when they ``know some bad news is going to be put out. At a mutual fund, you have to be more careful.″

Most fund lawyers disagree, noting that funds are so diversified that their directors run less risk of violating insider-trading rules than corporate directors do. Blaise Pasztory, a fund lawyer, says a fund director is extremely unlikely to ``be disqualified from buying and selling″ shares of that particular fund.

Barry Barbash, who heads the SEC’s investment-management division, says the agency doesn’t have authority to set limits on who can be a director, but he adds that directors should be more knowledgeable. ``Some fund managers,″ he complains, ``have the view that they are the investment-management professionals and don’t want lawyers and other financial experts on the board.″

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