National instrument 81-106: Investment Fund Continuous Disclosure has been in force since June 2005. Its purpose is to protect investors by better informing them on an ongoing basis about the funds they own. This relatively new disclosure rule introduced new periodic filings, a rejigging of some existing disclosures and the elimination of others. Ironically, the result is more disclosure but decreased transparency.

Although funds are required to disclose more information than ever before — for example, top 25 holdings each quarter, trading expense ratio, soft dollars, management discussion and analysis, etc. — they no longer have to release statements of portfolio transactions. Previously, an investor could obtain a fund’s SPT upon request (or by visiting www.-sedar.com). The SPT became history when the new disclosure rule received ministerial approval.

Why do I care about the SPT? Next to the prospectus, I consider it the most useful investment fund disclosure because it gives the reader great insight into how a fund is managed. Here’s an example of how an SPT helped me.

A few years ago, I downloaded a Canadian equity fund’s SPT as part of my research process. In the media and in marketing materials, the fund manager said he sought companies with 10% annual earnings growth and bought shares at prices of less than 30 times earnings. But this fund’s SPT listed numerous trades in the shares of Nortel Networks Corp., which stood out for lacking the very attributes preferred by the manager. He traded in and out of Nortel faster than Britney Spears changes cell-phone numbers. For example, the manager bought 3.9 million shares below $8.50 a share in early 2004. The day after the last of those 3.9 million shares were sold, the manager began a buying spree in which he picked up 4.3 million shares north of $10 a share. Nortel was again becoming an index heavyweight at the time.

The erratic trading in Nortel hurt this fund’s performance. But, without the SPT, I’d have never known to ask this manager why he swiftly dumped Nortel at less than $8.50 and then, so shortly thereafter, backed up the truck for more shares at prices above $10. (His answer, by the way, had to do with “minimizing tracking error.” The fund’s marketing brochure missed that part.)

The SPT’s main value, then, is the list of questions it triggers and the insight that results from such discussions. Yet this valuable document was sacrificed for largely superficial information that does not better inform or protect inves-tors as far as I can tell.

Some may call my complaint pointless, as there were few previous requests for SPTs. Today’s disclosure rule explicitly requires fund companies to maintain records of all securities trades for each of their funds. But the rule doesn’t mandate public disclosure of such trades. In fact, I’ve recently requested trading reports and have been told that such disclosure now breaches internal policies at many companies. However, as fund companies are required, by law, to maintain detailed trading records, this information should be made available to requesting analysts, advisors and investors.

Without access to the SPT, I’m not sure anyone would notice if a fund manager trades outside of his or her investment policy. If these trades don’t pose a conflict of interest, the investment review committee won’t have to be consulted.

Don’t think this happens at mainstream firms? My earlier example is for a fund with more than $1 billion in assets sponsored by one of the 10 largest fund companies. It’s ironic that this disclosure rule provides inferior protection at increased expense to the very investors it aims to protect. IE



Dan Hallett, CFA, CFP, is president of Dan Hallett & Associates Inc. of Windsor, Ont., which provides a list of recommended mutual funds and investment research to financial advisors.