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Mutual Fund News

Buffett faults mutual fund directors

Challenges them to fire management companies over alleged trading abuses

Bloomberg News

Billionaire investor Warren Buffett condemned directors of mutual funds for not firing management companies that allegedly let trading abuses boost managers' fees at the expense of shareholders.

"Can you imagine directors who had been personally defrauded taking such a boys-will-be-boys attitude?" Mr. Buffett, 73, wrote in his annual letter to shareholders of Berkshire Hathaway Inc., his Omaha, Neb.-based investment and insurance company.

The rebuke to mutual fund directors hardens Mr. Buffett's stand of last year, when his letter characterized the process that fund boards use to select management companies as "zombie-like." Since then, the industry has become the target of probes by New York Attorney-General Eliot Spitzer, the U.S. Securities and Exchange Commission and state regulators, leading to civil actions against at least nine fund companies and 26 people.

"Like directors throughout Corporate America, these fiduciaries must now decide whether their job is to work for owners or for managers," Mr. Buffett wrote in the letter he uses each year to critique the state of U.S. business and industry. Since Mr. Spitzer revealed his probe of the $7.4-trillion (U.S.) mutual fund industry in September, Mr. Buffett has seen no directors fire the "offending management companies," he wrote.

Mr. Buffett applauded Mr. Spitzer for uncovering what he deemed a "blatant wrongdoing" that "betrayed the trust of so many millions of shareholders."

The mutual fund probe has focused on companies that allowed favoured investors to engage in market timing -- rapid in-and-out trades that exploit changed prices in a fund's underlying investments. Regulators say the practice often violates policies of funds and can raise costs for long-term investors.

"Hundreds of industry insiders had to know what was going on, yet none publicly said a word," Mr. Buffett wrote. "It took Eliot Spitzer and the whistleblowers who aided him, to initiate a housecleaning. We urge fund directors to continue the job."

Mr. Buffett said shareholders should push fund boards to affirm they have considered other management companies and have agreed on a managers' fee that is comparable to the fee other clients with equivalent funds would have negotiated.

The letter was accompanied by the release of Berkshire's fourth-quarter earnings. Profit doubled to $2.39-billion or $1,553 per class A share, from $1.18-billion or $772 a share a year earlier, while revenue rose 64 per cent to $19.9-billion.

Berkshire, whose subsidiaries include International Dairy Queen Inc. and Geico Corp., had $845-million in investment gains.

Berkshire turned around General Re Corp., the reinsurance unit that had $7.5-billion in underwriting losses from 1998 to 2002, while the recovering U.S. economy lifted profits at businesses such as Acme Brick Co.

© 2007 The Globe and Mail. All rights reserved.

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