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Shhh. You may own an Enron
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February 15, 2002: 4:08 p.m. ET
Fund disclosure rules have enough loopholes that you might not realize you own a troubled stock.
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - Anyone reading the headlines lately has got to wonder how the big guns on Wall Street blew it with these stocks.
Enron, Tyco, K-Mart and Global Crossing -- all mired in accounting irregularities, bankruptcies or credit downgrades. All taking a dive.
But you might own these stocks too -- you just might not know it. In fact, mutual fund disclosure rules have enough loopholes that you will only know for sure what your fund owns on two days during the year. And there could be problem stocks in your fund's portfolio that you'll never find out about.
"It's a hole you could drive a truck through," said Russ Kinnel, an analyst at Chicago fund-tracker Morningstar. "Investors can be kept in the dark."
What you don't know can hurt you
The Securities and Exchange Commission requires mutual funds to report all of their holdings every six months. Some funds report on June 30 and Dec. 31; while others report on April 30 and Oct. 31.
But if they owned a stock at any other time they don't have to mention it in their filings. And they may take up to two months to file the paperwork with the SEC. So if a fund files its holdings as of Dec. 31, you'll find out about it in February. But then you're stuck with the same dated data months later. In June, you'll still be looking at their lineup from six months ago -- a lifetime on Wall Street.
Fund families and other big institutional investors must also file with the SEC if they buy or sell big stakes in stocks. For example, they must report to the SEC if they buy or sell enough of a stock that it represents 5 percent or more of the outstanding shares.
A heated debate about the rules
Critics say the system allows funds an easy way to do "window dressing," before the end of a reporting period, meaning they can keep controversial stocks off their books in order to look better to shareholders.
"You'll have window dressing to the max with respect to stocks like Global crossing, Enron, Tyco and K-Mart," said Mercer Bullard, a former SEC lawyer who founded Fund Democracy to provide information to fund shareholders and serve as an advocate for shareholder rights. Bullard left the SEC as an assistant chief counsel so he could advocate for reform on issues like fund disclosure.
SEC filings show that many of the biggest fund operations have owned Enron, Tyco, K-Mart and Global Crossing. Fidelity and Putnam declined to talk about the issue. Efforts were unsuccessful to reach someone for comment at other fund families with a track record in these stocks -- including John Hancock funds, Seligman funds, Munder funds, Davis funds and Dodge & Cox funds.
A glimpse inside a fund
But the SEC filings do provide a small window into what the big funds -- some which are staples in 401(k)s -- are doing.
For example, fund giant Janus recently reported that it cut its large stake in AOL Time Warner. Janus had been the largest shareholder of AOL Time Warner, parent of CNN/Money. Recent filings show that Janus was the largest shareholder of Tyco as of Dec. 31, and the largest Enron shareholder as of Sept. 30. (For more on the story, see "Janus cut AOL stake in 4Q.")
Shelly Peterson, a Janus spokeswoman, said the company sold all of its Enron shares by mid-November, when the stock was trading at less than $10 a share. Janus declined comment on Tyco.
"We began purchasing Enron in January 1999, and our position peaked in March 2000," Peterson said. "We saw a lot of appreciation early on, and that offset declines in the stock. We've let people know that our investment in Enron did not have a material effect on the firm's performance."
(Click here to read more about Janus's stake in Enron in CNN/Money's "Shock Therapy for Janus.")
Fund newsletters are another source of information for shareholders who can translate the gobbledygook in SEC filings.
For example, Jim Lowell, editor of the newsletter Fidelity Investor, said Fidelity recently slashed its holding in K-Mart. K-Mart had represented almost 10 percent of assets at Fidelity parent FMR Co. as of Jan. 31. The company recently slashed the position to 1.3 percent. At the same time, FMR Co. upped its stake in United Airlines from 0.7 percent to 10.8 percent.
Enron was a lightly-held stock at Fidelity, but Fidelity Magellan owned a weighting equal to the S&P 500, Lowell said. "It wasn't a glam stock over at Fidelity by any means," he said.
But Tyco is the No. 4 holding in Magellan as of Dec.31, according to Fidelity. The company releases the top ten holdings in its funds four times a year. (Many fund companies voluntarily release top holdings quarterly, or even monthly, the ICI said.)
Magellan is down 4.15 percent year-to-date as of Thursday, compared with a loss of 2.65 percent for the S&P 500. But Lowell said Tyco isn't the only stock hurting the fund. Citigroup, GE, and Microsoft are all suffering.
"With Magellan's performance, it's isn't just a tale of Tyco's woe. It's a market still struggling to get up," Lowell said. 
* Disclaimer
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