A trio of MarketWatch articles lament a more frequent disclosure of mutual fund holdings to select institutional clients and business affiliates than to individual shareholders.

The first article states that

First and foremost, as a shareholder, you should recognize that a fund’s trading record is your intellectual property.

As a result, you most likely believe that the funds you own report their holdings—which easily can be reverse engineered to show transaction trends—every quarter, as required for nearly a decade now by the Securities and Exchange Commission. But many funds report their holdings more frequently than that, often giving their details—with active investment themes redacted—to data firms like Morningstar and Lipper on a monthly basis. The purported benefit to more-regular disclosures is that it helps research firms evaluate and categorize funds, which is good for shareholders.

The funds also typically give those updated portfolios to their top clients, pension funds and institutional money managers.

The problem is that data collecting firms resell this information

In describing a product called “full holdings data for institutional investors,” for example, Morningstar documents say the research “provides the most up-to-date portfolios available and makes waiting for SEC filings from EDGAR [the commission’s online document depository] unnecessary.”

although the second article indicates that this particular product has received little interest from hedge funds. While there is no evidence of “front running” individual fund trades based on that information, knowledge of collective trends in funds is apparently valuable:

In short, if you can tell where managers, on the aggregate, are going, you can ride the crest of the waves they create.

The second article gives an example of American Funds having recently broadened the scope of additional disclosures:

Under the disclosure rules, the firm releases its portfolio quarterly, but then makes more frequent and regular disclosures to the fund’s “custodian, outside counsel, auditor, financial printers, proxy voting service providers, pricing information vendors, co-litigants (such as in connection with a bankruptcy proceeding related to a fund holding) and certain other third parties … each of which requires portfolio holdings information for legitimate business and fund oversight purposes.”

More than half of all mutual funds disclose their holdings more frequently than required by the SEC. (To be precise, at a minimum the disclosure has to be made within 60 days from the end of the first and third quarter in the fiscal year of a fund.) In fairness, some funds publicly post such information on their websites, which also benefits individual investors. On the other hand, firms like AthenaInvest™ mine funds’ data to run a family of Global Tactical ETFs.

The third article realizes that allowing funds to only make quarterly disclosures or forcing them to make monthly disclosures is not practical. Hence, a compromise solution:

If funds exercise the option to disclose their holdings more often than required, they should be required to give that extra information candy to everyone, or to no one at all.

Any such regulatory change, if undertaken at all, will undoubtedly take time. Meanwhile, Alpholio™ can help level the playing field for underprivileged investors.

Even a more frequent (monthly) disclosure of holdings suffers from a number of problems, which we outlined in one of the previous posts. This is especially true for funds with high turnover ratios, in which portfolio composition changes rapidly. While not showing individual securities, the Alpholio™ analysis demonstrates an effective exposure of each fund to major investment factors modeled by exchange-traded products (ETPs).

The analysis is updated monthly with a significantly shorter lag than that of the regulatory disclosure. The results of the analysis are much more comprehensible than a long listing of individual holdings. They are also less susceptible to portfolio manipulation at the end of the reporting period.

Finally, Alpholio™ also helps investors to easily navigate the actual regulatory disclosures of fund holdings published on EDGAR. To access this information, all a subscriber has to do is to select the fund by its ticker or name, click View Filings, and click Quarterly Schedule of Portfolio Holdings. For convenience, the list of all N-Q filings is arranged in reverse chronological order.

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