The Still-Sorry State of Bond-Fund Disclosure

It's five years after the crisis, and bond funds still badly need to improve how they tell shareholders what they own

Eric Jacobson 29 September, 2014 | 12:00PM
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On any given day, you might find Morningstar analysts sifting through pages of bond-fund reports and factless "fact sheets" trying to grasp a manager's strategy or what kind of market exposure a fund has. Forget about the shareholder letter providing anything useful. If you're lucky you might learn a little about why the fund performed the way it did during a six-month period that ended two months ago. But detailed explanations of a fund's market bets, or what's driving a manager to make them, are often few and far between.

We've been fortunate to benefit from a long-term industry shift towards providing more detailed data to institutional investors and firms that work with them. The opacity of most regular bond-fund disclosures, however, makes them nearly useless to the average shareholder.

There is a lot of important information in those reports, and there's much more today than there used to be. But if you really want to know how and why a fund is positioned the way it is and what market risks it has, those materials are often woefully inadequate. Delving into the holdings of a bond fund, meanwhile, is orders of magnitude more difficult than doing so for a typical equity fund. The reasons are many, but the most basic is just the availability of data and information. Those are almost universally available on the Internet for exchange-traded stocks, which number in the thousands, a manageable figure for almost any data or research provider. Depending on what you include, that figure could approach 10 million for the number of individual bonds. Unless you've got the analytical and data firepower to sift through and compare a fund's holdings against that entire universe—capabilities possessed by only a very small handful of Wall Street's largest firms—the only place to get useful information is from fund companies themselves.

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Eric Jacobson  is director of fixed-income research with Morningstar.