Commentary: A Mutual Fund That Lets It All Hang Out

Online retailer eToys Inc. opened on Sept. 10 about two points higher than its previous closing price, and Maurice Werdegar, a trader for the Open Fund, sensed an opportunity. Word was out that eToys could be facing a "short squeeze," forcing investors to buy shares to cover those they have borrowed. Werdegar snapped up 800 shares at 45, and eToys finished the day at 53.

The stock rose again on Monday, and Werdegar cashed out at 59 5/8. But he still liked eToys. "Short-covering and e-Christmas hype could send this one higher, and we'll consider reentry on a pullback," Werdegar wrote on his trade blotter. He got his chance on Tuesday, buying 700 shares at just under 57.

What Werdegar did is just what many mutual-fund traders do to make money. What is highly unusual is that every trade the fund makes is posted on its Web site, So are the number of shares, the acquisition price of every stock in the portfolio, real-time changes in prices, and the trade blotter.

The Open Fund and its parent,, are rewriting the book on the how mutual funds interact with their shareholders and the public. The $6 million fund, launched Aug. 31, is up 3.8% in its first two weeks.

ROOM WITH A VIEW. Sure, there is some gimmickry at work. At the Web site, you can peer into the South San Francisco trading room and watch the action--which isn't much. Most institutional investing consists of traders dickering with brokers on the phone. There are message boards at the site that invite discussion on stocks in the fund. But most people invest in funds because they don't have the time, interest, or resources to maintain a portfolio. That may be so, but Donald L. Luskin, chief executive of, argues that the Net has created a new investor, a more engaged individual accustomed to getting information at warp speed.

Most mutual-fund companies, even at their Web sites, deliver portfolio information with all the speed of an oxcart. That's because they do only what the law requires, disseminating their complete portfolio every six months. What's more, the funds have up to 45 days to issue the report.

In recent years, companies have begun to report their funds' 10 largest holdings, either quarterly or monthly with a delay. But some fund groups are resisting giving much more. Putnam Investments Inc. even let Standard & Poor's Corp. pull its "Select" rating from several funds rather than give S&P portfolio updates.

Some companies provide updated portfolios to the fund-raters, but not to their shareholders. Morningstar, Inc. makes Aug. 31 portfolios for John Hancock Funds available to subscribers. Yet Hancock's own site only shows June 30's top 10 holdings.

LOW PRIORITY. Despite the slow disclosure, the issue is not on the Securities & Exchange Commission's agenda. Barry P. Barbash, an attorney at Shearman & Sterling and former director of the SEC's Division of Investment Management, says "technology and market forces will take disclosure much farther than regulators."

Disclosure cuts two ways. Until recently, the $2.5 billion Munder NetNet Fund posted its portfolio daily at its Web site. But the fund management suspected traders were bidding up those stocks, making it more costly for the fund to build a position. The fund switched to month-end reporting, with a 15-day lag. "More information is better as long as it doesn't get in the way of performance," says Paul T. Cook, the fund's manager.

Still, the funds would make a giant leap forward if they adopted even Munder's model, never mind Open Fund's. Of course, the fund industry has become a $6 trillion giant despite its disclosure practices. But that may not work in the future. Cheap online commissions and easy access to information already have bred a generation of investors which may bypass funds altogether. Unless they appeal to Net-savvy customers, mutual funds might discover it's more difficult to find future investors.

Before it's here, it's on the Bloomberg Terminal.