C A P I T A L R E S E A R C H A N D
M A N A G E M E N T C O M P A N Y
333 South Hope Street, Los Angeles, California 90071 · Telephone (213) 486-9345 · Fax (213) 486-9455
February 14, 2003
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
RE: Shareholder Reports and Quarterly Portfolio Disclosure of
Registered Management Investment Companies
File No. S7-51-02
Dear Mr. Katz:
Capital Research and Management Company ("CRMC") is the investment adviser to the 29 open-end investment companies ("mutual funds") in The American Funds Group, with more than $350 billion in assets and over 15 million shareholder accounts. We appreciate the opportunity to comment on the Commission's proposals to improve the periodic disclosure provided by registered management investment companies about their portfolio investments, costs, and past performance.1
We support the Commission's proposal to permit mutual funds to include a summary portfolio schedule of investments in their reports to shareholders, provided that a complete schedule is filed with the Commission and provided to shareholders upon request and without charge. We agree with the Commission that a more concise listing of portfolio securities will enhance shareholder understanding of each fund's primary investment focus. It also will reduce printing and mailing costs.
The proposals would also require funds to include a tabular or graphic presentation of their portfolio holdings in their reports to shareholders. Our own research suggests that most investors find this type of presentation highly effective and meaningful, and thus we support this new requirement.
The proposed amendments would require funds to disclose their complete portfolio schedule on a quarterly basis in filings available on the Commission's Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). We are grateful that the Commission has recognized that "front running" activities may cause harm to shareholders; we strongly support the proposal to allow quarterly filings to be made with a 60-day delay. However, we remain concerned that disclosure of a fund's entire investment portfolio each quarter could harm fund shareholders, especially those of larger funds.2 For this reason, we feel we can support this aspect of the proposals only if additional safeguards are added to impede predatory trading practices. Our specific suggestions are discussed below.
The Commission's proposals would require disclosure in shareholder reports of fund expenses borne by shareholders during the reporting period. We support this requirement, particularly since it avoids the significant costs, burdens and complexities associated with individualized expense disclosures on quarterly account statements. However, we urge the Commission to simplify its approach to expense disclosure, as described below.
Finally, the proposed amendments would require funds to include Management's Discussion of Fund Performance ("MDFP") in their annual reports to shareholders. This is consistent with our practice. Thus, we support the requirement.
I. Improved Disclosure in Shareholder Reports
A. Summary Portfolio Schedule
The Commission has proposed to permit funds to include a summary schedule of investments in their reports to shareholders, while requiring that the complete schedule of investments be made available upon request to investors who have an interest in receiving more detailed information. Funds selecting this option would be required to disclose their 50 largest holdings and any holdings that account for at least one percent of net assets.
The proposals would require that securities be listed in order of descending value. The Commission requested comment on whether it should adopt a different approach (e.g., listing securities by identifiable category). We believe the Commission should allow individual funds to select the most appropriate format for the presentation, in light of the fund's investments. For example, international fund investors are likely to benefit from a presentation where securities are grouped together by country or region, rather than simply listed in descending order of contribution to net assets.
In addition, we believe the Commission should not attempt to prescribe specific categories for these groupings, given the broad range of investment objectives and strategies within our industry. Individual funds should be allowed the freedom to categorize their holdings in the most meaningful way, based on their actual holdings at the close of the period covered by the report.
The Commission's proposals would limit the portfolio holdings to be included in the summary schedule to investments in securities of unaffiliated issuers. We believe the Commission should allow investments in affiliated issuers to be included in the summary schedule because it will help investors focus on a fund's most significant investments. The Commission could require, for example, that such securities be identified by an appropriate symbol or footnote.
We recommend that the Commission eliminate the current requirement that funds identify in their schedule of investments non-income producing equity securities, given the large number of companies that currently do not pay dividends to shareholders. However, we support retention of this requirement in the case of fixed income securities.
Regulation S-X currently permits a fund to exclude from its complete listing of portfolio securities certain securities in an amount not exceeding five percent of the total value of securities of unaffiliated issuers, "provided such securities are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders...or to any exchange, or set forth in any registration statement, application, or annual report or otherwise made available to the public."3
The Commission, in its proposed summary schedule, did not provide for similar treatment of these "miscellaneous securities." It is not clear from the Proposing Release whether this omission was intentional. We occasionally rely on this provision to guard against release of information that could lead to front running. We feel strongly that it should be carried over to the summary schedule in its current form. Funds should not be forced to choose between using the summary schedule and relying on the current exclusion.
With regard to money market funds, we strongly support the Commission's proposed exemption from the requirement to provide a schedule of investments in securities of unaffiliated issuers in their reports to shareholders.
B. Disclosure of Fund Expenses
As noted above, we support the Commission's general approach to additional disclosure of fund expenses. However, we respectfully suggest that the Commission simplify its proposed disclosure by requiring only the cost in dollars of a $10,000 investment in the fund, based on the fund's actual expenses and return. In our view, requiring this actual expense disclosure and disclosure of the cost in dollars of a $10,000 investment in the fund, based on the fund's actual expenses and an assumed return of five percent per year, adds little to the analysis.
A second expense figure will not make expense comparisons across different funds with different investment results any more meaningful. Importantly, there is a significant risk that investors will be confused by presentation of two inconsistent expense figures, with attendant explanations. Funds with multiple share classes will have an even harder time avoiding confusion.
II. Quarterly Filing of Portfolio Holdings
Our view of the quarterly filing requirement is simple: We believe the vast majority of fund shareholders have an interest in understanding their fund's investment results, and the major factors contributing to those results, on a regular basis, and quarterly reporting of major fund holdings is generally consistent with this notion. For this reason, we publish on the American Funds website (www.americanfunds.com) the top ten holdings of each equity fund, and update these listings on a monthly basis, following a delay and excepting securities for which confidentiality is necessary to avoid front running. We also publish on the website each quarter portfolio listings for these funds, again excepting securities for which confidential treatment is necessary and appropriate. We feel this approach addresses the legitimate needs of fund shareholders and their advisers, and provides adequate transparency regarding fund investments and operations.
The Commission's desire to increase the transparency of portfolio holdings information can easily be reconciled with our concern with front running. If the Commission retains the new quarterly portfolio holdings disclosure requirement, it should allow for confidential treatment of holdings in accordance with the standards for confidential treatment of information we report as an institutional investor on Form 13F under the Exchange Act.4 This would allow funds to avoid disclosing an ongoing program of acquisition or disposition at the end of the reporting period and 60 days later, when the portfolio holdings report must be filed with the Commission.
* * * * *
We appreciate the opportunity to comment on these important regulatory proposals. Please feel free to contact either of us if you should have any questions regarding our comments.
/s/Susi M. Silverman
Susi M. Silverman
/s/Stuart R. Strachan
Stuart R. Strachan
|1|| SEC Release Nos. 33-8164; 34-47023; IC-25870 (December 18, 2002), 68 Fed. Reg. 160 (January 2, 2003) ("Proposing Release").
|2|| Front running is a daily concern for most, if not all, institutional investors in today's highly volatile stock and bond markets. Our traders and other investment professionals seek to avoid the adverse impact of disclosure of trading activity by seeking confidentiality wherever possible. For example, confidentiality is among the most important criteria in our selection of brokers to execute trades, and we increasingly use ECNs and other anonymous trading facilities. In our public filings with the Commission, we have requested confidential treatment where we believe public disclosure of securities positions would be harmful to fund shareholders.
|3|| Note 1 to Rule 12-12 of Regulation S-X under the Securities Exchange Act of 1934 (the "Exchange Act").
|4|| Our suggestion that confidential treatment be afforded to quarterly holdings reports consistent with Form 13F reporting requirements is separate from, and in addition to, our proposal (described above) to continue the option to exclude "miscellaneous securities" permitted by note 1 to rule 12-12 of Regulation S-X.