(I can't read the WSJ article and rely on Taylor's summary). Everything is relative. Mutual funds are
not the same as everything else you can buy at a brokerage. Mutual funds are
supposed to be
safer than individual investments in individual assets. And they are
supposed to be safer than hedge funds.
Mutual funds are
supposed to have regulatory limitations on the amount and kind of risk they take. That's why the Investment Company Act of 1940, which created the mutual fund as we know it, was passed. According to the Investment Company Institute (ICI) some of the
core principles behind the law include
- transparency
- daily valuation and liquidity
- limits on leverage,
- custody, and
- diversification.
Let's look at liquidity since that's what's under discussion. Taylor quotes the article says saying "The agency aims to prohibit a fund from investing more than 15% of its money in 'illiquid assets.'" This is not some new idea the SEC has come up this. This is their
job. The ICI says:
At least 85 percent of a mutual fund’s portfolio must be invested in liquid securities.
The only thing new is that they are trying to come to grips with recent problems in mutual funds due to formerly liquid assets, notably junk bonds, becoming less liquid than before. As I understand it, they are requiring mutual fund companies to do more and detailed reporting, and are trying to find good ways to measure liquidity.
Since one of the whole points of mutual funds is that they provide daily liquidity to investors, obviously mutual funds themselves must invest in
reasonably liquid issues themselves, or you have a chasm that is too wide for the fund to bridge.
If junk bonds used to be suitable assets for mutual funds to hold, but no longer are, so be it. Perhaps we can't have junk bond mutual funds any more. More likely, we can have relatively conservative junk bond funds like Vanguard's, but not extremely aggressive ones like Third Avenue Credit Focussed.
Rather than rescind fundamental regulations that have been in place for seventy-five years, investors who would like to take greater risks can always invest in hedge funds--which are now allowed to advertise if they want to, and which are allowed to sell to people with a net worth of $1 million if they want to. We should not be turning mutual funds into hedge funds: if people do not have the qualifications to accept the risk of hedge funds, then they do not have the qualifications to accept the risk of hedge funds in mutual funds' clothing.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.