When it comes to mutual fund reporting, transparency is the name of the game.

Given the current regulatory landscape brought on by the upheaval at some of the nation's biggest fund shops, it is now more crucial than ever for companies to communicate the value of their funds. In recent months, Big Four accounting firm Price-waterhouseCoopers has emerged as a voice of leadership on how funds can restore investor confidence and convey a clearer picture of their businesses.

In what the firm has dubbed a "thought leadership piece" on fund reporting, it outlines a four-pronged approach for presenting information, one that includes the assessment, monitoring and communication of a fund's strategy, capabilities and investment performance.

"The real or potential loss of investor confidence underscores an urgent need for the entire fund industry to examine its existing practices and to consider the adequacy of current disclosure," the 20-page report said.

The paper's position was forged through a series of ongoing discussions with PwC clients, fund industry leaders, regulators and PwC employees around the world. To gain additional insight, the company polled fund executives across 40 fund families in Asia, Australia, Europe and North America to determine their views on transparency in fund reporting. Nearly 90% of the respondents agreed that the industry should do more to provide transparency to investors.

While it stated that disclosure is a key element of transparency, the paper made the distinction that the two concepts are not synonymous. PwC defines transparency as a holistic message that provides a clear picture of what a fund manager hopes to achieve for investors and what is being done to meet those goals.

"We do not believe that piecemeal increases in disclosures, addressing individual issues separately, is the solution to providing investors with the information they need from those managing their money. To be relevant, information and results should be presented in a way that demonstrates the impact of events and activities on a fund's rate of return," the report said. In other words, merely disclosing data without explanation or guidance does not constitute transparency.

The framework for transparent reporting is broken down into the following categories: market outlook, value-creating activities, investor protections and financial results. It is not, however, an all-inclusive step-by-step "how-to" of sorts. Rather, it serves as a baseline for discussions about how to present vital information using a holistic approach.

The first leg of the stool focuses on management's outlook for the markets and how it affects the fund's investment strategy. This is an area PwC sees plenty of room for improvement in that most fund managers generally do not communicate their market outlook well to investors, despite using it internally as a tool to guide their investment strategy.

"If people can understand what you consider important drivers of the market and how you're going to use them to choose your investments, it helps build the trust, which is what both parties really need right now," said Allen Goldstein, national director of PwC's investment management industry group.

For example, some firms offer their opinions on economic indicators such as industrial production, retail sales, employment, capital spending, currency markets and world events. PwC believes that too much emphasis has been placed on reporting historical information and not enough time has been devoted to sharing management's perspective for the future. The firm noted that investors should not be forced to seek this information from outside analysts, economic forecasters and the media. "If we expect investors to have realistic expectations, fund managers must provide and take ownership of market outlook information," the report said.

The next leg of the stool is called "value-creating activities," which encompasses a top-down discussion by fund management about available resources and how they are tapped to create value for the fund. For example, if a fund uses soft dollars to acquire outside research, it should discuss how that adds value for investors, what the potential conflicts are and how they are addressed, the report said. Another issue under this category that needs clarification is the comparison between actively managed funds and index funds. Active portfolio management has drawn fire from critics for not matching or surpassing the performance of market indices, and funds should illustrate to investors how active management adds value.

The third leg centers on mitigating risk through investor protection measures. Given the scope of the mutual fund trading scandal, a prudent discussion of market timing and what can be done to prevent such abusive practices is in order. Another vital issue is the makeup of the boardroom and its independence from the advisor. Specific compliance controls also factor into the equation.

"A frank discussion [that is] not boilerplate about the principal risk factors and various protections in place to mitigate them should be [offered to] investors to differentiate among funds across asset classes," the report noted.

Lastly, PwC urges funds to explain fund performance in terms of drivers of the rate of return and fees and expenses such as brokerage commissions. Investors need to know the impact these transaction costs have on their returns so that they can better analyze the fund's actual performance on an annual basis from one fund to another.

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