Ignorance about funds carries a price New SEC rules can help investors educate themselves

ANDREW LECKEY

November 17, 1993|By ANDREW LECKEY | ANDREW LECKEY,Tribune Media Services

What you don't know can hurt you.

Mutual funds continue to capture the imagination and dollars of American investors in this dramatic year that has combined market strength with volatility.

Weak returns from bank investments and an increasing need for baby boomers to put money aside for retirement or children's educations are contributing to this growth.

Yet I recently spoke with the concerned chief executive of a large mutual fund company, who was shaking his head over the incredible amounts of new money being poured into his company's coffers.

"It's amazing, really amazing, and I'm grateful for these millions of dollars," he said. "But there's constant worry about how educated these new investors are and how they'll act in a significant correction."

Educate yourself now so you can roll with the punches in an investment world in which values go down as well as up. Some novices may bolt when things get rough simply because they didn't understand the basic investment and its characteristics in the first place.

"Because mutual funds are complex, a lot of investors have a hard time understanding components of performance and how a fund operates," said Robert Plaze, assistant director of the division of investment management at the Securities and

Exchange Commission. "The investor must know the investment objective and whether it fits his own."

Changes adopted this year by the Securities and Exchange Commission can make you a more informed investor -- so long as you make use of them.

"There are times when I think that if a check for a small amount of money was published in each prospectus, few checks would ever be cashed because few people actually read these documents," said A. Michael Lipper, president of fund-tracker Lipper Analytical Services.

Each mutual fund, starting with documents issued since July 1, must now:

* Disclose in its prospectus the name and background of individuals responsible for day-to-day portfolio management. If there's a change in manager, the fund must "sticker" this fact in the prospectus. However, if decisions are made by committee, it can state that and not identify members.

* Provide in its prospectus or annual report a discussion of factors, strategies and techniques that affected the fund's performance in the most recent fiscal year. It's good to know why the fund did or did not beat the market. Understanding a fund makes you less worried when you see it perform poorly during certain economic and market periods.

* Include a line graph in its prospectus or annual report comparing performance with an appropriate broad-based index. This graph assumes a $10,000 hypothetical investment and reflects fund expenses, sales loads and account fees. The Standard & Poor's 500 index for domestic stocks or Morgan Stanley Capital International indexes for foreign stocks are examples, while, for bonds, there are the Lehman Bros. and Salomon Bros. indexes. To gauge fluctuations, a revised financial table includes annual total returns for 10 years, or the fund's life if it isn't that old.

"Some industry people are still concerned that some funds don't have an index clearly relevant to the kinds of portfolios they manage," said Erick Kanter, vice president with the Investment Company Institute. "On the other hand, other funds were mimicking the S&P 500 and comparing their results to it well before these changes."

New requirements enable investors to cut through the pervasive "we're No. 1" hype of many funds, said Brian Mattes, vice president with Vanguard Group, which had already included most of the information.

John Rekenthaler, editor of the Morningstar Mutual Funds investment advisory, said it had been a problem ascertaining exactly who was managing some portfolios, especially when a ** familiar manager had exited.

Always consider the complete expense and performance picture.

"An investor might set a limit on the amount of ongoing expenses he's willing to pay of, say, no more than 2 percent, and it's also a good idea to buy a 'no-load' [no initial sales charge] fund," added Rekenthaler. "However, if you have a long time horizon and a fund is particularly attractive, be flexible and don't nickel-and-dime yourself over those factors alone."

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