A fund is more fun when the rules are in plain English

Mutual funds

September 29, 1996|By NEWSDAY

If you want to know what risks you run in your mutual funds, but you can't translate the legalese and securities-industry jargon in your prospectus, you might want to read one of John Hancock's new prospectuses. Even if you are not buying one of their funds.

They'll tell you what risks you are taking. Boy, will they tell you.

In one of the more startlingly and refreshing disclosures, John Hancock's new-form, simplified, multifund, plain-English prospectuses list 15 or 16 different kinds of risk, depending on the type of funds; define them clearly; then name and explain the various securities in the funds, and which risks they engender.

They top it off with a simple chart that tells you how much of each risk each fund can take, and compares the funds.

"We found that when we changed the prospectus from the old form, we ended up using the word 'risk' more," said Zeldy Lyman, vice president and director of retail marketing for Hancock Funds.

Don't be scared off by all the risks. You've been taking them all along, though it may not have been clear from the prospectus you have. Now you just have a better idea of what they are.

The prospectuses are broken down by fund type: growth, income, international/global, and growth and income.

Each prospectus lists six to eight funds and each fund gets two pages that explain the funds' goals, risk factors, securities and management. There is a breakdown of expenses and financial highlights, including a bar graph to show the volatility of a fund over time.

Is all that going to make John Hancock's funds perform better for you? Probably not. But the company has performed admirably for all fund buyers, and perhaps did the industry a service by giving it a new standard, and giving investors something besides dollars with which to measure service and performance of their fund companies.

"They came in early in the process and told us what they wanted to do," said Heidi Stam, associate director of the Securities and Exchange Commission's division of investment management, which oversee mutual funds.

Stam said the effort was in line with the SEC's desire to provide clearer information.

At the agency's request, eight fund companies have created two-page profile prospectuses that provide short, clear, essential information about their funds. The SEC is evaluating those to see if they can serve as alternatives or adjuncts to the regular prospectus. A decision is expected later this year.

"The prospectus is basically a liability document, so they were written by lawyers worried about being sued," she said.

And, while certain information has to be in the prospectus, writing it in plain English is not forbidden, despite evidence to the contrary in the average prospectus. Clarity is encouraged, and Stam said most of the direct-marketed mutual fund companies, like Fidelity, Janus and Vanguard, have upgraded their prospectuses to make them more intelligible to investors.

But Hancock's funds are broker-sold, sometimes to customers who buy the funds over the phone and don't see the prospectus until after they have bought. Lyman said she expects that the new form will encourage brokers to show it to customers in their office.

"These can help the customer define what kind of funds they really want by spelling out the differences clearly," she said.

With several funds in the same book, it gives the brokers a chance to sell another fund that might catch an investor's eye. Larger type, color and graphics also help make it easier to understand.

"While there is slightly less information, it is more easily discernible. We really didn't sacrifice anything," Lyman said.

Vanguard has gone the other way. Its plain-talk prospectuses are written in plain English, too, but they are somewhat longer than the old prospectuses. They are also different.

"They are more educational," Stam said, "and easier to read." Stam said they also contain a lot of personal finance information, which is allowed, but rarely seen, in a prospectus. "Some people may not want to read all the way through them," she said.

Vanguard's single-fund prospectuses may be a couple of pages longer than their old ones, said spokesman Brian Mattes, but writing about complicated issues in simple language often takes more words. The documents have good graphics, including red flags that indicate risks. Most pages contain explanations in the margins that are really personal finance information on investing.

While both companies spell out risk, they sometimes do it differently. For example, Hancock defines management risk this way: "The risk that a strategy used by a fund's management may fail to produce the intended result. Common to all funds."

Vanguard is less polite: "The fund is subject to manager risk, which is the possibility that one or more of the fund's investment advisers may do a poor job of selecting stocks."

Both are right, though Vanguard's may be a little more soul-satisfying.

There is another difference. Vanguard's bar chart on fund volatility lists performance quarterly, not annually, and it is matched against an index such as the Standard & Poor's 500. That way, investors can find out not only how volatile a fund was and when, but how that compared with the market.

Hancock's is simply a bar graph on the fund's performance, without an index. There is no benchmark, said Hancock spokesman William Benintende, because the SEC does not mandate such comparisons and because different funds might use different indexes, which could be confusing.

Hancock's shorter-form prospectus will not eliminate or affect the SEC's plan for the new two-page profile prospectus, Stam said. The SEC will probably begin the process of approving it later this year, with final approval sometime early next year.

Pub Date: 9/29/96

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