Proposed rules on matching names to style fall short

Mutual funds

March 16, 1997|By Jerry Morgan | Jerry Morgan,NEWSDAY

Fidelity Magellan Dreyfus Third Century Putnam Voyager. These are three mutual funds whose names don't give you a clue as to what they invest in.

That fact would make them exempt from proposed federal regulations that would require funds to have at least 80 percent of their assets in securities that match the name of the fund, instead of the 65 percent now required. If that sounds complicated, and it sometimes may be, the intention is to ensure that the ABC Japan Fund fund would have 80 percent of its assets invested in Japan, instead of 65 percent.

The point is to prevent investors from being misled by fund names, said the Securities and Exchange Commission, which is proposing the rule as part of a package of new disclosure rules for mutual funds. Those are the same proposals that include approving a simpler "short-form" prospectus to describe funds. It could be six months or so before the rules are approved and in force.

"You didn't need this 20 years ago when the investors in mutual funds were more sophisticated," said Glenn Parker, publisher of Mutual Fund Magazine. "But now you have a lot of unsophisticated investors in the market and everyone benefits if we bend over backward to have even more understandable levels of disclosures."

But the problem with the rule is that it excludes most mutual funds, such as those with nondescript names and those with investment strategy names like value, growth, growth and income, equity income, balance and global.

Those terms can have more than one meaning, an SEC official said, because the investment styles that they connote can be interpreted differently by different managers. A small company fund in his country might be a large company in an international context. And no one seems to be sure what a midcap fund is.

"They are names that have to be considered in context" of their prospectuses, the SEC official said. "The test is whether a reasonable person would be misled by the name given a fund." Country and regional funds -- like Europe or Pacific Rim funds -- have names that suggest the kind of securities that should be in the fund, the official said.

A. Michael Lipper, who heads the Lipper Analytical Services Inc. fund-tracking firm, said companies may decide to make fund names even less descriptive. Kurt Brouwer, partner in a San Francisco fund-consulting firm, said: "In the past, it seems that funds were named by the marketing department. So now we might see fund names like Columbus and Stanley and Livingstone, which don't tell you anything," but let the fund invest in anything.

In fact, the SEC specifically states in its proposal: "An investment company seeking maximum flexibility with respect to its investments would be free to select a name that does not connote a particular investment emphasis."

"That's not the idea, not the way to look at it," said Stephen Canter, chief investment officer for Dreyfus Inc. "We think prospective shareholders need to be better assured that the fund name gives them an idea of what they are really getting and the 80 percent rule is a step in that direction."

But many fund executives agreed with Dudley Ladd, managing director of Scudder, Stevens & Clark, who said that fund names now are so generic "that they are like book titles. The cover doesn't tell you anything, so you have to look at the fly leaf. So the investor is going to have to look at the prospectus to understand what they are getting and the potential risk."

Many experts are especially worried about the impact on supposedly more staid bond funds.

"This is only a first step," Parker said. "When a professional considers investments in a government bond fund, that can include World Bank bond. But a government bond fund means something else to the first-time investor buying for his 401(k) account who thinks a government bond fund is going to be 100 percent pure Treasuries."

Don Phillips, president of Morningstar Inc., the fund-ratings firm, said that while 80 percent may be OK for some stock funds, "It is still too low for government bond funds like Treasury funds or insured municipal bond funds, which should be closer to 100 percent. Do you want a government bond fund with 80 percent in Treasuries and 19.9 percent in junk bonds?"

Lipper agreed, saying that government bond funds could use derivatives of those bonds, which can be very risky, and meet the standards.

With stock funds, there are also some outs for fund companies. The proposed rules, for example, say that a country or regional fund, like the ABC Japan Fund, would have to invest 80 percent of its money in companies in that country, or securities issued in that country or, securities of companies in other countries that do half their business with firms in the name country.

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