Beware advertisements that promise too much

Your Funds

March 05, 2000|By Charles Jaffe

The Securities and Exchange Commission sent a message to the fund business recently when it announced plans to stiffen its oversight of mutual fund advertising.

That same message should not be lost on individual investors.

By the time regulators ferret out bad ads, investors already have been damaged.

So instead of relying on the SEC to better scrutinize fund advertising, you should do it yourself.

At the Mutual Fund Directors Education Council Conference two weeks ago, SEC Chairman Arthur Levitt announced a special review of fund marketing materials -- including Web sites -- to determine whether portfolio and investment strategies are consistent with advertised promises and disclosed statements.

Reason behind big numbers

To be your own advertising watchdog and have a better chance of determining whether a fund has a hope of delivering on its advertised promises, examine the following:

Numbers are just a part of the story.

You need to find out how eye-popping returns were generated -- what decisions helped the fund generate gains so much bigger than most competitors.

Did the fund benefit from its small size, or did management just make superior stock picks?

Learn enough to be sure you can live with the fund's strategy and that it complements your existing holdings.

A fund's statements

Many funds scream performance to recruit new investors but are more responsible in dealing with existing shareholders.

Shareholders tend to get the realistic spin, if only because semi-annual reports offer more space for detail and forecast.

You can get a company's reports to shareholders -- as well as any newsletters it sends investors -- from its toll-free phone lines or its Web site.

Don't be bashful.

Time period

Some funds hype calendar years, others the 12 months ending, say, last Thursday. If an ad shows strange time periods, look askance at the numbers; management might be playing games.

Key changes

Big returns lure dollars like molasses draws flies.

As a result, funds that become popular tend to see performance drop off, often because the fund now needs more winning ideas to keep the big gains coming.

Examine the fund's cash flow, its total net assets over time, and make a judgment call on whether "too much growth" -- a quintupling in asset size, for instance -- will make repeating past glories particularly difficult.

When Ryan Jacob, for example, left the high-flying Internet fund to start his own investment firm, the fund could still advertise its past triumphs.

That kind of move is both common and legal , but it does raise a question about the fund's ability to sustain its track record.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. His He can be reached by e-mail at or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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