Don't let them snow you in their annual report

Your Funds

Dollars & Sense

January 28, 2001|By CHARLES JAFFE

You are about to get a visit from your fund managers.

They're not coming to your house personally, of course, but it's annual report season and management's state-of-the-fund address should be read as if it were personal correspondence.

The manager is talking to you, the fund owner and boss.

Investors mostly ignore annual reports; they don't listen to what management is saying. But with the market fresh off its first down year since 1994, annual reports should make for some interesting reading this year.

This week and next, this column will examine what to look for in annual reports, starting with management's letter to you.

What you want from a manager's statement is clear, sensible answers.

The letter should be the one part of a fund's communication with you that is not dictated by the marketing department. It should be devoid of spin control.

That's why you must watch out for snow jobs.

"The letter should leave you feeling like you got an accurate picture of the fund," says Geoff Bobroff of Bobroff Consulting, a fund marketing firm in East Greenwich, R.I. "If you see the truth being blurred, you should be concerned." When you read management's letter, look for instances where the firm is trying to separate reality from truth. Here are some clues to what to search for:

"The market ate my returns."

OK, management won't be quite that brazen, but plenty of fund firms will say, "It's all the market's fault." It's not.

Management always bears some responsibility for the numbers the fund produces. If all you get from management are excuses -- rather than some measure of humility coupled with a plan for doing better -- you're not getting the whole story.

All performance talk in relative terms.

The 1999 annual report talked up absolute returns, the number you got from the fund. That's because a 15 percent return looked good, as long as it wasn't compared with most market indexes.

For last year, however, everything will be relative performance. To heck with absolute numbers -- particularly if they show a loss -- when you can say you beat peer funds or indexes.

If management trots out words such as "top-performing" in an asset class that was down, make sure its absolute returns were in line with your expectations for the fund.

It's a challenging market."

Investments are always challenging; they get described that way during hard times.

What this line really means: "We lost 20 percent for you in 2000, and it's entirely possible we'll do it again in 2001."

Too much talk about the Federal Reserve Board cutting interest rates.

The rate reduction has very little to do with the future performance of most funds. That won't stop some managers from talking about this and saying it portends a brighter economy and big things for the fund in the future. That's not all bad, as long as management tells you why the rate cut means good things for your specific fund. Otherwise, it's just blathering.

Not enough talk about November-December performance.

This applies to funds that operate on a fiscal year that ended Oct. 31. If a fund that got blasted at year-end issues a statement that ignores the start of its current fiscal year, it's intentionally trying to give you a blurry picture of what happened, and it's saying nothing about the future.

"It's a stock-picker's market." Duh. It's always a stock-picker's market.

Management should be telling you about its stock picks and what it plans, not telling you the obvious.

Promises, promises.

In the past few years, smart fund managers used shareholder letters as a way to manage expectations, to warn about how difficult it would be to keep returns sky high and to raise the prospect of the inevitable downturn.

Given the market's uncertainty, they should be doing that all the more this year. If they're not, but instead sound full of bluster about what they can deliver in the future, they're trying to sell you on staying with the fund. If you're a satisfied investor, no sales pitch should be necessary.

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

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