Pick through ad's hype, do your own homework

Your Funds

March 17, 2002|By CHARLES JAFFE

THERE WAS just one thing missing from the New England Patriots' victory over the St. Louis Rams in the Super Bowl: mutual fund advertising.

I'm sure most people were so consumed with the game that they hardly noticed, but for the first time in a few years, not a single fund company highlighted its services during the big game.

Fund advertisers didn't show up for the big game because they have no performance story to sell, and the bear market has beaten the tar out of their ad budgets. It's also tough to sell to a disappointed and nervous audience of investors.

But regardless of the market conditions, it should always be a tough sell. In fact, as a fund investor, one of your jobs is to be able to sift through the hype to pick which funds work for you.

There is absolutely nothing a firm can put into its advertising that should make you rush out and buy a fund, compelling performance numbers included. Every fund purchase you make should start with an evaluation of your needs and your current portfolio, two things the fund groups know nothing about when writing clever ads.

The first thing that should attract you to a fund is need, and only you or your financial adviser can determine which funds meet your investment objectives and diversification needs.

Fund advertising - and with the market showing signs of turning, you can expect it to come roaring back - sells performance, ratings and rankings, management style and emotion.

Here's how those elements of fund ads should factor into your thinking ... or not.

Performance: This is almost always the big selling point for a fund, but it can also be a siren song leading you astray.

Numbers used in ads lack context. You can't see how a fund stacks up against peers or how the entire sector performed. In the late 1990s, many funds that had 15 percent and 20 percent annualized gains looked great, until you realized they were trailing their peers.

Further, performance numbers tell you nothing about how the return was achieved.

Was it a smooth ride or a volatile one? Is the fund diversified or focused? Right place in the market or good management? Numbers are part of a fund's story, but they don't tell you enough of the tale for you to be sold.

Ratings and rankings: No one wants below-average funds. But when a firm says it tops a certain category in the Lipper rankings or that it gets five stars from Morningstar, it's not really a selling point. Lipper's ratings are a pure performance measure, and we've already discussed the need to discount the short-term results and dig deeper.

On rankings, the big question is not stars, but category ratings, which show whether the fund is above or below average compared with similar offerings. Star ratings are heavy on performance. When any fund class heats up, the entire category can wind up with above-average star ratings.

Obviously, not every fund can be above-average.

One more thing about rankings: Morningstar (or any other ratings firm) uses numerical evaluations. They aren't excited when a firm gets five stars, that just happens to be what the computer spits out.

So any firm that puts an exclamation point behind the stars in its ads - as if to shout "FIVE STARS!" - is taking you for a gullible idiot.

Management style: Most ads focus on performance and ratings, but some firms will tell you something about how they manage money, maybe laying out whether they use a team approach or saying how their managers get out and kick the tires and investigate their companies (rather than sitting in ivory towers picking stocks).

Style is a factor in management, but there has never been a study proving that tire-kickers are better than ivory-tower sitters (or vice versa).

There have been studies that show that long-term managers tend to perform better than newcomers (which makes sense, since they'd lose their job if they continually stunk up the joint).

If an ad focuses on the firm's approach without looking at stability and longevity, it misses the key selling points.

Emotion: Ultimately, this is what today's fund ads are selling, the idea that you need help reaching your goals, or that you won't get there without some top-flight fund.

If an ad strikes a nerve with you, terrific. Use it as a springboard to investigate fund companies, examine your portfolio and decide what to do next.

But don't let that emotion steer you toward the company that raised it.

Do your homework.

When it comes to funds, remember that some great firms have never spent a penny on advertising, and some lousy companies have gotten a lot of money largely because they know how to hire a good advertising agency, even if they can't figure out how to hire good fund managers.

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

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