How to read news release of a `top!' fund

Your Funds

Your Money

October 24, 2004|By CHARLES JAFFE

WHENEVER A mutual fund company makes an announcement designed to build the public's excitement and interest, investors should start looking for the answer to one simple question: "What's the big deal?"

Generally, there is barely a small deal. As long-term investment vehicles, funds don't generate much must-know-it-today news, which is why shareholders need to be able to discern the difference between real news and lame self-promotion.

To see the latter, look no further than a news release issued recently by the Preferred International Value Fund. The Preferred funds are run by Caterpillar Investment Management, a subsidiary of famous heavy-equipment manufacturer Caterpillar Inc.

That heritage shows because the news release shovels it deep.

"The Preferred International Value Fund, selected as one of the top 100 mutual funds by Money magazine for the third year in a row, is closing to investors at the end of this month. That leaves a small window for investors to buy shares in this successful fund. ...

"Average annual total return for the one year ended June 30, 2004 was an impressive 35.14 percent! The fund outperformed its benchmarks for the same 12-month period: total return was 29.36 percent for the Lipper International Fund Index, and 32.85 percent for the MSCI EAFE Index."

There are telltale signs of trouble there, outside of the blatant salesmanship in what should be a straight news item.

Funds stop taking new accounts all the time, but the very worst type of closing is one made with a lot of advance warning and hype. The fund business is rife with tales of hot funds that shuttered trying to maintain performance, but which were flooded by cash in the closing period and never were the same again.

Preferred - whose officials did not return my calls in response to their press release - didn't name the specific closing date in its release, but a few weeks time is enough to generate some "limited time only" sales.

Investment managers note that two key reasons to close a fund are to limit its size and to keep cash fluctuations reasonable, ostensibly to protect the interests of current shareholders.

The best kind of closing, therefore, is one that happens immediately, with the company making its announcement at the same time it restricts in-flows.

(Some firms suggest that they use the "slow closing" to placate financial advisers who might want to move clients' money around. That's a horrible reason to stay open, as it puts the interests of current shareholders behind the fund firm's desire to keep advisers happy.)

Preferred International Value is a large-cap foreign fund with under $600 million in assets, hardly bloated for its investment category. By comparison, Fidelity Diversified International recently announced plans to close Monday (another slow closing, but the news was straightforward and never encouraged investors to rush the gates), but it has nearly $20 billion in assets.

Presumably, Preferred managers have a reason for the closing, but didn't think it important enough to share. Because they went to the trouble of issuing a news release, all we know for sure is that they hope people jump through that "small window."

The most recent study done on funds that close to new investors was completed in 1999 by Morningstar Inc., and it showed that shuttered funds tend to cool off once the new cash stops flowing. While the study is out of date, empirical evidence suggests the conclusions still stand up, if only because hot funds are the ones the close, and no fund stays hot forever, regardless of cash flows.

Preferred's announcement, however, commits two other sins.

One is the exclamation point after the performance number.

Returns are a statement of fact, a reflection of the fund's effort. So is a star rating or a Lipper Leaders grade, which are statistical measures and given without emotion.

A fund company which puts exclamation points on ratings or returns in ads or fliers is assuming that investors are idiots. Don't get excited.

The second sin involves playing with timeframes.

If Preferred International Value has been a Money magazine pick for three years, show that longer timeframe. (They don't, possibly because it is less impressive.) And while beating the Lipper fund index is good, any investor who digs deeper will find that the fund has been a virtual mirror image of its Morningstar peer group over the past five years. That's not bad, but it shouldn't make you scramble to get through that closing window.

"You always have to wonder about the motive for closing a fund," says Jim Lowell, editor of the Fidelity Investor newsletter. "It can be good news, and it might be no news at all, but it probably shouldn't be the reason why you go out and buy a fund you've barely heard of before."

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