There’s a difference between what investors need to know before buying a mutual fund, and what they want to know.
But if the fund industry is serious in its quest to drastically alter the prospectus – effectively replacing the booklet of jargon with a few-page “quick-start guide” that it supplements by putting the traditional document online – management should be required to provide consumers with both types of information.
Any effort to reform the prospectus, which this column discussed last week, should be focused on giving consumers better, more useful decision-making materials. Behind the scenes, industry leaders seem to be more focused on their cost savings than on the wealth of information they can provide in new ways.
Remembering that investors will still have access to the full prospectus online, any proposed summary prospectus should have four categories of data: Nuts and bolts, basic information, statistics and wishful thinking. True reform won’t be possible until that last group is a reality.
Basic information: If funds can state in plain English their goal, investment strategy and significant risks, investors will get a clear picture of what they are buying.
Funds describe who they are appropriate for, but it would be hard for any investor to read those disclosures and not see themselves because management tries not to turn anyone off. One nice addition would be a disclaimer from management saying whether the fund is equally appropriate for taxable and tax-advantaged accounts; investors sometimes save a bundle by only owning a tax-inefficient fund in an account where Uncle Sam doesn’t pocket a big chunk of returns.
Throw in information about the manager, including his or her record at other funds, and you have the underpinnings on which an investor can make a decision.
Statistics: Funds should provide a comprehensive performance chart, including benchmarks against an index representing the appropriate asset class and against the performance of the average fund in the category. Performance should be shown on an annual basis, so investors can see what the fund has done in its best and worst years as well as showing the results of a $10,000 investment over time.
Next, investors need the numbers on fees and expenses, not just on a percentage basis but in real dollars, so they can decide whether they are paying a fair price for their returns.
Finally, a table showing portfolio turnover, and the fund’s past tax efficiency, would be a welcome addition, helping investors break ties that exist when they try to winnow down the fund universe into one or two selections.
Nuts and bolts: No summary prospectus would be complete without telling investors how to buy and sell shares, how distributions are made, what other services the fund company offers and what rules – such as short-term redemption fees or limits on quick-turnaround trades – the customer has to live with.
Wishful thinking: While my ideal summary prospectus steps up the performance disclosures, it also would have some additions to make fund-shopping significantly easier.
First, requiring funds to provide ratings no more than 6 months old from three independent research organizations – think Morningstar, Lipper, Value Line, etc.
Next, management should have to say if the fund works well with any sister offerings, providing a chart showing which siblings have a portfolio with at least 20 percent of the same underlying holdings.
Finally, management should have to lay out its own expectations for the fund, including a list of targets that define “disappointment.” Forcing management to define future disappointment would turn the prospectus from a sales document into more of an owner’s manual.
Chuck Jaffe, a senior columnist for MarketWatch, can be reached at jaffe@marketwatch.com.
