More Mutual Fund Data Flood Burgeoning Market
But investors may find the services more confusing than instructive. INFORMATION EXPLOSION
BOSTON — RUNNING down a list of 4,000 mutual funds to pick a winner could challenge any investor. But factor in the scores of magazines, newsletters, rating services, computer software, television and radio programs each pushing different funds and strategies, and the task becomes horribly snared in a tangle of conflicting advice.
The rapid expansion in information services reflects the explosion in mutual funds sales over the past five years.
``There's almost a din of people crying out for your attention,'' says Stephen Savage, editor of the Valueline Mutual Fund Survey, which itself headed into the crowded pack of information providers last October. ``You're being inundated with people giving you conflicting information.''
None of the doyens of the mutual fund tracking business, such as Morningstar, Lipper Analytical, and CDA/Wiesenberger seem perturbed by the heightened competition. The newest member, the veteran investment information company Valueline, cannot keep up with demand for its service, Mr. Savage says. ``It's almost been like a run.''
Timely access to information that once only brokers and portfolio managers were privy to is producing a glut of data for the man on the street. And the cost, is not prohibitive for many. Morningstar charges $395 for a year's worth of full-page analyses of 1,240 funds. Valueline charges $295 to review 1,500 funds.
However, this din that has the ring of prosperity for the mutual fund industry, may seem more deafening than instructive for many individual investors. As Evan Simonoff, editor in chief of Financial Planning magazine concedes: ``All this information in the hands of somebody who doesn't know how to use it, is either useless or potentially dangerous.''
Mutual fund ratings services have gradually honed their format to cater to the growing demand from individual investors. Morningstar, for instance, has added tax liabilities and risk factors to its profile of each fund.
But much of the spread of data on mutual funds is quantitative, not qualitative. Individual funds are ranked and rated for performance but rarely analyzed for investment strategy, portfolio content, and risk and tax factors. Publications such as Money magazine, Worth, and Forbes each offer their own lists of best buys and funds to avoid. Morningstar pins five stars on the top performers; Valueline awards a No. 1 ranking. And many financial planners throw in their own hot picks in newsletters to clients.
Sifting through these piecemeal lists to find the ``perfect'' fund has several shortcomings: All quantitative ratings are based on past performance and do not have much value for predicting future performance, Mr. Simonoff says. Another problem, he says, is that ``a lot of consumers, and even some financial advisers, will see a five-star fund and just jump on it.''
Seeing stars, so to speak, investors rush to buy top-ranked funds and ignore the crucial question of whether they are suitable investments for themselves. For instance, a Wellington fund and a Kaufman fund might both get five-star ratings, Savage says. But the former is low-risk and the latter an aggressive, high-risk fund.
``It's an oversimplification to try to sum everything up in a single rank,'' he says, adding that it might even be a disservice to some investors.
The crux of the problem is financial illiteracy. Most people are not equipped to assimilate the mountain of information on tap, says Terry J. Siman, national president of the Institute of Certified Financial Planners based in Denver. The tremendous growth in financial service professionals attests to that, he suggests. But the abundance of information can induce ``paralysis by analysis,'' he adds. And some of those who do turn to planners might still join the crowd that artlessly snaps up five-star funds. Mr. Siman laments: ``People spend so much more time picking out a toaster oven than they do picking out a financial adviser.''
THE key to fighting one's way out of the information maze is not to even glance at a list of mutual funds before assessing one's own investment goals - asset allocation, time horizons, risk tolerance, the experts say. Then the search for funds to fit with an individual's investment portfolio takes on some direction.
This is where the process should begin, Savage says.
He adds that this is also where qualitative data comes into play, as opposed to all the numbers and statistics. Only Morningstar and Valueline offer analytical profiles of individual funds, which tend to be the largest and oldest funds. Valueline also offers a unique analysis of 100 fund families on a semi-annual basis.
Siman's final word of advice, however, is to have a ``healthy dose of skepticism about this information explosion providing all the answers.''