The Reading Is Easy For Fund Investors
BOSTON — Investors got some good news last week: Mutual-fund companies are making their sales information easier to read.
Regulators and a handful of companies announced on July 31 the arrival of the "profile prospectus," which summarizes in plain English key points from a mutual fund's prospectus. Many in the industry say the single-sheet profile is an improvement over the lengthy, jargon-heavy legal document that investors usually have to wade through to determine a fund's costs and performance.
Profiles will be available on a trial-basis for 24 funds during the next year. If successful, they may pave the way for use by the entire industry.
"Anything that can be done to simplify the horribly tedious legalese found in most prospectuses, I think would be a good thing," says Eric Tyson, a San Francisco-based financial counselor and author of "Mutual Funds for Dummies" (IDG Books).
The eight participating companies are the Dreyfus Corp., Fidelity Investments, T. Rowe Price Associates, Scudder Stevens & Clark, American Express, Bank of America Corp., Capital Research & Management, and the Vanguard Group. Each is offering a "fund profile" for one of its existing stock, bond, and money-market funds. For now, the profiles are only available only as companions to the full prospectuses.
The new forms are the result of prodding by Securities and Exchange Commission chairman Arthur Levitt Jr., who has supported clarifying prospectuses in the past few years. The SEC gave its blessing to a one-year test period for the profiles, but it will not make any long-term recommendations until after it has studied the effectiveness of the profiles.
Some in the industry expect that the profile, rather than the full prospectus, could become a primary resource for investors.
"We hope that the SEC is going to be in a position at some point down the line to say 'use this as a stand-alone document,' with the full prospectus available to people on request," says John Collins, spokesman for the Investment Company Institute (ICI), a mutual-fund trade group in Washington.
Others caution that profiles alone should not determine investment choices. "These new profiles could be a good thing for investors," Mr. Tyson says. "The only concern I have is that people should not view this sort of simplified profile as a substitute for doing more thoughtful research about whether or not a particular fund is good or bad."
Although the layout varies from company to company, each profile clearly answers the same 11 questions, which the companies, the SEC, and the ICI have agreed upon. Questions cover a fund's goals and strategies, fees and expenses, operation, and inherent risks.
Bar charts not found in full prospectuses are used in the profiles to display a fund's total returns in the past. A few companies have included benchmarks for their funds' returns in their charts, which is not mandatory - but some industry watchers say it should be.
"One of the shortcomings of these new profiles," Tyson says, "and this is a shortcoming that is true of most mutual-fund communication materials, is the fact that they still do not show in a clear and compelling way how the fund in question performs versus other truly comparable funds and other truly comparable market indexes."
Collins of the ICI says that if benchmarks should be included in the profiles, this will be revealed during an ICI evaluation, based on investor feedback, to be released in 1996.