What to Look for in the New Mutual Fund 'Profile.' (Analysis of Nine Points of Investor Information)
Markese, John, Consumers' Research Magazine
Think thin. As of the first of June mutual funds will be allowed to offer investors a new source of fund information--the profile. Just as its name implies, the profile is a slim sketch of a mutual fund's critical character points.
Remember the mutual fund prospectus, often written by the fund's legal department with disclosure requirements in mind rather than understandable investment information? The prospectus is neither gone nor forgotten, but the first summary of fund information you are likely to see in the future is the mutual fund profile.
Because the format of the profile is a standard nine points in a specific sequence and the discussion is lean, profile-to-profile comparisons are relatively easy and efficient. The same information for each mutual fund will appear in the same place and in the same form. Funds have the option of presenting each of the nine items in a question format (for instance, "what are the objectives of the fund?"), or as simple statement ("the fund objective is...")--not a substantive difference.
Can you use the profile to make intelligent mutual fund decisions? Yes. Is the profile all you need? No.
A step-by-step walk-through of the nine points will give you an idea of what the profile can tell you and what it cannot. To illustrate the nine points, parts of various funds' prototype profiles appear in italics under each point, followed by comments on what to look for and what to expect.
* Point One: Investment Objectives/Goals. The fund seeks to provide long-term capital growth and some income through investments primarily in common stock.
What to 100k for: The example is a mutual fund portfolio of common stock, with all the risk/returns inherent in equities. The investment strategy section will give more details, but mention of income and capital appreciation implies more mature stocks that are likely to pay dividends and a mutual fund category match closest to growth income. Is it particularly specific on details? No, but you now would have some idea of what the portfolio in general would look like and how it would behave. The asset class question is answered.
* Point Two: Investment Strategy. The fund invests primarily in domestic and foreign stocks, but may also invest in debt securities. Although there are no limits on the amount of assets that may be invested in any security, the fund intends to spread its holdings among many companies and industries. In selecting investments, the fund focuses on companies that pay current dividends while offering the potential for growth of earnings.
What to 100k for: Well, the example is not a sector fund concentrating in one or a few closely allied industries. The fund's strategy is to be diversified by firm and industry--a less risky approach than sector concentration. The option of holding debt securities (i.e. bonds) is no surprise, since stock funds do hold cash but rarely move significantly into bonds. But where did foreign securities come in? The trend among managers of domestic equity funds is to have and use the flexibility to invest overseas. While not operating as a global fund, significant foreign holdings up to 25% of the portfolio are not uncommon.
Does all this "flexibility" make you uncomfortable and unsure of what this fund is really all about? It should. That's why an examination of the semiannual or annual report is necessary. The report lists the holdings of the fund broken down by stock versus debt securities; and within stocks by industry and usually by domestic versus foreign. Since this fund is focusing on firms that pay a current dividend, the annual report should confirm a listing of more mature firms rather than small emerging stocks.
* Point Three: Principal Risk of Investing in the Fund. This is primarily a stock fund; like all stock investments, it exposes the investor to potential drops in stock prices. In bull markets, this fund's focus on income-producing securities could dampen its performance. …