Is it all about per­for­mance on mu­tual funds?

Connecticut Post (Sunday) - - Business - JULIE JA­SON

My ex­pe­ri­ence over 30some years in the fi­nan­cialser­vices busi­ness tells me that most peo­ple start with per­for­mance ( that is, past per­for­mance) when choos­ing an in­vest­ment — or a money man­ager.

Are in­vestors re­ly­ing too much on past per­for­mance? Should they be pro­vided ad­di­tional in­for­ma­tion to help them un­der­stand the risks and po­ten­tial re­wards of the in­vest­ment or in­vest­ment ser­vice?

These types of ques­tions are be­ing con­sid­ered by the U. S. Se­cu­ri­ties and Ex­change Com­mis­sion in con­nec­tion with mu­tual funds. To help im­prove dis­clo­sure, the SEC asked mu­tual fund in­vestors for feed­back on how per­for­mance in­for­ma­tion en­ters into the in­vest­ment de­ci­sion ( SEC Re­lease No. 33- 10503: “Re­quest for Com­ment on Fund Re­tail In­vestor Ex­pe­ri­ence and Dis­clo­sure”).

By the way, it’s not too late to send in your com- ments, even though we’re be­yond the pub­lished cut­off date, and it might be a good ex­er­cise. Here is the link to the re­lease: sec. gov/ rules/ other/ 2018/ 33- 10503. pdf.

I’ll fol­low up when the SEC pub­lishes its find­ings, but in the mean­time, it’s help­ful to re­view what the reg­u­la­tors want to know. Here is a sam­ple:

“( D) o you use ( per­for­mance) to eval­u­ate the risk of a fund, or do you use it for some other pur­pose, such as to as­sess the skill of the in­vest­ment man­ager?

“How could funds im­prove the pre­sen­ta­tion of per­for­mance in­for­ma­tion?

“Should past per­for­mance in­for­ma­tion be em­pha­sized or de- em­pha­sized in fund dis­clo­sures?

“Should short- term per­for­mance pe­ri­ods ( such as 1- year) be de- em­pha­sized and longer- term per­for­mance pe­ri­ods be em­pha­sized?”

These all are im­por­tant ques­tions to con­sider. Most im­por­tant is the first: The SEC is re­ally ask­ing what the per­for­mance numbers tell you — how do they guide you in mak­ing a buy, sell or hold de­ci­sion.

The main thing is that in­vestors need con­text. That is, his­tor­i­cal per­for­mance is good in­for­ma­tion and use­ful for com­par­ing and con­trast­ing sim­i­lar in­vest­ments. But it doesn’t mean that you will repli­cate the results af­ter you make a pur­chase. There is a lot more in­volved. You’ll want to know what the man­ager is at­tempt­ing to ac­com­plish ( that’s in the prospec­tus). You’ll also want to look at his­tory to judge whether the man­ager has met his or her ob­jec­tives. That you’ll find in the fund’s an­nual re­port. You’ll also want to com­pare the man­ager to peers, which the SEC is con­sid­er­ing mak­ing a manda­tory dis­clo­sure as well. How­ever, at this point, to do a peer anal­y­sis, you need to do some of your own leg­work us­ing data­bases such as Steele Sys­tems and Morn­ingstar.

Get­ting back to the an­nual re­port, in the Man­age­ment’s Dis­cus­sion of Fund Per­for­mance ( MDFP), you’ll find the fac­tors that ma­te­ri­ally af­fected the fund’s per­for­mance, in­clud­ing mar­ket con­di­tions and strate­gies.

The MDFP in­cludes 10- year per­for­mance graphs com­par­ing the fund with an ap­pro­pri­ate in­dex, such as the S& P 500, and a ta­ble with the fund’s av­er­age an­nual re­turns for the most re­cent one-, five- and 10year pe­ri­ods.

The SEC be­lieves the MDFP can help “in­vestors un­der­stand fund per­for­mance, the strate­gies the fund has used, and the risks it has taken on. This can help in­vestors make de­ci­sions about whether to buy, sell, or con­tinue to hold fund shares.” If the reg­u­la­tors have this point of view, it’s prob­a­bly a good idea to read the full an­nual re­port. Self- di­rected in­vestors would need to read it thor­oughly, along with the prospec­tus, of course. Keep in mind that the prospec­tus tells you the fund’s plan; the an­nual tells you how it ex­e­cuted the plan.

If you have a point of view on how the SEC’s mu­tual fund dis­clo­sure doc­u­ments can be im­proved, you can com­ment at sec. gov/ cgi- bin/ rul­ing­com­ments. Again, even though it’s a few weeks be­yond the cut­off for the com­ment pe­riod, it’s not too late to state your views. I sup­pose the most im­por­tant thing to get across is what in­for­ma­tion you need in or­der to make an in­formed de­ci­sion.

To en­gage in a di­a­logue about per­for­mance through this col­umn, email me at read­[email protected] julie­ja­son. com. Please put “per­for­mance” in the sub­ject line and where you read the col­umn.

A fi­nal note: I’m think­ing of es­tab­lish­ing an award for em­ploy­ees who fully ap­pre­ci­ate the ben­e­fits of their com­pany’s 401( k) plan. Let me know if you think that’s a good idea by email­ing me at read­[email protected] julie­ja­son. com.

Julie Ja­son, JD, LLM, a per­sonal money man­ager ( Jack­son, Grant of Stam­ford) and au­thor, wel­comes your ques­tions/ com­ments ( read­[email protected] julie­ja­son. com). Her awards in­clude the 2018 Clar­ion Award, sym­bol­iz­ing ex­cel­lence in clear, con­cise com­mu­ni­ca­tions. Her lat­est book, a cu­rated col­lec­tion of Julie’s col­umns, is “Re­tire Se­curely: In­sights on Money Man­age­ment From an Award- Win­ning Fi­nan­cial Colum­nist.” To hear Julie speak, visit www. julie­ja­son. com/ events.

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