Q&A; : New Rules for Mutual Funds Start Today

Investors will find it much easier to evaluate mutual fund management, performance and prospects thanks to the latest in a series of new fund disclosure rules taking effect today. These new rules, enacted by the Securities and Exchange Commission, will require standardized disclosure of fund fees and returns. They will also require disclosure of information about management, fund goals and relative performance.

“This is a highly significant event,” says Don Phillips, publisher of Morningstar Mutual Funds, a Chicago-based fund rating service. “Taken together, these are the most significant rules to come out of the mutual fund industry since 1940.”

Here are some answers to questions about the new rules and how they will affect your fund investing.

Q. What exactly is changing?

A. Starting today, all funds must provide three new pieces of information to investors: 1) the name and background of the fund manager, 2) a chart comparing the fund’s 10-year performance to a market average and 3) an explanation of the fund manager’s strategies and how those strategies affected performance during the last year.

Q. Why is that so important?

A. Since funds currently report some performance information inconsistently, it’s difficult to adequately compare one fund to another. Additionally, some funds occasionally misrepresent key information--such as who is managing the fund’s assets--in an apparent bid to quell investor concerns about inexperienced fund managers.

Moreover, until today companies could switch managers at will and not notify investors, even when individuals specifically chose the fund based on the previous manager’s track record. The SEC has received more than 600 letters complaining about the lack of disclosure about fund management, says Robert E. Plaze, assistant director in the division of investment management.

Q. Does it matter that much who is managing the fund? My fund company says I should look at the fund, not the manager.

A. Institutional investors maintain that management is a key element in investment performance. These savvy investors say they’d never buy a company’s stock without knowing the name and background of the chief executive, and they’d never invest in a fund without knowing the manager.

There’s some statistical evidence to show that management changes--when fund managers jump or join ship--are pivotal to performance. A recent study by CDA/Wiesenberger Mutual Funds in Baltimore looked at fund performance before and after management changes and found that high-performing funds tend to tank in the five years following a change, while poor performers tend to do significantly better.

Q. My fund is managed by a committee. Does that mean I’ll get a notice every time a member of the committee leaves?

A. No. Money market funds, index funds and funds managed by committees are specifically exempted from disclosing names and backgrounds of management members. Since these funds are managed by many individuals, the SEC thought the participation of any one individual was not important enough to warrant disclosure.

Q. How will the new rules affect disclosure of a fund’s performance?

A. Fund performance tables have been expanded and revamped in an effort to make them easier to read. Currently, performance charts are designed “by accountants, for accountants” to the detriment of anyone lacking an advanced financial degree, Plaze says. The new tables reorganize the data into more logical groupings and add 10 years of annual return data.

Additionally, funds now must provide a graph that compares their performance to the performance of an established industry index over a 10-year period. Currently, fund companies tend to compare themselves to the indexes only when they compare favorably.

These charts, which are similar to new charts required in company proxies, give investors a clear picture of what they’re getting for their money. A glance at the chart should show whether you’d be better off simply buying into a stock or bond index, for example. And those who invest in several similar funds can compare long-term performance at a glance.

Q. Will all funds use the same index?

A. No. They are given some discretion to choose the index that best describes their investment strategies. For instance, a bank stock fund would compare itself to a bank stock index rather than to the market as a whole. A fund specializing in small companies would compare itself to measurements of small-stock performance rather than the Dow Jones industrial average.

Q. Because the rules go into effect today, should I expect my fund company to immediately provide this information?

A. No. It will be included in the next prospectus or annual report you receive. These reports come out according to each fund’s regular schedule, which is determined by the fund’s fiscal year-end. If you are uncertain of those dates, call your fund company and ask.