For some time now, the
Securities and Exchange Commission
has been on a "plain-English" crusade to eliminate legalese from documents.
As part of that initiative, the SEC has called for all fund companies to clean up their prospectuses, and the December deadline for all the stragglers is nigh.
Unfortunately, no one reads these mind-numbing documents, which are targeted at prospective investors. And investors aren't going to start reading them -- even with a shiny new look.
Instead, the SEC and the fund companies should turn their efforts to semiannual and annual reports, which investors actually read and use.
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Dear Dagen board
In these reports, firms are required to explain poor performance and what caused it, a practice called performance attribution. However, many fund companies use every imaginable euphemism to obscure bad results.
I've been reading through some of these reports, and I'm encouraged to find that some firms do try to make these report useful, intelligible, even amusing. But many don't.
Here's a short list of some of the things that distinguish the good and the bad in shareholder reports.
The Good: Honesty
I would really like to see just one manager say, "This fund sucks. It's my fault. I'm sorry. I will try to do a better job."
That's not going to happen.
But some managers do exhibit some contrition.
Oakmark fund has been a bona fide weakling for some time now.
But at least the guy is exhibiting a small amount of regret.
In the fund's most recent annual report, he writes that, "The fiscal year ending September 30, 1999 was very disappointing to me. Your Fund lagged significantly behind the overall market, and this is especially frustrating after our lackluster 1998. While your Fund generated positive absolute returns each year, it has dramatically lagged a very strong overall market."
It's not cash, but it's something.
The Bad: Obfuscation
Truly dreadful performance from a manager is bad enough. But it's unacceptable when he tries to gloss over it in the shareholder letter.
Take Don Yacktman, for example.
The letter that opens his fund's most recent report says: "For investors who purchased shares at the
Yacktman fund's inception in July 1992 at $10.00 per share, your initial investment, adjusted for dividends and capital gains, would have grown to $20.31 by the end of the second quarter of 1999 -- representing an average annual return of about 10.7%."
That utterly irrelevant information is as meaningful to shareholders as the price of
Purina Dog Chow
Shame on Yacktman.
That sentence only applies to shareholders who bought the fund more than seven years ago and doesn't address anyone who bought it between now and then. But the seven-year average looks a lot better than the fund's year-to-date return of negative 22.1%.
The Good: Readable, Entertaining Prose
No one expects
when they peel open a shareholder report. It would be nice, however, if fund companies could present their results with some half-decent prose that's evenly mildly entertaining
The managers at
know how to turn a phrase.
Not surprisingly, these value managers are not fans of the Internet business, a position they describe with flair in their March 31 report.
"Internet stock valuations are particularly difficult for us to comprehend. In our opinion, these issues are truly the cork on the champagne bottle. As a group they have little or no earnings and no near-term prospects for earnings that could justify their sky high stock prices. We feel as though we are sitting on the sidelines watching a wild party going on and wondering if we are missing out on all the fun. However, we remember that, at best, these parties end with a hangover or are brought to an abrupt end when the police show up and cart everyone off to jail."
You might not agree with them but they know how to get their point across.
The Bad: Dull Commentary
I would prefer reading the list of ingredients on a cereal box to some of the reports I've seen.
I know the
Brandywine fund has made a comeback this year, but Foster Friess now needs to spruce up those reports.
"We continue to isolate one company at a time, seeking the rewards that strong earnings attract while avoiding the pains that high price-to-earnings ratios often invite."
As long as his numbers are good, I guess investors can just skip his reports.
The Good: A Glossary
With every report, fund companies should always expect to encounter new investors or least forgetful ones. And these shareholders shouldn't have to go out and buy a copy of the
Barron's Dictionary of Finance and Investment Terms
just to get through a fund report.
solves this problem by including a short list of investment terms. The list Vanguard includes in its bond fund reports is particularly helpful. It's not hard to forget the meaning of average duration.
The Bad: Jargon
Some fund companies avoid using money management babble in their reports.
Unfortunatley, banal jargon seems to be the standard.
The annual report for
Oppenheimer Global Growth & Income fund, for example, opens with the following line: "In many ways, the 1999 investment environment has, so far, unfolded as many expected it would, producing both attractive opportunities and formidable challenges for investors."
Oppenheimer can just recycle that introduction each year by simply replacing the date.
These are just two examples of what seems to be a widespread problem. Fund companies communicate with investors using language that no one would dare use in conversation.
Investing doesn't have to be boring and confusing. But these fund reports would make you think otherwise.
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