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"We're No. 1."

That emphatic claim is made by a host of athletic teams and their fans each sports season. These spirited disputes aren't resolved until an ultimate winner is installed following a final confrontation or a decision by a poll of experts.Throughout our highly competitive society there's a similar mania to be first and to dominate.

Every mutual fund wants to be No. 1 because it can mean millions of dollars in new investment money. A flashy performance ranking from a tracking service such as Lipper Analytical Services or Morningstar Mutual Funds attracts droves of individuals who study such claims and rankings before placing their dollars.

Advertisements and sales literature of investment firms understandably put the most positive spin on performance of their mutual funds. However, because not everyone can be No. 1, misrepresentation has been common, and a fund may not be as highly ranked as it portrays itself.

"By selectively `cherry-picking' a specific period you wish to emphasize in an ad, you can be No. 1," warned R. Clark Hooper, who heads the 15-member staff that monitors investment advertising for the National Association of Securities Dealers (NASD), an industry self-regulatory body. "One problem is that some investors seem to believe that if a fund has ever been No. 1, it's No. 1 forever."

Ads may also obscure or omit important considerations such as volatility, risk and underlying investments. Aware of the problem, the Securities and Exchange Commission recently approved guidelines proposed by the NASD on how rankings can be used in ads and sales literature. These rules, which require prominent disclosure of important facts in the proper context, have already served to tone down industry ads.

"The size and diversity of mutual fund products, with banks and broker dealers now involved in this growing customer base, makes it important that a presentation is balanced," said Hooper, whose staff will examine 45,000 pieces of investment advertising this year.

The NASD is playing hardball on infractions. For example, it's seeking to suspend Palomba Weingarten, chairman of the Los Angeles-based Pilgrim Group, for a year from the company's mutual fund subsidiary and exact a $100,000 fine.

It's all because of two 1993 ads that touted Pilgrim fund rankings. According to the NASD, those ads contained "misleading or exaggerated statements" that gave the false impression five Pilgrim funds were the top five of all funds ranked by Lipper. In reality, they ranked highly only in some extremely small categories. Pilgrim is appealing the penalties, claiming it got enmeshed in the early confrontation over changing ad requirements.

After Morningstar published an article criticizing those ads, Pilgrim sued for libel, but a California state appeals court threw out the suit this year.

Every investor should do more research than simply reading ads or casually browsing literature. But it's understandable to fund-trackers why funds employ "creativity" to gain instant attention.

"Most people dress up when they go out on a date, don't they?" observed A. Michael Lipper, president of Lipper Analytical, whose rankings frequently show up in fund company ads. "I suggest an investor get data for the periods in which a fund did poorly as well, so you grasp the complete equation."

The new guidelines on ads and sales literature of mutual funds sensibly require that:

- A headline or other prominent statement must not state or imply the best performance in a category unless it is actually ranked first in it.

- There must be prominent disclosure of the ranking, total number of funds in the category, name of the category and period on which the ranking is based. A ranking based on asset size isn't permitted.

- No ranking based on a period of less than one year may be used. Total-return rankings must be based on the length of a fund's existence, with, for example, a 10-year-old fund providing one-, five-and 10-year returns and rankings.

- "Load" (initial sales charge) funds, must state whether their ranking takes into account sales charges and whether fees have been waived or expenses advanced during the period. The publisher of the ranking data used must also be noted.

- Whenever the ranking consists of a symbol, such as a multiple star ranking, the meaning of the symbol must be disclosed.