clock menu more-arrow no yes

Filed under:

Balancing act: Read prospectuses before you toss them

If you've ever heard a radio ad for a mutual fund, you've heard the fast-talking guy who comes on at the end to give a litany of legal disclaimers.

But just as most people tune out the fast-talker, many investors also ignore prospectuses that are sent to them by fund companies.

And that could be a big mistake.

I got to thinking about these jargon-filled documents recently when a reader named Allyson sent me an e-mail asking how long she should keep prospectuses, semi-annual and annual reports from mutual funds.

For help with her question, I talked to Sterling Jenson, senior managing director for Wells Capital Management in Salt Lake City.

First, to answer Allyson's question, Sterling says you probably are safe tossing a particular quarter's prospectus or mutual fund report once you receive an updated report the next quarter.

"When they receive the next prospectus, that gives an update of the company's position and updates historical information, so there's really no reason to save the old prospectus," Sterling says.

But perhaps the more pressing question is what to do with these reports once you get them.

Sterling says each mutual fund prospectus contains key points that you should find and examine.

First, you need to be sure the fund managers are investing in the kinds of companies they describe in their mandate.

"For example, if you have a mutual fund that says it invests in (large-cap) companies, you want to look at their holdings to make sure that's what they're really investing in," Sterling says. "Usually there are auditors that take care of that function as well, but you just want to make sure that your manager is staying true" to the fund's goals.

The second thing to look for is a clear and concise disclosure of fees. "That's one thing they should disclose right up front," Sterling says.

Next, look at the fund's returns. How has it performed relative to its benchmark or to its peer group?

"They should have comparisons like that in the prospectus . . . ," Sterling says. "If they've had poor performance, do they give an adequate explanation why? Or, if they've had performance that deviates substantially on the up-side, what kind of risk did they take to achieve that? Are they really smart, or are they doing things that are risky that could snap back and bite you?"

You also should check for consistency in the fund's management. If a mutual fund has a great track record but it's due to a particular manager, the departure of that manager should send up a red flag, Sterling says.

So now we know what to look for in a prospectus. But what about an individual company's annual report?

Sterling says you should look first at the statement in the front from the company's chairman or CEO.

"What is their explanation for their results, and what is their forward-looking prognostication for the company? How are they achieving earnings growth? Is it coming from growth from revenues or is it coming from cost-cutting? . . . Usually you want a company that has good internal growth and that can achieve it without acquisitions and can do it through new products and innovation and forward thinking," Sterling says.

Of course, you won't find any of this information if you throw your prospectuses and annual reports away as soon as you get them.

"If a person will be patient and read the first few pages, they'll usually get the knowledge they need," Sterling says. "My experience is, for the most part, people are confused by them and they toss them. . . . But any time you have money committed and are allowing someone else to manage it for you, you should take the ownership and responsibility to be well-informed."

So, Allyson, feel free to clear your closets of old prospectuses. But next time you get a quarterly report, take a few minutes to sit down and read it. It may take some effort, but you'll be a better-educated investor.

If you have a financial question, please send it to me by e-mail to gkratz@desnews.com or by regular mail to the Deseret Morning News, P.O. Box 1257, Salt Lake City, UT 84110.


E-mail: gkratz@desnews.com