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Profile Summary Is, in Sum, a Mixed Bag

March 09, 1997|CHARLES A. JAFFE

I hate reading mutual fund prospectuses as much as the next investor. Nothing makes me want to take a snooze more than hard-to-follow, impossible-to-swallow legalese.

At the same time, reading prospectuses is a part of my job, and I find a lot of interesting stuff in them.

So when the Securities and Exchange Commission came out with its formal proposal for the "profile prospectus," an easy-to-read summary of old-fashioned sleep-inducing paperwork, a big part of me was very happy.

Another part of me cringed.

The profile prospectus is the classic good news/bad news story. The pluses are obvious--at last, a document that makes some sense and gives investors a real shot at understanding what they are buying--while the negatives lurk beneath the surface.

About half of all funds are expected to issue profiles once the SEC proposal receives formal approval later this year.

Here's the skinny on what it means for you.

*

Good news: The "profile" must include bar charts showing in dramatic fashion the performance the funds have experienced.

Bad news: Most of these funds have never survived a downturn.

The SEC flubbed this one; it should have forced the funds to show the 10-year history of a relevant index and not just the few years of a fund's history, so investors get an idea of what they might be able to expect from this type of asset.

Good news: The profile makes it easier to shop around.

Bad news: It makes funds more like a commodity.

The small size of the summary prospectus, along with its bar charts and fees-in-one-place tables, make it easy to compare two funds, just as you might compare similar cars by looking at sticker prices listing features and costs.

Unfortunately, a prospectus is not a sales tag. There are other reasons to choose funds besides fees and performance.

Good news: Reading a summary is better than reading nothing.

Bad news: It's still not like reading the complete story.

An SEC study shows that just half of fund shareholders consulted a prospectus before buying. The profile should help boost that number, but it's still no substitute for skimming the full prospectus.

The full prospectus is the legal contract that outlines your ownership in the fund; never sign a contract you haven't read.

Good news: Funds will still be required to send you the full-blown prospectus.

Bad news: It normally arrives after you buy the fund, and it's likely to be harder than ever to slog through.

The traditional prospectus is not obsolete, but, unless you ask for it, you won't see one until after you buy the fund.

People in the fund industry have noted that most consumers don't see the owner's manual for their cars until after the purchase. Most owner's manuals don't contain warnings about how the car could blow up, yet that kind of trouble sign is exactly the kind of information an investor might find in a full prospectus.

In addition, consider history. The last time the SEC changed the rules on prospectuses, it created a separate "Statement of Additional Information." If you think a prospectus is hard to read, call your fund for one of these statements. It'll cure the worst insomnia.

"Fund companies have no incentive whatsoever to make the full prospectus more readable," says Don Phillips, president at Morningstar Inc. "They'll give one short, readable document, then throw the full prospectus into the hands of their lawyers, who will make it even more worthless to the average investor."

Good news: You have a better chance of understanding the fund you buy.

Bad news: If you discover too late that you invested in something you didn't intend to, the firm will base its defense on the full prospectus.

Mutual fund problems have been rare in recent years, hidden by the strength of the rising market. When the market turns and investors find themselves in funds that have strayed from their course, they could be stuck with trouble.

Management will say that the full-blown prospectus represents the contract between investor and firm. It will have the necessary disclaimers, eliminating most recourse. If you choose not to read the complete prospectus, it's your fault--at least in the eyes of the fund and most courts.

So go ahead and use the summary prospectus. Ignore the full document at your own risk.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, MA 02107-2378.

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