New ‘Profile Prospectuses’ Are a Quick Study

Is it possible to put everything you need to know about a mutual fund onto a single sheet of paper? Probably not, but eight fund companies have unveiled their first efforts with that goal in mind.

In a test program, the eight families have introduced “profile prospectuses” designed to summarize the key facts that typically get buried in the regular prospectus, a type of owners manual supplied to shareholders and other interested parties. Unlike the regular prospectus, which can easily exceed 50 pages of legal mumbo jumbo, the short version can be read in minutes.

The profile document isn’t intended to replace the regular prospectus but to accompany it. Investors will receive both when they seek information on a fund.

The eight fund families that introduced profile prospectuses on a total of 24 funds this month did so at the urging of the Securities and Exchange Commission, the federal agency that regulates the fund business. SEC Chairman Arthur Levitt has expressed concern that many investors don’t understand the risks of funds that they buy.

The profile prospectus is intended to make for easier comparisons among funds. Each document lists the nuts and bolts on 11 key topic areas in a standard format. These areas include risk, performance and expenses.

With less room for verbiage, fund companies are forced to pick and choose their words carefully. For its goal, EuroPacific growth fund, part of the Los Angeles-based American Funds family, “seeks to make your money grow over time through investments in stocks of companies outside the United States,” plain and simple.

As for risk, EuroPacific’s profile prospectus carries this concise warning: “Stock prices rise and fall. Investing outside the U.S. involves special risks, such as currency fluctuations.” That, plus a short general caveat that the fund’s principal isn’t guaranteed, is pretty much it.

Other fund groups offer a bit more detail. For example, Vanguard Group describes the dangers on its New York Insured Tax-Free fund in terms of credit risk, income volatility and principal changes caused by fluctuating interest rates. Vanguard’s Prime Money-Market Reserves portfolio adds a sentence clarifying that it doesn’t invest in derivatives.

One nice feature of the profile format is a standard bar chart that shows a fund’s total returns over each of the last 10 years. Another plus is a section that addresses the types of investors for which a fund might be appropriate.

For example, Dreyfus International Equity, according to its profile prospectus, might be suitable for people seeking capital growth provided they also own a diverse mix of other investments and are willing to hold the fund for at least five years.

For money-market funds, the profile prospectus provides sufficient disclosure. These stable investments subject shareholders to a very small probability of loss and thus aren’t worth a significant research effort. It’s doubtful many people read the full prospectus for a money fund anyway.

Yet the abbreviated prospectus format includes a few shortcomings when it comes to stock and bond funds.

One drawback is jargon creep. With less room available for explanations, some firms incorporate financial buzzwords into the text without defining them. Would-be investors in the Scudder Emerging Markets income fund, for instance, had better know the meaning of such terms as “weighted average maturity,” “distribution-reinvestment fee” and “30-day net annualized SEC yield.”

Another definition problem concerns the terms “total return” and “yield,” which several fund companies discuss in the same breath without offering explanations of either.

Then there’s a general lack of details on how funds are managed. T. Rowe Price Equity Income is one of the few that tells what types of companies it buys in terms of the “value” or “growth” stock-picking styles. Most other funds don’t provide examples of the types of stocks they might own.

Perhaps the major disappointment involves disclosures on portfolio management, or the lack thereof. Of 19 profile prospectuses reviewed, none name the person calling the investment shots for these funds or provide a sketch of that individual’s experience or training.

Nor is there much information about the sponsoring fund companies. T. Rowe Price mentions that it was founded in 1937 and manages $60 billion in 3 million accounts, while American Funds reveals that its funds employ multiple managers. These tidbits are representative of the maximum extent of disclosures made by any of the eight families about their own operations.

If the SEC deems the profile prospectus worthwhile during the open-ended trial run, the agency will probably sanction the abbreviated format for use on a permanent basis for all fund groups. Families still would be required to supply regular prospectuses on request, assuming investors want them.

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Bear Stearns has introduced an usual mutual fund that picks stocks largely on the basis of insider transactions at various companies.

The Bear Stearns Insiders Select portfolio evaluates the buying and selling activity of a firm’s officers, directors and large shareholders, supplementing that with more conventional fundamental research.

The 2-month-old fund (800) 766-4111; $1,000 minimum on taxable accounts, comes in two shares classes, with a maximum sales charge of 4.75%.

The portfolio has attracted $15 million in assets.