The ‘Personalized Returns’ Issue: Why Can’t Funds Do It? : SEC suggests fund companies provide statements showing how an individual’s investment performance compares with official returns. : Companies hem and haw, saying it’d be very costly.
Mutual fund companies love to brag about how they’re using sophisticated technology to bring better service to customers.
Yet when a top official of the Securities and Exchange Commission recently proposed a new way for them to do just that, the grumbling and backpedaling could be heard coast to coast.
The suggestion by Barry Barbash, director of the SEC’s division of investment management, is that fund companies “personalize” their statements so investors can see how their own investments fared over the span of a quarter or year--based on their pattern of purchases and sales.
“Generally, the reporting you get of performance is the performance of the fund over a period of time,” Barbash said in an interview. “You don’t have a comparison of your performance to the fund’s. What I was saying was that if this industry is so customer-friendly, why not consider this sort of helpful information?”
Indeed, most companies today simply report a figure showing how each fund performs over the course of a quarter, half or calendar year, as though for a mythical investor who puts in a lump sum on Dec. 31 and doesn’t make another move for the rest of the year.
Such vanilla reporting has become an issue because of the markets’ recent volatility. A fund that reported a 25% post-to-post gain in calendar 1996, say, might have risen 50% through June 30 and backtracked halfway through the end of the year. What if you sent in your money on July 1? You’d have lost half of it by New Year’s Eve, when your fund manager was breaking out the champagne to celebrate another sterling performance.
Yet when Barbash raised this point during his March 17 address to the Investment Company Institute, the mutual fund industry’s trade group, he said, the reaction was: “Nice idea, costs too much.”
“Performance measurement is a tricky business,” says Dudley Ladd, a managing director of the Boston-based investment firm Scudder, Stevens & Clark who attended the Barbash speech. “It’s doable, but it’s a lot of [software] programming” to accommodate the limitless patterns customers follow in transacting purchases and sales.
That view is seconded by executives at one fund company that has already started providing personalized performance figures for its customers.
“This is not a simple or easy process, and it’s not without cost,” says Jack Neal, president of Kemper Funds, which began this year to mail out statements with personalized results for all investors who have been with the company two years or more. The figures, however, only cover investors’ results back to 1990, the earliest numbers Kemper held in its customer database.
Neal says the change was deemed worthwhile to make good on Kemper’s claim to serve its customers’ long-term interests.
“Most people are buying mutual funds as an investment vehicle for something in the future, like a car or a college education,” he says. “We determined that we send our shareholders very few things that really show long-term results.”
Kemper was able to provide the service because, with 1 million customers, it was big enough that “economies of scale worked for us,” he adds, making the per-customer cost of the programming “reasonable.” Kemper has more than 1 million customers, far fewer than some other large mutual fund groups.
Several other fund families, including T. Rowe Price and Fidelity Investments, say they are studying whether and how to personalize statements along the lines Barbash proposed. But they say any such changes would take at least a year to execute.
And many in the industry still argue that the cost is a major hurdle.
Deborah Gatzek, a senior vice president for the parent firm of the Franklin/Templeton funds in San Mateo, Calif., said personalized reporting would drive up expenses at a time when the industry is under pressure to cut costs. She also questioned the relevance of personalized reporting, since it “doesn’t necessarily reflect on the performance of the fund.”
That may be precisely the point: An individual investor’s portfolio performance can radically deviate from that of a fund’s, depending on when and at what price purchases and sales are executed. In a consistently rising market, for example, an investor who makes periodic investments through the year will under-perform the fund’s calendar-year number. In a falling market, by contrast, a regular investor should do better than the fund.
Some industry observers believe the industry’s plaint about costs is “a big smoke screen,” in the words of Daniel P. Weiner, editor of the Independent Adviser for Vanguard Investors, a newsletter that tracks the Vanguard Funds.
Weiner believes the industry is resisting the change because it would tell customers too much about the risk profiles of their funds. He also believes that once the big funds start providing such data, all the others “will fall into place.”
The irony is that many investors probably have the software necessary to personalize their statements already installed on their home computers.
Most popular personal finance programs, such as Quicken and Microsoft Money, which many people use to balance their checkbooks, can spit out reports listing all the transactions executed in a user’s mutual fund account and calculating the gain or loss for any period, automatically annualizing the figures for periods longer than 12 months.
The catch is that users must be scrupulous about entering all their transactions in the necessary detail.
The programs need to know the dates of each purchase or sale in a fund and at least two of the following items: the dollar amount, the fund price at which the transaction was made and the number of shares purchased or sold. Fund distributions of dividends and capital gains must also be entered, as well as whether they were taken as cash or reinvested.
Of course, all such data resides in the fund companies’ databases, often going back five years or more.
In fact, the fund companies hoard sufficient information to provide investors with an even broader range of custom-crunched numbers. Barbash in his speech touched on one other possibility that no doubt also had fund executives gagging: providing investors with the tax basis of their redemptions.
“A fund could report to a redeeming shareholder the average cost of the shares sold, allowing the shareholder easily to determine profit or loss on the transaction,” he said. “The calculation of average cost can be very time-consuming and requires a shareholder to have retained every monthly or quarterly account statement since the initial purchase of the fund’s shares. Many shareholders lack the knowledge to make the calculation, and end up paying more tax than necessary.”
But he also said that he was not sure that the SEC has the legal power to force such disclosures.
“I was trying to throw out an idea,” he said, “and hoping that the industry could run with it.”
Michael A. Hiltzik is a Times staff writer. He can be reached via e-mail at michael.hiltzik@latimes.com
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Top Mutual Funds by Category
The funds with the best performance in the last 12 months in two major categories. Three- and five-year returns are annualized.
EQUITY INCOME
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Sales Expense Total % return Fund Ticker chg (%) ratio (%) NAV 1-yr 3-yr Heartland Fds: ValPlus HRVIX NL 1.45 13.98 +28.7 +17.7 Kemper Funds A: DrHiRA KDHAX 5.75 1.25 26.32 +25.2 +22.3 PIMCO Funds A: RenaisA PQNAX 5.50 1.25 15.21 +21.5 +16.5 Cutler Trust: EqInco CEIFX NL 0.98 13.48 +21.4 +18.6 Keystone Amer A: TotRtA KGBAX 4.75 1.39 17.16 +20.8 +17.3 Evergreen Funds: SmCapY ESCEX NL 1.50 13.23 +20.7 NA State Str Resrch A: EqIncA MSEIX 4.50 1.25 13.41 +20.5 +16.1 Federated A: EqInA p LEIFX 5.50 1.03 15.40 +19.2 +18.2 Strong Funds: EqInc SEQIX NL 1.30 12.71 +18.5 NS Del Grp Instl: Dec1 I DEDIX NL 0.74 18.43 +18.1 +17.1
Fund 5-yr Heartland Fds: ValPlus NS Kemper Funds A: DrHiRA +18.8 PIMCO Funds A: RenaisA +15.3 Cutler Trust: EqInco NS Keystone Amer A: TotRtA +13.9 Evergreen Funds: SmCapY NS State Str Resrch A: EqIncA +16.0 Federated A: EqInA p +15.9 Strong Funds: EqInc NS Del Grp Instl: Dec1 I NS
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MID-CAP STOCK FUNDS
*3Total % return
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Sales Expense Fund Ticker chg (%) ratio (%) NAV 1-yr 3-yr MAS Funds: MCapVA MPMVX NL 0.88 15.27 +28.2 NS Dreyfus: MdcpVl r DMCVX NL 1.30 16.98 +26.8 NS GS Institutional: MidCap GSMCX NL .NA 18.45 +25.3 NS First Amer Fds A: Equity p FASEX 4.50 1.13 19.24 +24.7 +20.1 Armada Funds: MidCaI p AMRIX NL 1.05 13.64 +21.9 NS Ariel Mutual Fds: Apprec CAAPX NL 1.36 25.53 +21.2 +12.7 Performance Fds: MCpGrI PCGIX NL 0.98 15.03 +19.1 +19.5 Robertson Stephens: ValPlus RSVPX NL 1.45 23.44 +17.8 +22.1 SEI Portfolios: MidCap SEMCX NL 0.77 14.53 +17.7 +12.0 PIMCO Funds Instl: MdCpGr PMGIX NL 0.70 17.48 +17.6 +17.8
Fund 5-yr MAS Funds: MCapVA NS Dreyfus: MdcpVl r NS GS Institutional: MidCap NS First Amer Fds A: Equity p +19.7 Armada Funds: MidCaI p NS Ariel Mutual Fds: Apprec +10.9 Performance Fds: MCpGrI NS Robertson Stephens: ValPlus NS SEI Portfolios: MidCap NS PIMCO Funds Instl: MdCpGr +16.3
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Source: Lipper Analytical Services. Data as of market close Friday. Note: Only one class or variation of same fund listed. NA: not available; NAV: net asset value; NL: no load; NS: fund created during the period; i: special expense circumstance
Lipper / Associated Press fund category descriptions:
Equity income: Seeks relatively high current income and income growth through investing 60% or more of its portfolio in equities.
Mid-cap: Limits its investment to companies with average market capitalizations and/or revenue between $800 million and the average market capitalization of the Wilshire 4,500 index.
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Do It Yourself
Your fund says its performance was great but did your investment in it do as well? Your statement won’t tell you, but we’ve provided an example for a spreadsheet that will do the job. A couple of caveats: This template is in Microsoft Excel, one of the most popular spreadsheet programs on the market. Users of Lotus 1-2-3 or Borland Quattro Pro must use slightly different formulas. We assume you know the essential basics of spreadsheets. In addition, to simplify matters, this example will work only in cases in which you have up to five transactions. In this form, it will be accurate only over periods in which the fund has made no distributions of capital gains or dividends. A version of this template can be downloaded from the Los Angeles Times Web site at
https://www.latimes.com/HOME/BUSINESS/mutuals.htm
Research and Excel spreadsheet by MICHAEL A. HILTZIK / Los Angeles Times
To use the example shown:
1. Type in the labels and basic data in the cells A4 to A9, B4-B9 and C4 to C9. In this example, there are three purchases and one sale.
Enter 0 in blank cells.
2. To calculate the number of shares purchased at each date, use the formula =IF(b5>0,c5/b5,0) =IF(c6>0,c6/b6,0) and so on. The “IF” equation allows you to leave lines blank without giving you an error.
3. Total amount invested and total number of shares are calculated simply by adding up the columns, using =SUM(D5:D8) and =SUM(C5:C8)
4. C12 is today’s price, the key figure to determine return.
5. C13, today’s value is C12*D10
6. C14, your return, the figure we seek, is =(C13-C10)/C10*100
7. C15, the fund’s return, is (C12-B5)/B5*100. Comparing C14 to C15 shows how you did compared with the fund.
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A B C D 4 DATE Price $ Amount Shares 5 01/15/97 $10.00 $5,000.00; 500,000 6 02/15/97 $11.50 $5,000.00 434,783 7 03/30/97 $13.00 $5,000.00 384,615 8 04/03/97 $11.00 ($3,000.00) -272,727 9 04/30/97 $0.00 0.00; 0.00 10 Totals $12,000 1,046.671 11 $ 12 Today’s price $14.00 13 Today’s value: $14,653.39 14 Your gain or loss: 22.11% 15 Fund gain or loss: 40.00%
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