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Mutual Fund News

Fund investors can no longer feign ignorance

Investors of the nation, you're running out of excuses for living in ignorance about mutual funds.

Financial industry regulators have created a concise new disclosure document for mutual funds and segregated funds that tells you a lot of what you need to know before you buy. If a fund is too expensive, too risky or too much of an underperformer, this document will help wise you up.

A model of the two-page document was released late last week, along with a suggestion to introduce a new cooling-off period that would allow people to cancel a fund purchase within two business days. Financial industry types have until Oct. 15 to offer their comments, but it's hard to see much to object to. The disclosure documents go easier on the matter of fund fees than they probably should, and everything else is pretty much at the level of "See Dick and Jane buy mutual funds."

Not that there's anything wrong with that. If there's one thing regulators know about educating investors, it's that simplicity rules.

Truth be told, there is already a great way for investors to find out everything they need to know about a fund they're considering or that has been recommended by an adviser. It's called a simplified prospectus and it's stuffed with easy-to-read information.

Regulators forced the simplified prospectus on the fund industry several years ago, but there have been problems. Investors usually don't get the prospectus until after they've actually bought a fund and, most importantly, they never read them, anyway, because they can appear long and intimidating.

The idea of a more digestible disclosure document has been kicking around for a long time. Joe Killoran, an investor advocate and investment industry gadfly, has had his own version on his Investorism.com website for at least seven years.

The two-page disclosure document released last Friday was created by the Joint Forum of Financial Market Regulators, which is made up of representatives from the securities, insurance and pension sectors. The group intends the document to be presented to investors by hand through an adviser, or by fax, mail or electronic means. Sensibly, the idea of putting the document on the Internet for investors to download for themselves was rejected because the majority of people wouldn't bother.

The disclosure document was designed in such a way as to avoid legal or financial jargon, and to make as much use as possible of tables, graphics and simple examples. In terms of providing a simple overview, it's a complete success. The various sections rate a fund's risk level on a six-part scale; explain the kind of investor for whom a fund is appropriate; list the top holdings of a fund; show how the fund has performed over the past 10 years; list the various costs of buying a fund; explain in broad terms how an adviser gets paid for selling a fund; and explain how to change your mind and cancel a fund purchase.

Where the document falls down is in its treatment of fees. Example: while there's a blurb to show how $1,000 invested in a fund 10 years ago would have grown, there's nothing to show how much would have been paid in fees. The only real information on ownership cost is a listing of a fund's management expense ratio.

Similarly, there's a brief explanation of how advisers get paid trailing commissions as long as a client holds a fund, but it's left to advisers to provide specifics.

If the whole idea of the document is to put key points down on paper, then why can't investors be told how much they might pay in trailers?

This is a particularly relevant issue, given that the disclosure documents are intended to be used as a way for investors to compare funds. Trailers vary and could influence an adviser's decision on what to recommend to a client.

That said, the proposed new disclosure document will show investors what some of the key issues are when choosing funds, and it may help prevent them from buying funds they won't be happy with. People have to take some responsibility for their investment decisions, and this new document will help.

Favourite firm

The investment dealer Edward Jones has for the second year in a row taken top spot in a survey of client satisfaction by the research firm J.D. Power and Associates. TD Waterhouse and the ScotiaMcLeod division of Scotia Capital took the second and third spots in the survey, which was performed in April and May and was based on replies from 3,357 people who use full-service firms.

The survey found that only 30 per cent of participants reported receiving a formal written financial plan, and that these people had much higher levels of satisfaction than those who didn't have a plan.

rcarrick@globeandmail.com

*****

Funds made simple

Here's a sample of the kind of information investors will find on a new mutual fund disclosure document proposed by regulators.

QUICK FACTS

Date fund created: January 1, 1996

Total value on June 30, 2006: $1-billion

Annual expenses, as a % of the fund's total value (also called the MER): 2.25%

Portfolio manager: Capital Asset Management Ltd.

Distributions: Annually, on December 15

*****

INVESTMENT MIX

(JUNE 30, 2006)

Financial services: 34%

Energy: 26.6%

Industrial goods: 16.5%

Business services: 6.4%

Telecommunication: 5.9%

Hardware: 3.7%

Healthcare services: 2.3%

Consumer services: 2.1%

Media: 1.9%

Consumer goods: 0.6%

*****

TOP 10 INVESTMENTS

(JUNE 30, 2006)

1. Royal Bank of Canada

2. Encana Corp.

3. Petro-Canada

4. Alcan Inc.

5. Canadian National Railway Company

6. Goldcorp Inc.

7. Extendicare Inc.

8. Husky Energy

9. Open Text

10. Thomson Corp.

Total investments: 126

The top 10 investments make up 32% of the fund

*****

PERFORMANCE

1997: 21.3%

1998: 12.9%

1999: -0.6%

2000: 24%

2001: 10.3%

2002: -5.7%

2003: -7%

2004: 20.1%

2005: 12.3%

2006: 21.8%

SOURCE: JOINT FORUM OF FINANCIAL MARKET REGULATORS

© 2007 The Globe and Mail. All rights reserved.

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