See Morningstar's version of the summary filing.
Morningstar's fund analysts cover 2,000 mutual funds. Their full analyst reports, including Stewardship Grades, are available in Morningstar Principia Mutual Funds Advanced and Morningstar Advisor Workstation Office Edition.
Morningstar's mutual fund analysts filed a comment letter with the SEC on Feb. 27 supporting the commission's proposal for a summary mutual fund prospectus. The SEC has suggested that funds distribute a three- to four-page document to potential shareholders that highlights the fund's strategy, historical performance, and fees. The fund's traditional, full prospectus would be available on the fund company's Web site, and shareholders also could receive paper copies, should they request them. To accompany our comment letter, the text of which is below, we created our own sample of a summary prospectus. You can see our version here.
February 27, 2008
Nancy M. Morris
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-0609
Dear Ms. Morris,
The mutual fund analysts at Morningstar, Inc. appreciate the opportunity to comment on the Commission's proposal for a summary mutual fund prospectus (File No. S7-28-07, Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies).
We support the Commission's effort to make mutual fund disclosure more understandable and meaningful, and we think the proposed summary prospectus is a step in the right direction. We regularly review mutual fund prospectuses as part of our analysis of funds' investment processes and stewardship practices. Many current prospectuses go into great detail on the types of securities funds could (but probably won't) buy and various wide-reaching investment policies, making it difficult for investors to figure out what a fund will actually do. We suggest a greater emphasis on strategy, performance, and cost. We support the spirit of the summary prospectus, and we have some suggestions as to how it could be improved. Our sample version of the document, which is based largely on the SEC's version, can be viewed here.
We organized our version into three main sections centering on fund strategy, past performance, and fees. In the strategy section, we started with a concise, yet substantive, overview of the fund's strategy so investors can quickly determine whether an offering's approach may be appropriate for their portfolios. We discussed the basics here, including the types of securities the fund usually owns and the criteria a fund manager uses when buying and selling securities. These details are far more helpful than the standard investment objective, with its vague references to "income" or "capital appreciation," so we cut the investment objective from our example.
To further help investors understand the portfolio and strategy, we also included a fund's broad asset allocation for each of the three previous calendar years. Fund reports usually don't include this data in pie-graph form as we have in our sample, but the information can be gleaned from the fund's annual report. Displaying this information graphically in the summary prospectus would give potential investors a sense of how the fund has invested in the past--without making hypothetical suggestions about where it could invest in the future.
We also included data on the fund manager's ownership stake in the fund because we've found that shareholders are keenly interested in whether the manager invests alongside them. Potential fundholders shouldn't have to go hunting through a fund's lengthy Statement of Additional Information filing to find this key indicator of good stewardship.
Put Returns in Context
In the performance section, it's critical to compare a fund's returns with those of the offering's stated benchmark. Investors are best served when performance data is put in context, and prospective shareholders can easily determine whether the fund has consistently beaten its performance benchmark. It shouldn't be a burden for asset managers to provide this performance comparison as they typically do so in funds' annual reports.
Clearly Label Fees
As for the fees section, we made a few changes to the way the fees and charges are labeled so it's clear which expenses are paid up front (or later on, in the case of B shares) and which are continuing, annual fees. It's important that consumers understand funds' costs and how those fees impact returns.
Our suggestions would be relatively easy to implement because they incorporate data and information that typically already exists in funds' SEC filings. The summary prospectus should surface the most important fund data so investors have a good foundation for making an informed decision.
Use "Plain English"
The summary prospectus presents a great opportunity for funds to explain very clearly what they're about, but it will be useful to shareholders only if it includes language that simply and concisely explains investing terms. In recent years, many fund companies and fund boards of directors have made an effort to cut out money-management jargon and describe their processes so that novice investors understand how their savings are being managed. We would point to Putnam Investments as a leader in this area.
The Putnam funds' reports are some of the best in the industry because they employ straightforward descriptions of strategy and risk. For example, the description of Putnam Voyager's
Putnam and other firms have demonstrated that it's possible to use "plain English" in SEC filings. A reasonable test, in our view, would be to assume that summary prospectuses will be read by investors who have never before purchased a mutual fund. If a novice can use the summary prospectus to get a clear understanding of how a fund invests, how it has performed, and how much it costs to buy in, then this effort will be a success.
Thank you for the opportunity to weigh in on this important matter. We hope the Commission will incorporate our suggestions in its version of the summary prospectus.
Laura Pavlenko Lutton
Senior Mutual Fund Analyst
Editor, Morningstar Stewardship Grades for Mutual Funds
Laura Pavlenko Lutton is a senior analyst with Morningstar.