Funds' New Sales Pitch: Trust Us...Really

Fund companies are having a tough time figuring out how to advertise their funds these days. The old standby was to advertise recent returns in the hope that some people would think short-term returns were good indicators of future returns. However, the bear market proved that tack was a dead end. If you tell an investor to buy based on short-term returns, then they’ll probably sell when the inevitable downturn comes.

Now, the market-timing scandal is adding to that challenge. Investors are more focused on integrity and are rightly wary of slick marketing campaigns. So, the industry has responded with two approaches. One is an informational ad that has a rather sober message and encourages investors to do more research. No mention of returns that will get you rich quick. No managers staring down at you like Greek gods.

The other approach is to push the firm’s integrity. It says “Trust us (this time).” Scandal-marked shops such as Janus and Putnam are among those that have adopted this line. Some have argued that it’s a little early for companies reforming their practices to speak of integrity. And I’ll go one step further and point out that there won’t likely be any correlation between fund companies with integrity and ad campaigns highlighting integrity. The real relationship is between the size of ad budgets and ads highlighting integrity. Many of the most ethical firms have little or no advertising budgets because they never lost sight of the fact that they were fiduciaries, and not salespeople.

But, I’m cool with both approaches. Both are telling investors about things that actually matter. While saying that you have integrity doesn’t mean you actually do, it does mean you’re going to really hear it if further actions reveal otherwise. I’ve lost track of how many times people rubbed Janus’ nose in the fact that it hyped that its analysts looked under manhole covers but missed some crucial things about Enron and other stocks, including obvious things like P/Es.

For too long the industry was talking out of both sides of its mouth. Fund companies would broadcast 12-month returns to the heavens while offering educational materials about the benefits of diversification and long-term thinking. Not surprisingly, this led many investors to do a miserable job managing their portfolios. Some investors built strong portfolios, but too many chased performance and held wildly unbalanced portfolios, and that ended disastrously in the bear market.

These new ad campaigns won’t change behavior overnight, but over time, they can help. The industry has to act more responsibly and most of today’s ads are a big improvement. We’re seeing more sober approaches in sales efforts, too. Many load fund firms such as Putnam and AllianceBernstein are pushing diversified packages of funds that have balance built right in. That’s a big improvement over the flavor-of-the-month approach.

In sum, these are signs that on some fronts at least, the industry is behaving a little more responsibly.

Poll Results
Last week, I asked whether Vanguard’s move to diversify its corporate bond funds was a good move or a bad one, and you were evenly split on the verdict.