Keep Reading the Fine Print

Fund companies are in business to manage money, but they are also in business to gather assets. And to do that, many of them advertise. In years past, the ads often focused on short-term performance, listing big gains for various funds in an effort to catch the attention of potential investors. The ads included all the requisite disclaimers, of course, being sure to point out in the small print that future returns may be higher or lower than past returns. But many readers saw the returns and assumed they could be repeated. If they weren't, the investors were likely disappointed and probably looked elsewhere. That buying and selling was bad for shareholders, who may have sold a perfectly good fund at an inopportune time, and it was bad for the fund, as a fund with steady inflows is easier to manage than one with big inflows and outflows.

A recent look through newspapers and magazines shows many funds have improved their advertising by pushing research, expenses, and consistency rather than short-term returns. But five recent print ads, some good and some not-so-good, in The Wall Street Journal show that potential investors still need to go beyond the fine print before choosing a fund.

A Fidelity advertisement argued that the strong returns at Fidelity's funds are the product of better research. That message is fine, but the ad went on to list five funds with one-year returns of more than 20% each, arguably setting expectations too high and inviting potential shareholders to chase returns. What are the odds that  Fidelity Canada (FICDX) will continue to deliver the 30% return that it has averaged over the past five years? And do investors really need a fund that focuses on a fairly small and rather narrow Canadian market? A day later Fidelity cherry-picked a few other international funds, including  Fidelity Emerging Markets (FEMKX), and proudly displayed huge returns (60% over the past year for Emerging Markets) once again.

A Janus ad also argued that its results were strong because of its research. It didn't list absolute returns, instead showing the since-inception quartile ranking of 11 funds versus their respective category peers. That's a good way to argue a fund's superiority without setting return expectations too high. However, the strong long-term records of a number of the listed funds came under prior managers. In fact, six of the 11 funds are managed by new managers. To Janus' credit, the management changes are listed in the fine print of the ad. But investors need to dig deeper to learn what prompted the changes and what the new managers might bring to the table.

American Century pushed teamwork and discipline in a recent ad. It then listed 30 funds with Morningstar Ratings of 4 or 5 stars, in an effort to show its broad strength across multiple asset classes and fund types. The ad got its point across, but Morningstar analysts actually like some of the firm's 2-star funds better than some of its 4-star funds. As we always say, the Morningstar Rating is just one factor to consider when choosing a fund.

T. Rowe Price took a narrower approach, listing the Morningstar Rating for just its target-date retirement funds. It also relied on a quote from Kiplinger magazine, which said that T. Rowe Price has the "best target-date retirement funds." Morningstar also likes T. Rowe Price's target-date funds, so I don't think that T. Rowe Price was pushing boundaries by including the Kiplinger's quote. The ad also explained why Kiplinger names its funds the best. And I like that T. Rowe Price included a line about calling an Investment Guidance Specialist, as it sets expectations that T. Rowe Price will work with shareholders to help them select an investment that is right for their situation.

Vanguard took a completely different approach than the others. Its ad didn't rely on returns, star ratings, or any other measures of past success. It simply showed a drawer full of ties and a paragraph of text discussing how choosing an investment can be easier than getting dressed. It directed investors to a Web site that shows just a few Vanguard funds that investors can use to build a diversified portfolio. I like that Vanguard is looking to simplify the investing process, but I expected a little more. I had no problems with the funds listed but would have liked to see a greater discussion of the risks of each fund. I also think choosing a mutual fund is a little more complicated than neckwear selection.

Overall, though, fund advertising looks to be headed in the right direction, with more companies boasting of good risk/reward profiles and fewer touting short-term returns. Of course, investors should continue to read the fine print and do homework on their own before buying any mutual fund.