Mutual fund prospectuses may get easier on the eyes


Here's a scary fact: Investors, most of them not knowing exactly what they are investing in, pour billions of dollars into mutual funds each month. Now, some in the mutual fund industry are trying to change that.

Fidelity Investments, the nation's largest mutual fund company, last week rolled out a rewritten and redesigned sales document for its high-profile Magellan stock fund, the first in a series of revamped prospectuses that the firm will release over the next 18 months for its more than 100 funds.

Improved sales literature has been released by a sprinkling of other money managers. Many more are expected to follow Fidelity, a traditional trendsetter, as the industry tackles a pervasive problem that could come back to haunt it.

"The state of mutual fund prospectuses on the whole is quite dismal," says John Rekenthaler, editor of Morningstar Mutual Funds, a Chicago newsletter.

According to one survey, more than half of all investors in mutual funds can't -- or won't -- read the eye-glazing documents full of legalese and sales information.

Fidelity includes a portfolio list of stocks and other securities in the funds' annual and semiannual reports. But first-time investors must request these reports when they ask for prospectuses. Even so, Mr. Rekenthaler said, Fidelity's make-over "is a big deal because they're the biggest fund group in the country, and they're going out there promoting that."

Fidelity's move comes as the mutual fund industry faces pressure to educate investors who are choosing riskier stock and bond funds to replace low-yield deposits as the preferred storage for nest eggs.

Mutual funds are "the fastest-growing investor segment," said Eric Kobren, editor of Fidelity Insights, a newsletter that tracks the firm. "As you grow fast, you attract more people who are less knowledgeable. It has to be brought down to a level where everyone can understand it -- not just the mutual-fund junkie."

Selected Financial Services, a Kemper Financial Services subsidiary, revamped prospectuses on its mutual funds this year. The impetus for the changes was an independent survey commissioned by the firm that found that only 40 percent of investors bother to read a prospectus. In addition to simpler materials, Selected combined in one document prospectuses for all of its funds.

Fidelity executives set about changing the documents after investors complained that they "weren't written in English" and were confusing and intimidating, said Ellen G. Hoffman, a Fidelity vice president.

Fidelity's layout won't compete with Vanity Fair magazine. But the new document is a sight for sore eyes and tired minds. It defines investment concepts, with boxes titled "Understanding Expenses" and "Understanding Performance." Most important, it is written concisely.

In a recent repackaging of its investor reports, John Hancock Mutual Funds found a way to give investors some information about fund holdings in the prospectus. In a "wrap" sheet around its Sovereign Bond Fund prospectus, for example, the company provides both a breakdown of the industries invested in -- industrial, financial, utilities -- and its five-largest holdings -- from Ginnie Mae to Standard Credit Card. The average maturity of the portfolio's securities is also included.

The reason for the change: "The investor sees the prospectus when they first buy the fund," said Susan Volpe, John Hancock's director of corporate marketing. "It's important before they invest to know what the fund's current holdings are."

Morningstar's Mr. Rekenthaler, who believes that funds prospectuses should contain some information, blames the Securities and Exchange Commission, not just fund managers, because it does not require the information.

"The SEC tends to nit-pick on the boilerplate language, making sure you get in information about options and repurchase contracts," he said. "But they don't get into the question of what types of stocks do funds buy."

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