MOST mutual fund advertisements carry a warning that past performance is no guarantee of future returns.
Last week, the Securities and Exchange Commission issued a big reminder of just how true that can be.
The SEC censured and fined the Van Kampen Investment Advisory Corp. and its former chief investment officer. They had failed to say in advertising how much the company's Growth fund was affected by hot initial public offering stocks and how it would be unreasonable to assume that performance could continue.
While this case is very specific, sources say the SEC is closely pursuing a number of other cases of misleading track records being used in advertising.
Here are the specifics of the Van Kampen case:
During 1996, Van Kampen Growth was an incubator fund, not yet open to the public. Fund companies do this all the time, starting funds with small amounts of seed money, hoping to generate big gains that will attract investors once the fund is ready to open "for real."
While in incubation, Van Kampen Growth had between $200,000 and $380,000 in assets, according to the SEC. Van Kampen advertised that the Growth fund gained nearly 62 percent in 1996, topping all of its peers for the year.
The Oakbrook, Ill.-based firm pushed that record hard, and it worked. Van Kampen Growth took in nearly $110 million in assets during the first five weeks it was open to the general public.
But more than half of the fund's incubator gains were the result of buying IPOs. According to the SEC, the fund held shares in more than 30 new-issue stocks during 1996, always owning between 100 and 400 shares.
That's enough action to make a tiny fund look terrific, but not enough juice to radically move a $100 million fund.
The SEC found that Van Kampen's former chief investment officer knew performance was driven by IPOs, but did not inform senior officers. The company, in turn, did not disclose in ads that the fund had no prayer of repeating past performance by investing the same way it had during the incubation period.
"You can not advertise a spectacular return without advertising the full picture," says Jeannette Lewis, assistant regional director of enforcement for the SEC's Midwest regional office.
"It is very questionable whether the fund could ever get substantially similar results to what was advertised. They just would not be able to get their hands on enough IPOs, and they didn't say anything about that in the fine print."
It's that last part that is the real lesson for investors in this case. Whenever a fund company advertises performance, always read the fine print.
You're not just looking for standard disclaimers. Certainly, anyone buying the hot Internet funds after two years of 100-plus percent gains will be told that the funds are highly speculative and that the recent record is extraordinary.
What you are looking for is proof that the track record may not be a great indication of what really happened in a fund.
This goes beyond a fund that starts small, does great, and has a hard time keeping performance up once it gets big. The SEC has allowed some types of investment portfolios -- insurance accounts, bank trust funds, and private investment companies, for example -- to morph into mutual funds and market their track record to consumers after a few minor adjustments.
But trust funds and private accounts are not mutual funds. Allowing them to use their track records "as if" they were a fund is revisionist history, kind of like allowing the NFL's New England Patriots to say they went to the Super Bowl last year because they might have gotten that far had several star players not been injured.
Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at firstname.lastname@example.org or at the Boston Globe, Box 2378, Boston 02107-2378.