THE MUTUAL fund industry has declared open season on investors again.
Confirmation arrived at the start of February, when Boston-based Fidelity Investments debuted a new ad campaign highlighting some of its big winners of 2003.
While some smaller firms had started using performance ads toward the end of last year, it's a different story when the world's largest fund company starts jumping up and down and flashing its numbers at people.
Investors ought to know better than to chase hot funds, but it seems they don't.
Consider the flow of money into stock funds in January.
Americans poured a near record $40.8 billion into funds last month, according to AMG Data Services, with much of that cash going into last year's hot asset groups like foreign and small-company stocks.
It was the third best month since 1992.
One more reason to fear that investors are chasing performance: The last time this much money was gushing into funds was the first two months of 2002.
You know what happened next.
During that bear market, fund companies stopped promoting performance.
Advertising became about service, or the need to diversify, or the value of professional management (value that was questionable for a lot of funds during the downturn).
But give fund companies one good year and the marketing guys will go into overdrive.
In Fidelity's case, the ads show short-, intermediate- and long-term performance numbers on the highlighted funds. The one-year numbers are awesome, the three-year results decent and the longer-term average gains enticing .
That makes for a good ad, if you run a fund company.
If you're an investor, however, that ad is missing something major, namely the fund's worst performance period.
Before the bear market, many funds were too new to have experienced a significant downturn. So experts suggested turning the performance ads upside-down, saying, "If a fund can go up 75 percent in a year, it can lose that much too. Would I be able to stomach that ride?"
Today, all but the newest funds have wrestled with the bear and survived to tell the tale. Performance advertising never truly tells it.
While regulators have looked at performance ads in the past and forced fund companies to include longer-term results and more in ads that promote past gains, they have never forced them to put an even-better evaluation tool into print.
Here's a suggestion: Any fund that is willing to show off its most recent year of performance should also have to graphically show its worst 12-month run ever.
That decline should not be based on annual numbers - it's not like a lot of investors throw everything in the pot on Jan. 1 - but rather on the strong likelihood that some investors will have the worst possible timing.
If a fund peaked on March 10, 2000, and had its worst year immediately thereafter, it would have to show a bar chart showing the worst-case scenario: The loss from March 10, 2000, through March 9, 2001.
Fund executives will have a cow over that suggestion. They'll cry foul, and they would fight any formal proposal to get that kind of information tooth and nail.
That's precisely why it is worth asking for.
"You'd get a good flavor for volatility looking at that kind of number, a real-live worst potential downside," says Ruben Gregg Brewer, director of mutual fund resources at Value Line. "It's something that might stop some people from chasing the performance they see with all of those big, positive bars that get shown in the ads."
Executives at mutual fund services companies say it would not be hard for a telephone representative to come up with worst-case numbers, but they can't recall the question ever coming up.
If fund companies are going to target investor greed and promote performance, it's time for individuals to come up with a solution, countering the greed punch thrown by funds with a jab of fear.
"It sensitizes people to the trade-offs in both directions," says financial adviser Mark Balasa of Balasa, Dinverno & Foltz in Schaumburg, Ill. "With every fund company pulling performance ads out of the closet again, this is a question investors must ask in order to protect themselves.
"It gives them perspective.
"If recent performance attracts you, look at the worst performance and see if you still feel the same way. If it looks too scary, you'll forget about what you saw in the performance ad, and that might be the best thing that fund investors can do."