MUTUAL FUNDS MAY NOT BE WHAT YOU THOUGHT YOU BOUGHT Did you know that your U.S. government bond fund could invest as much as 35% of its assets in junk bonds? Or that your global equity portfolio includes U.S. stocks? A mutual fund can use a certain name if, under normal market conditions, at least 65% of its assets are invested in that category, according to Securities and Exchange Commission guidelines. For funds that call themselves tax-exempt, the minimum mix is 80% tax-exempt and 20% other assets. If a fund uses the term municipal, the requirement drops back down to 65%. Confused? How about the terms "global" and "international"? The dictionary defines global as involving the world and international as reaching beyond national boundaries. So it should come as no surprise to the literally minded that global funds include U.S. stocks or bonds, while international funds don't? But many people don't realize this. It is not the intention of the SEC to give license for funds to mislead investors, but to allow those funds the ability to have good management. An investor can find out generally what a fund can invest in by consulting its prospectus, and can discover exactly what a mutual fund owns at a particular point in time by consulting its annual or semiannual report. The report will list all the holdings as of a certain date, including complicated assets like derivative securities and forward currency positions that might never get mentioned in the fund's prospectus. If you want to find out what the fund is investing in, the annual report is critical. Such a snapshot report is not perfect, but it gives investors a better understanding of a fund. If you want a current portfolio mix, call the fund sponsor to ask for a fax of the fund's current portfolio. Finding out exactly what a mutual fund owns as well as what it could buy is crucial information for investors. It strikes at the heart of what is happening with your money and what could happen to the money, including the risks that are taken. The prospectus, often a drab legalistic document, lays out the parameters of the fund's investment policies, objectives and possible practices, including most expenses, but it is not nearly the whole story. The prospectus establishes the rules of the game, but it doesn't necessarily establish what the practice is. Many funds have elastic investment objectives. These can be wild card risks. Under SEC rules that took effect July 1, 1993, new prospectuses will be more informative, including, for example, the name of the portfolio manager. Total fund returns for the last 10 years, a discussion of the factors and strategies that affected the prior year's performance, and a chart illustrating how a $10,000 investment would have fared compared to a broad-based market index will also be included in the new prospectus or annual report. The new guidelines don't require funds to list winners and losers among their investments, or how the use of futures contracts, derivatives or forward currency contracts affect performance. But some mutual funds may choose to divulge such information in keeping with the spirit of the guidelines. One piece of information they won't have to disclose in the prospectus is an asset class that comprises less than 5% of the total portfolio. That's the current rule and it isn't about to change. While the performance of 5% of a fund's assets generally does not have a dramatic impact on the performance of the overall fund, its effect can be multiplied substantially if the asset is used for leverage. Some extraordinarily powerful residual bond can create as much as four times the leverage of a traditional bond. If interest rates rise, the value of the residual bond -- a popular derivative also known as an inverse floater -- will drop almost four times as much as a regular bond. The investor may discover in the fund's Statement of Additional Information that the fund can invest in such a complicated product but the disclosure won't be easy to find. this document is usually lengthier and more turgid than the prospectus. Another piece of information not required in a mutual fund prospectus or in the annual report is the cost of brokerage commissions, which could add up in funds with a hefty turnover rate. Given current low interest rates and low inflation, investors have to be attuned to every cost a fund incurs. They have to be conscious of how much it costs to get their money managed. If a fund has 2% of assets in brokerage costs, that may adversely affect performance -- or it may not if the portfolio manager is skilled at taking short term profits. The issue of disclosure about mutual fund activities is probably as old as the business itself. But recently it has received more attention because of the new SEC rules and other developments. In mid-1993 the New York City Department of Consumer Affairs charged the Dreyfus Corp. and the Franklin Advisers for engaging in deceptive advertising. Dreyfus was cited for claiming in a brochure that its Growth and Income Fund does not invest in junk bonds even though its prospectus states that up to 35% of its assets may be invested in convertible debt securities deemed to be junk bonds. This is the portion of the fund left over after 65% is invested in securities that resemble the name of the fund. Franklin was cited for claiming in an ad that its Valuemark II fund guaranteed retirement income for life even though the fund pays an annuity issued by an insurance company that is only as secure as the insurance company itself. You can have a full team of managers even for a small nestegg If you are not ready for global investing, or are seeking domestic investment management to go alongside your international portfolio, there is a service available for your needs. Many investors haven't the time, experience or inclination to choose and supervise their investments. Family and business might be taking every possible moment, and many can't or won't take the time to invest properly. This is where an investment manager can help. Of course it will cost, but if you don't have the time and experience to do the job, right, a professionally managed portfolio is likely to give you a better return than a self-managed portfolio that you don't devote time to supervise regularly. The Investment Monitor Service is an investment management system that uses top institutional money managers with proven track records. Each manager stays within his specialty, such as blue chip stocks, international stocks, corporate bonds, etc. The monitoring service shifts funds between managers based on changing market conditions. This allows for multiple levels of management -- the managers, who are constantly managed for performance, and the allocation process. As many as 12 different portfolio models are available from the Capital Preservation model to the Global Aggressive Growth, depending upon your investment needs and goals. Each model utilizes eight to twelve managers, all working on your behalf. All this might sound expensive, but it actually costs no more than the management fee in a typical mutual fund, while giving you much greater diversification than being invested in just one mutual fund. The average management fee is 1.75%, and the minimum account size is $25,000. No opening fees, no closing fees, no transaction costs. The service is also available for pension plans, IRAs, and 401K rollovers. Don't let that management fee put you off. Popular money magazines -- who get most of their money from running mutual fund advertising -- have done a good job of convincing the public that investment management comes free because of all the ads for "no- load" mutual funds. But all "no-load" really means is that there is no sales charged added on to the purchase price. There is a management fee, but they don't make it visible, and most people don't read the fine print. So you're not getting free management by using a mutual fund. For more information and a brochure, write Investment Monitor Service 705 Melvin Avenue, Suite 102 Annapolis MD 21401 or call (800) 545-8972.