Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 5, 1993 TAG: 9304060368
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
PROSPECTUS IS DULL READING, BUT IT'S RIGHT ON THE MONEY
The mutual fund you're considering buying into has sent you its prospectus. Your immediate problem is how to make sense of all that print.A prospectus, joked Peter Milward, "is a great cure for insomnia."
It tells you just about everything you need to know about a mutual fund or a new stock issue. Yet the booklet appears daunting to nearly anyone faced with wading through it.
That's why many people turn to a trusted broker or financial adviser for help in choosing a mutual fund, said Milward, who is manager of the Roanoke office of J.C. Bradford & Co.
A mutual fund that markets its shares directly to the public must, by law, send you a prospectus in advance of your purchase.
A broker, on the other hand, sends it after the purchase and gives you five business days to change your mind and rescind your order to buy.
Milward, whose company is a broker selling securities, said a mutual fund prospectus tells you three things you must know before you buy:
Any initial sales fee, plus other charges imposed on an annual basis.
Performance of the fund over long periods of time.
Most importantly, the investment objecthe fund, so you can tell if they jibe with your own goals.
Milward said mutual fund prospectuses are identical in format to comply with rules of the Securities and Exchange Commission.
The first page is a summary of expenses. A prospectus for Washington Mutual Investors Fund, for example, shows an up-front sales charge of 5 3/4 percent, which comes off the top of the investment.
The same fund, however, had an annual sales charge of only 0.74 percent, which is low by industry averages. Depending on the length of time that the fund shares are held, it could outweigh the sales charge.
Investors should look for funds to note annual charges that total no more than 1 to 1\ percent for management services, 12B-1 (promotional) fees and other costs such as printing, postage, legal fees and audits.
If a fund charges as much as 1 1/2 percent, Milward pointed out, it means investors will pay 15 percent over a 10-year investment. This fund would cost 7.4 percent in a like period.
Every fund has costs, Milward said.
The next section of the prospectus deals with the performance of the fund over the prior 10 years. It is quoted in terms of net asset values. Our example, the Washington Mutual fund, according to its prospectus, gained between $9 and $16 in assets every year.
Immediately following that statement is the fund objective.
Washington Mutual said it aims for income and an opportunity for growth of principal through sound common stock investments.
This is the place where investors need to compare their personal financial goals for investments against those of the fund.
Milward pointed out that thousands of funds have differing goals ranging from the safety and income of government bonds to new stock issues or high-yield (so-called "junk") bonds, which often carry greater risks.
The fourth section deals with invest results over the history of the fund. Washington Mutual, for instance, gained 17 percent a year.
Gold may be hot one year and small company stocks the next, Milward said. An average investor should seek out steady good results rather than a No. 1 ranking for a single year.
That's followed by information about the people who run the fund, methods of redemption and the like. Unless it interests you, Milward said, skip over it.
Unless you have a lot of money, that is. Milward said one section lists "break points," or lower fees granted to families who invest $50,000 or more.
When it comes to stocks, Milward said, a prospectus is issued only for a company going public for the first time or a company issuing new stock.
People who buy existing stocks, such as Norfolk Southern Corp. or General Electric Co., must rely on their knowledge of the company, a broker's advice or research reports.
Milward said most average investors should not buy new issues of companies coming on the market for the first time. This is a field for more sophisticated investors with greater appetites for risk.
Anyone planning to play this market, he said, should read two books.
One is "Blue Chips & Hot Tips" published by the New York Institute of Finance. The other is "One Up on Wall Street" by Peter Lynch, former manager of the Fidelity Magellan Fund. Both can be ordered through book stores.
It's also important to know something about the new company, Milward said, and have a belief in its product.
This is more possible than the average person might think. But consider that Longhorn Steak House, which has an outlet in Roanoke, went on the market last year. Fossil Corp., which came out last month, sells designer watches that are available in area department stores. That means a potential investor can judge for himself the quality of a company's goods and services.
Before buying stock, as opposed to a mutual company, search the prospectus for information on how the money raised by the bond issue will be spent. Milward said it should go toward company growth, not paying back the founders for their original investment.
In the case of stocks, look at the people who run the company. Find out what stake they have in terms of shares owned, both now and after the new bond issue.
Milward said potential stock investors should read the short summaries of the company's business and finances. Look for steady growth in sales and profits each year for the last three years.
Always read the section on risk factors, Milward said, because every business carries risks.
Fossil Corp., for instance, discussed threats from fashion trends, competition, foreign manufacturing and political turmoil in countries where it has factories.
A section labeled "certain transactions" is a most important - and most interesting - reading in a stock prospectus.
Milward said that contains "the dirt," the serious negatives or problems. That's where you will learn if the president's wife's mother owns the factory for which the company pays exorbitant rent.
Skip over the detailed sections on company operations, legal opinions and financial statements, Milward advised.
Before buying a large amount of a new stock issue (as opposed to a mutual fund) take the prospectus to a certified public accountant, Milward suggested.
When it comes to new company issues, Milward said, "if you don't understand it, don't buy it."
\ Money terms\ Here's a glossary of terms used in this story:\ \ Management fee: The amount paid by mutual fund to their investment advisers. Generally it is about half of 1 percent of the fund's assets, according to the Investment Company Institute, a trade group.\ \ Mutual fund: A company making investments on behalf of individuals and institutions with shared financial goals. The fund pools money from its shareholders and manages their interests in a variety of stocks, bonds and other investments.\ \ Net asset value: The market value of a mutual fund's total assets. A key figure for investors is the net asset value per share, which is computed by dividing the fund's value by the number of outstanding shares. It is especially important when an investor decides whether to buy or sell shares.\ \ Prospectus: A formal, written offer to sell shares in a business enterprise.\ It contains information that an investors needs to make an informed decision.