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Fund firms get failing grades in client mailings, study says

Not only are fund companies in Canada bypassing important opportunities to market themselves and their products, they are also failing to communicate some crucial information to their clients. These were the conclusions of a just-released study by DALBAR Canada, the Canadian office of DALBAR, a research firm based in Boston.

The study, conducted in late summer, evaluated the mailings in the latest financial year of 22 mutual fund companies and included 17 of the 20 largest fund sponsors in Canada.

The report, "Consistency in Communications" assesses the consistency and effectiveness of the five pieces of information that fund companies are legally required to send to shareholders. These core communications include simplified prospectuses, annual reports, semi-annual reports, investor statements, and initial confirmation statements. The study reviewed whether the communications made it easy to contact the company and more qualitative factors, such as the firms' ability to convey their personalities through descriptions of history and philosophy.

Some of the report's findings were predictable. For example, all but one of the 22 firms surveyed included information on how to contact the company on all five pieces of core communications.

However, some conclusions were unexpected. Surprisingly, fund sponsors generally failed to promote the services of the sellers of their funds. Despite the fact that 12 of the 22 companies surveyed distribute load funds primarily through the broker-dealer channel, few companies promoted the value of using a financial adviser. In fact, the study found that none of the companies mentioned the benefits of third-party financial advice in more than two of the five communications to shareholders.

For the most part, companies also failed to adequately promote -- or even describe -- themselves and market their products in their core documents.

"Company description was the worst score that was achieved," said Manny Da Silva, Dalbar's director of business development. He pointed out that AGF Management was the only company whose description of itself in the prospectus, annual report and semi-annual report scored an excellent rating.

Also, beyond the "how-to-purchase" new share information that is standard in prospectuses, only one company, no-load direct seller Scudder Funds of Canada, informed investors how to invest in additional shares of their funds.

Although there were some minor differences, the findings of the Canadian study closely mirrored the results of a study in the U.S., Da Silva said. The U.S. study, which was also the first of its kind for DALBAR, was conducted at about the same time and results were released just before the Canadian results.

Lack of coordination within fund companies that produces inconsistency in published materials is also a significant problem, says Da Silva. He added that, in many cases, each of the five pieces of shareholder communications is handled by a separate department.

"All of the different areas are targeting the same investor, and you're not always saying the same thing in the same way. The result of that can be a confusing message -- and a less effective message," he said.

The report did find that many companies have realized that shareholder mailings represent potentially valuable educational and marketing tools. This recognition is reflected in a move towards simpler formats and language.

The trend towards documents that are easier to read is supported by the development of the Canadian fund industry's new fund disclosure document. After months of study, the Canadian Securities Administrators (CSA), representing regulators across the country, has set a deadline of July 31, 1999 for the use of new fund-summary documents.

Prototypes of the new fund summaries, which are aimed at standardizing data and which will replace the simplified prospectus as the main disclosure document for mutual funds, have been proposed and the reactions of investors and the industry to the new documents will be studied.

The new standards for disclosure also address the issue of historical performance, a topic that was also surveyed by DALBAR. The study found that less than a quarter of the fund companies studied used these communications to report investment results effectively. among the key features of the proposed fund summary are graphic depictions of calendar-year returns, as well as reports of compound annual returns for one year, three years, five years, 10 years and since inception.

In addition, the new summary disclosure document includes portrayals of cumulative growth using line graphs of hypothetical investments. Cumulative growth will be portrayed by line graphs showing the growth of an initial hypothetical investment of $10,000, with comparisons against market benchmarks where relevant.

Both the DALBAR study and work on standardizing the main disclosure document have come in response to shareholders' desire for better communications. Fund companies could gain competitive advantages by responding to the desire for clearer communication and by taking advantage of opportunities for promotion, even within communications that are standardized.

"Because you have to spend such huge amounts of money on them anyway -- why not make them more effective?" says Da Silva.