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Performance Ads Run, Despite Drawbacks

Fund companies touting year-end performance in their advertisements could be setting themselves up to disillusion investors and incur increased redemptions in the coming year, industry analysts and spokespeople say.

Fear of that happening has prompted some fund companies to not run performance-related advertisements.

"With performance ads, you attract hot money and momentum players that are looking for a wave to ride until it doesn't appear to be going anywhere and then they jump on the next wave," said Steven E. Norwitz, a spokesperson for T. Rowe Price of Baltimore, Md. "Those aren't the kind of investors we want to attract."

"Whenever you have a year like last year, I feel you have to tell investors that we don't think you'll be able to see triple digit returns sustained over the next year," he said. "In fact, I would be surprised if we had many double digit returns this year."

Vanguard Group of Malvern, Pa. is another company that will not run performance-related advertisements.

"Vanguard does not advertise the past performance records of its funds," the company said in a statement to MFMN. "We believe such a practice has the potential to mislead investors into believing that past performance is indicative of future results."

But that fear has not stopped a spate of performance-related advertisements from appearing in several major newspapers on an almost daily basis in January.

"In the context of fiscal performance related to the calendar year, the industry seems more inclined to promote Dec. 31 numbers than any other time period of the year," said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I., a mutual fund consulting firm.

Some companies that do not generally advertise performance have felt recently that it was a good time to run advertisements that highlighted their funds' performances in 1999. AIM Funds of Houston, Texas is one of those companies.

AIM has been running a half-page advertisement in The Wall Street Journal and The New York Times listing 29 of its funds that beat the S&P 500 benchmark this past year.

"Twenty-nine Funds Outperformed the S&P 500 in 1999," the headline of the advertisement reads. The decision to run the advertisement was weighed carefully, said Ivy McLemore, a spokesperson for the company. "When you run these types of ads, you can't please everyone. We simply wanted to make a point that actively-managed funds had an outstanding year." AIM printed the one, five and ten year returns in an effort to inform investors and brokers that this year was an exceptional one, he said.

Still other companies advertise performance on a regular basis.

"I guess I would have to say that a mutual fund company that did not put news of wonderful performance out there would be remiss," said Sally Carleton, vice president of corporate communications for Berger Funds of Denver, Colo.

Four of the eight funds listed in Bergers' current advertisements report year-end returns of over 100 percent. The lifetime performances of the funds are also listed.

"Every mutual fund company is concerned about the issue of hot money," Carleton said. "We always encourage people to invest in the long-term. We recognize that last year was a spectacular year and we realize that it is unrealistic to expect returns of over 100 percent every year."

The SEC has become more vigilant in protecting investors from being misled by performance-related advertising, according to Bobroff.

"If we look at redemptions because of people being unhappy with the performance of their funds, we're talking about billions of dollars," he said. "What we probably wound up with were investors with net losses instead of net gains and it has soiled their experience."