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Perceptions Defy Reality, Survey Finds

Can fund companies influence investors' perceptions of fund performance by building brand recognition through marketing, advertising and favorable media coverage? The answer is yes, according to a recently released survey by Financial Research Corp. of Boston.

"Firms that have the resources to promote strong performance via broadcast advertising have the best potential for creating favorable perceptions among non-shareholders," the survey said.

The firms that run a significant amount of advertising and receive exposure in the media were perceived to have strong overall performance, the survey found. For instance, Fidelity Distributors of Boston was ranked second by respondents for one-year performance while the firm actually finished 35th in actual performance. Conversely, Montgomery Funds of San Francisco finished 53rd in investors' perceptions, but finished second for actual performance. BlackRock Funds of Wilmington, Del. suffered a similar perception problem. Actual performance of the firms' funds placed it eighth overall, but respondent's ranked it 48th.

Consumers' perceptions of fund performance and actual performance matched only with Janus of Denver, Colo. The company was ranked first in perceived and actual one-year performance.

Consumer's perceptions of long-term performance followed a similar pattern as short-term performance perceptions. Vanguard of Malvern, Pa., ranked first in consumer perception for five and ten-year performance while the company's actual rankings were 21st and 25th, respectively. Evergreen Funds of Charlotte, N.C., on the other hand, ranked 53rd in investor perception while its actual five and ten-year rankings placed it 32nd and 39th, respectively.

"These perception gaps' indicate that the most valuable asset - real outperformance - is being squandered by many fund companies," the survey said. "At the same time, however, many other firms are benefiting from favorable investor perception due to their size/market presence, favorable press coverage and/or word of mouth, or strong shareholder loyalty."

For the survey, FRC conducted an online poll of approximately 4,700 households. The survey ranks the 55 largest U.S. fund companies based on consumers' perceptions of performance versus the funds actual performance.

"I think one of the conclusions that we can draw from the analysis is that if you have good performance in your product line, you have to do an aggressive job of advertising," said D. Chris Brown, an analyst with FRC who helped conduct the survey. By doing so, a company can firmly establish its brand and buoy investors' perception of fund performance even if actual performance is lagging, Brown said. Similarly, fund marketers can expect a perception gap when they begin advertising a fund that is doing well, he said.

No amount of advertising and media coverage can compensate for strong actual performance, said Burton Greenwald, president of B.J. Greenwald & Associates, a mutual fund consulting firm in Philadelphia. But, strong actual performance that is marketed successfully can have an impact on consumer's perceptions, he said.

"If you have to choose between a hot shot unknown fund and a strong performing fund that belongs to a well-known firm, you're going to go with the well-known firm," he said.

Shaping consumers' perceptions through branding is increasingly important in today's market because so much business comes from the 401(k) market where participants tend to be less informed about the financial services industry, he said. As a result, more funds are beginning to shape their brand identity around concepts of investing, not performance figures, Greenwald said.