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After-Tax Disclosure Could Aid Marketing

The Securities and Exchange Commission, long the scourge of fund marketing departments, may have given marketers something to smile about in adopting new regulations on after-tax disclosure of performance information. The new regulations, which require funds to post before and after-tax performance information in prospectuses and advertisements promoting funds' tax management, provide some funds a new approach to marketing their product, said industry executives. The regulations were adopted Jan. 19.

"In a funny way, the SEC could be doing the fund industry a favor by giving them a new way to market funds that they didn't have before," said Dan Ross, president of Wechsler Ross & Partners, a marketing and design firm for the financial services industry, of New York. "People have been trying to sell tax-managed investments for several years, with what I would say is limited success."

It has been difficult to market tax-managed funds because there has never been a uniform method to quantify the funds' tax efficiencies, Ross said. However, that will change with the adoption of the new regulations.

"Once these claims get translated into numbers, you're going to see much more attention paid to after-tax returns and in fact, I think this could be a whole new area of marketing for funds," he said. "What is going to enable this is consistency of reporting in an SEC-mandated format. Without the SEC stepping in, there is no way to quantify all of these claims."

The new regulations will increase investors' awareness of the implications of taxes on performance and will be an important part of Eaton Vance's marketing strategy, said Tom Faust, chief equity officer for the firm. Eaton Vance, of Boston, is known for its municipal bond mutual funds but also manages $19 billion in assets in six tax-managed mutual funds, which are distributed through financial intermediaries.

"We will certainly be ramping up our program of supporting these funds in new promotional programs," said Faust. "One of the things we have in mind is we want to be in a position to be an early adopter of the regulations in making this information in the SEC-prescribed form available for all of our tax-managed funds. We will do that as soon as we can."

The timing of the rule is fortuitous for tax-managed and tax-efficient funds because many investors who were heavily invested in technology are still smarting from huge tax distributions they took this year, said Scott Cooley, an analyst with Morningstar of Chicago.

"A lot of people are ready to pay attention to these issues given the fact that there are a lot of painful memories out there," he said. Funds would be wise to take advantage of the current situation, he said.

"I think there is definitely an opportunity and there has never been a better opportunity," he said.

Confluence Technologies of Pittsburgh is one firm ready to capitalize on the attention being paid to tax efficiency, said Kirk Botula, vice president of the software and technology firm that provides 40 percent of all U.S. funds with investment performance calculation software. The firm has developed a service that will calculate funds' after-tax performance conforming to the new SEC standards, he said.

Although funds will be required to include the new data in prospectuses beginning Feb. 15, 2002 and in advertisements starting Oct. 21 of this year, the new regulations are going to quickly raise the industry's awareness of tax efficiency, Botula said.

"I think there is going to be a sudden awareness about [taxes] in the industry," he said. "We think our after-tax returns service will be able to help a lot of people ... solve this problem."

Moreover, the new regulations will stimulate sales of tax-efficient funds, he said.

"Some people have said that they think after-tax disclosure may hurt the sales of funds, and I don't think that's the case," Botula said. "What I think you'll see is product differentiation. You'll see funds competing based upon an additional relevant piece of information."

That competition began last year when Vanguard of Malvern, Pa. announced it would provide before and after-tax performance figures for its mutual funds, said Cooley of Morningstar. Shortly after that, T. Rowe Price of Baltimore, Fidelity Investments of Boston and Eaton Vance announced they would also provide after-tax performance data for some of their funds, he said.

The new regulations have also revived Lipper's plans to provide fund rankings based on after-tax performance, said Sean McLaughlin, a spokesperson for the firm. Last year, the firm postponed plans to rank funds using after-tax performance figures because there was no standardized method of comparing performance, he said. Lipper's after-tax rankings will use the SEC's standardized format, McLaughlin said. He declined to say when the rankings would be available.