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Number Juggling Affects "Performance"

Poof! Now your under-performing fund looks good.

During the recent market boom, fund companies began using fund performance in marketing materials more than ever. Now that the market has fallen, fund firms are finding new ways to "juggle" the numbers so that funds appear attractive.

Earlier this month, Fidelity Investments announced that its Select Health Care Fund was the top performing mutual fund over the last 20 years, a rather impressive fact. There is an interesting point to be made, however. While the fund has had strong performance over a 20-year period, it happens to be down 14.99% so far this year, according to Morningstar.

Fidelity is not alone. While fund marketing has moved away from performance data somewhat during the downturn, people still want to see numbers, according to analysts. And more and more fund companies are presenting statistics that go beyond the one-, three- and five-year standard return figures to highlight any strength a fund might have.

"There are a lot of things you can do with fund data to improve the appearance of the fund," said Donald Cassidy, senior analyst at Lipper. "We often see funds curiously changing their benchmarks." Fund companies will occasionally call Lipper and maintain that the fund tracker is using the wrong classification for its fund. Many times, it appears as though the company wants to change the classification simply because the fund will have better numbers against other peers, Cassidy said.

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"Finding a benchmark that the fund is beating is the most frequent thing a firm will do to alter data," said Christine Benz, an analyst at Morningstar. "If you've got a value fund that has done so-so, compare it to the S&P 500 which has done worse."

In fact, there are a huge number of things firms can focus on besides one-year performance according to Ramy Shaalan, a fund analyst at Wiesenberger, a unit of Thomson Financial, (the publisher of MFMN). Wiesenberger even launched a marketing and sales tool last October called FundEnterprise, which, using more than 200 data points, offers firms the capability of finding numbers related to a fund that might ordinarily not be used. "It allows you to find out your fund's hidden strengths," claims Shaalan.

For example, performance consistency can be a marketable statistic, he said. Even if the fund does not have spectacular numbers, if it has rarely been negative, firms can figure out how many quarters the fund was positive. In some cases, especially during a market downturn, the performance of the fund simply looks bad. However, firms utilize the fact that the fund's respective benchmark is even worse and figure out what percentage of the time the fund is beating the benchmark, said Cassidy. If that's good, they'll market that.

Another alternative performance statistic firms use is tax efficiency. This year, tax repercussions received a lot of attention and so that could be an area to focus on if a fund's performance is poor, according to Shaalan. "Let's say a fund's tax efficiency is 81%. That's not great, but if it's better than 95% of the other funds in its group, why not say so," he said.

Firms will often add older numbers to pump up performance, according to Cassidy. "A great 20-year return might include a miserable last five years," he said. Firms can even play with the scale of the charts that plot performance in order to make things look better. "If you want to show a big increase in the beginning of 2000, but there is a huge drop off that happened recently, you can cut a 5-inch chart down to a 2-inch chart, and suddenly the drop doesn't look so bad," said Cassidy. "It's all in the graphics."

Another widely used tactic that firms are employing during the downturn is the highlighting of fixed-income products, according to Scott Berry, an analyst at Morningstar. "When times are tough, firms tend to emphasize the yield of their bond funds," he said. "That's a good way to shift the focus away from equities."

One thing to consider is how the use of the new numbers is going to look, according to Benz. It may be obvious that very specific data may purposefully ignore important performance numbers and firms do not want to give the impression that they are trying to trick investors. Of course, firms have to be very careful about giving misleading information lest they draw the attention of the Securities and Exchange Commission. "These days, firms are generally pretty clear about what they can and can't do," said Berry. "Everyone knows that the SEC is keeping a close watch."

Clearly, the main reason for the adoption of alternative data is that the downturn has obliterated many high-flying performance numbers. "Advisors are not just looking for standard performance numbers," he said. "They're looking at a fund's resistance to a bear market because investors are now saying they want something that has a history of surviving storms, as opposed to something that just rides the waves."

Deriving and knowing the hidden strengths of a fund is important for the marketing executive planning the overall marketing campaign, said Shaalan. Firms need to position funds on their real strengths, and not only in a downturn.