Mutual Fund Strategies: A New Century Demands a New Approach

EXECUTIVE SUMMARY * RUMORS OF THE DEATH OF MUTUAL FUNDS ARE GREATLY exaggerated. Funds have grown and adapted over their 80-year history and continue to meet investors' needs for diversification and professional management. Better tools to analyze and select funds mean CPA/financial planners can make better use of them in client portfolios. * SEC-MANDATED AFTERTAX REPORTING RULES MEAN funds must report as a return what the investor actually takes home, not what the fund manager generates. This will make it easier for CPAs to compare funds because all will use the same reporting standards. * IN RESPONSE TO DEMAND, MOST MUTUAL FUNDS HAVE increased their industry and sector fund offerings in areas such as energy, financial services, health care or technology. Exchange-traded funds also are a popular alternative for clients concerned about the tax consequences of mutual fund investing. And mutual fund companies also are making more hedge funds and funds-of-funds available. * CPA/FINANCIAL PLANNERS HAVE A VARIETY OF analytical tools they can use to make mutual fund recommendations. These include software, Internet databases and other online research tools that make it easier to compare and contrast funds, determine risk and provide in-depth information on a prospective purchase. * FOR THE FUTURE, CONGRESS IS CONSIDERING legislation that would eliminate the need for mutual funds to distribute capital gains annually. Shareholders would instead pay taxes on gains when they redeem their shares. And the SEC has issued new regulations requiring accuracy in fund naming--a fund must invest 80% of its assets in its namesake. Over the last several years, headlines in the business press proclaimed the coming demise of the mutual fund industry. fees were too high, flexibility too low and shareholders had too little control over the tax consequences in traditional open-ended mutual funds. Exchange-traded funds (ETFs), hedge funds and separate accounts (which give investors direct access to money managers) were sounding the death knell for the 80-year-old mutual fund industry. But to paraphrase Mark Twain upon reading his obituary, reports of their death have been greatly exaggerated. Open-ended mutual funds still are around because they continue to serve investors' needs for diversification and professional investment management. They are growing because they can adapt to demands for improved products and because of newer, more sophisticated analytical tools available to the CPA/financial planners who recommend these funds. new tools not only give investors a chance at better long-term performance, they also provide CPAs with an edge in using this investment product. bottom line? If mutual funds haven't been part of your client's past, they certainly will be part of their future. Here is a review of the new analytical tools that can help CPAs pick the best funds for their clients as well as an update on the new services that make traditional mutual funds more attractive. CONSTANTLY IMPROVING As originally conceived, mutual funds had serious flaws, some of which are described above. industry responded. Total shareholder costs on equity mutual funds declined 40% over the last two decades, funds now come in every size and flavor and management has worked diligently to reduce the annual bite for taxable investors by lowering portfolio turnover. In addition to the efforts by fund management, CPAs are getting another boon in helping clients manage investment taxes. SEC-mandated aftertax performance reporting will spread across the industry this year. CPAs will now be able to compare apples to apples because a fund is required to report as a return what the investor actually takes home after paying taxes, not what the fund manager generates. The new aftertax reporting is a much more effective way to allocate assets, says Carl Kunhardt, CFP of Quest Capital Management in Dallas. …