REAL FUND-EXPENSE FIGURES GET EASIER TO FIND

MUTUAL FUND WATCH By Robert Barker

Better disclosure of what fund companies charge to manage your money is right around the corner. On June 1, mutual-fund prospectuses -- the government-mandated documents that investment companies use to describe their services -- will begin appearing with clearer notification of fund companies' fees.

Many fund operators are in the habit of advertising their funds with higher, so-called teaser yields, which are created when the fund's adviser waives or otherwise discounts some or all of the actual expenses of running the fund. The amount of actual expenses winds up buried in footnotes -- where only the truly diligent will find the figures.

Consider the current top-yielding money-market fund -- Strong Step 1 Money Fund, which has been paying an annualized yield of 5.72%. That's great, except that investors who buy shares in the fund are agreeing to pay 1.26% annually in management and other fees -- expenses that currently are being waived in their entirety by Strong. If the actual expenses were charged, Strong Step 1 Money Fund's yield would sink to a below-par 4.46%.

As it happens, Strong says its fee waiver on the fund is guaranteed through Aug. 1. Tony D'Amato, director of retail marketing for the Milwaukee-based fund complex, adds that "we hope to keep this fund highly competitive," implying that the fee waiver might continue. But he acknowledges that any waiver is at Strong's discretion.

And there's the rub: If you bite on a teaser rate, you have to keep alert to its disappearance if the fund company decides it has gathered enough assets in the fund. It's one thing for a fund company to forgo a percentage fee on a small pot of money, and something else altogether to do it on a big pile.

How common are fund fee waivers? They show up across all classes of funds, but they're especially prevalent among money-market funds. More than 58% of money funds currently waive some portion of their fees, according to Peter Crane, managing editor of IBC Financial Data, a publisher of money-fund guides (www.ibcdata.com). The average waiver is $11 on each $10,000 invested, yet with 1,331 money funds holding $1.145 trillion in assets, this is no small issue. The average annual expense charged on money-market funds is $58 on each $10,000 invested.

In the future, under a recent Securities & Exchange Commission decision, the practice of burying the fee waiver in fine print will be reversed: In the table where every prospectus details fees and expenses, the full or contractual figure will be presented first and foremost in regular-size type. Any discounted figure will go in a footnote.

The changes are part of a broad overhaul of fund prospectuses, which together make up "the most significant changes to mutual-fund disclosure in 15 years," according to Barry Miller, associate director of the SEC's division of investment management. He notes that every fund needn't comply immediately and that investors will see the new prospectuses emerge on a rolling basis over the next 18 months or so.

Once the reform is fully in effect, it figures to change where investors put their money to work. It may even encourage fund companies to operate more efficiently. Most investors tend to shop for money-market funds simply by comparing yields. "Investors really only care about yield, and they don't care how they get that yield," observes Crane.

But in money-market funds, there really are only three ways to raise a fund's yield: by lowering the credit quality of securities in the portfolio; by lengthening the average maturity of the portfolio; or by cutting expenses. The first two ways make a fund riskier. So, credit quality and average maturity being equal, the most efficient funds in the future figure to be those that have the highest yields on display in prospectus fee tables.

To help you compare money-market funds, I asked IBC to compile two tables. The first lists the nation's top-yielding, generally available funds with minimum initial investments of $25,000 or less; the second lists funds that actually incur the lowest expenses -- in other words, the most efficient. As you'll see below, there's a good bit of difference, and if you don't want to worry about whether or when a high teaser rate will disappear, you'll do well to pick from the second list.

Take a look at the accompanying tables.

Edited by Douglas Harbrecht