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Reading annual and semi-annual reports

Fund reports are worth the read

Now that the kids are back in school and nightly homework a part of the everyday drill, how about doing some homework of your own and making it a point to read the annual and semi-annual reports that your fund family sends out. While the reading might not be thrilling, it's worth your time.

Each year, all funds are required by law to send their shareholders semi-annual and annual reports. And like some corporate reports, these tomes can be off-putting because of their legalese and accounting gobble-dee-gook. But don't let that keep you from going through them. After all, contained inside each are the nuts and bolts of the investment you've made.

Although there aren't any must-read rules regarding these reports, if you make it a point to read through things like the shareholder letter, the fund's statement of operations and all of the footnotes, you'll be on the road to becoming both an educated and a wiser investor.

"These (annual and semi-annual reports) are legal documents and they are written to make a point. But that point may not be the same one investors are looking for " says Steve Schoepke, vice president of research and product development at SunAmerica Asset Management. "So investors need to do a couple of things when reading these documents: They need to read between the lines and then make sure to read all of the footnotes---they are full of information.

Ariel Mutual Funds chairman and CEO John Rogers, Jr., makes a similar point. " No matter how straightforward a company's communications may be, " writes Rogers in a quarterly report dated June 30, 2002, " It goes without saying that the onus is on shareholders to read the fine print."

With that in mind, let's go back to one of the first things that investors come across in these reports--- the shareholder letter.

Depending upon the type of mutual fund, and the style of the person writing it, shareholder letters span the spectrum from short and boring to lengthy and full of information about the markets, the economy and explanations about the fund's performance.

For example, the first sentence in the Vanguard 500 Index Fund's semi-annual report written by John Brennan, chairman and CEO of The Vanguard Group, Brennan writes, " During the six months ended June 30, 2002, Vanguard 500 Index Fund returns -13.2 percent, as weak corporate earnings and accounting scandals at several high-profile companies shook investor confidence."

Brennan's letter then goes into detail about what happened in the market during the first six months of 2002, how the fund and various stock indices had performed and the importance of keeping a long-term perspective when investing in stocks." The continuing decline in stock prices, combined with revelations of corporate malfeasance, seems unprecedented, but it's important to remember that the stock market has recovered from similarly bleak periods."

Schopeke says it's important that the author of the shareholder letter be straightforward about how the fund has performed in the past. If not, they really aren't doing their shareholders any favors. "Investors are smart enough to know that the market has been lousy lately. But if they read a shareholder letter that puts a positive spin on things, they've got a right to wonder about fund management and to be a little offended and insulted."

Following the shareholder letter will be a listing of the fund's top holdings, its past performance figures along with how that performance compares with the fund's benchmark. All useful information when comparing and researching like funds.

And then there are the financial's. Here you'll find things like the fund's holdings, a statement of net assets and a statement of operations. In the statement of net assets in an equity fund are the names of the stocks the fund has invested in, the number of shares owned along with their market value as of the last day of the reporting period. Check out the statement of operations and you'll find out how much the fund spends on things like its advertising and marketing. And, how much the portfolio manager and the fund's directors are paid.

Move to the financial highlights section for a quick overview of the fund including it's expense ratio and portfolio turnover rate. Throughout the entire report will be footnotes and overlook them---small print can contain some pretty big news.


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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