MUTUAL FUND LESSON 3 This week we will discuss many of the criteria that make up a mutual fund and ways to assess this information in order to understand what the fund will do for you.

*** NO NAME MUTUAL FUND The mutual fund example we are going to use is one of my favourites. The brand name shall remain anonymous, for two reasons: it won't help you understand the structure of a particular mutual fund and these articles are intended for educational consumer investing.

Last week, if the editor was successful, the column was able to print the first reporting page for this fund through November of 1998.

This mutual fund, one of the first ever in the United States, was started in 1924, and is still growing at an average rate of return since inception of 10.09 percent. If you had put one dollar in this fund at inception, and left it for the long-term until 1998 (through the stock market crash of 1929 and all other market events since), it would be worth today approximately one thousand, three hundred and fifty dollars ($1,350).

Suppose you had invested $10, $100, or even $1,000. Add a few zeros to that number. Amazing, is it not? In spite of the severe depression in the United States that lasted more than four years, some investors were able to keep their money fully invested, and some today (or their heirs), are still living to enjoy it. Most people when they see these statistics think, oh, this is just hype. No, it is not, there were shrewd, street-smart cautious investors in the early 1900s, just as there are today, but back then, they did not have the benefit of the Age of Information Access. Investing and planning for the long-term does pay off! LONG-TERM INVESTING CASE A case in point; this is a true story. A client of mine (while I still practised in the United States) came to see me for some tax advice. This was the good kind of advice, the kind with a happy ending.

All too often when the statement "I need some tax advice'' is made, we suspect the client has run afoul of the United Stated Internal Revenue Service, very often through a total misunderstanding of tax law.

This particular client's grandfather had just given her and her two sons, two shares (2) of his bank stock (he was the largest shareholders). Why such a small number? The minute the client informed me of this gift, I knew (in my tiny mind) that I was seeing something absolutely extraordinary. For a while, I knew about the exponential growth of long-term investments, I had never witnessed anything first hand.

ANOTHER DEPRESSION ERA MEMORY And the story is this. During the depression in early 1930, her grandfather scraped up enough cash to buy a small bank on the East Coast, somewhere in New York State. He paid $900 for this business and received 900 shares of stock.

Over the years, the bank prospered growing conservatively and slowly, building assets.

In the early 1990s after the stock market crash of 1987, which this bank weathered quite nicely, many of the US interstate banking laws were modified to allow a freer flow of banking commerce.

Now large and small cash-rich aggressive and hungry banks could cross state lines and buy up other banks, in the endless quest, even today, to increase their market share (in bank vernacular, this is referred to as share of customer wallet).

And so as commerce goes, as her grandfather became an elderly (and extremely wealthy) man, still holding the majority of the shares of this bank, he agreed to sell.

HARD WORK TRANSLATES INTO HIDDEN WEALTH The price at the acquisition of his bank, the shares that granddad had purchased for one dollar each in 1930, 67 years later sold for $75,000 per share! Because this transaction placed him in the top taxable tier with the highest tax percentile, the dear gentlemen now had a very, very large tax problem, along with this new wealth.

And canny man, that he was, he surrounded himself with tax experts, financial planners and lawyers (he could afford it) to figure out the best way to reduce his income and estate tax liabilities, otherwise he and his estate would pay most of the profits directly to Uncle Sam.

In the best of financial planning advice, he generously divested himself of these shares and gave them away to every single relative (and charity) he could find. He would receive a tax deduction on the charitable gifts. And, all relatives were free to accept his magnanimous present, plus the transfer of the liability to pay the capital gains tax on the stock, if they sold it (with a basis of one dollar and a capital gain of $74,000). What a problem to have! For our client, one share (net of tax) for her two young sons invested wisely long-term meant that their university education was already completely paid for. I think she celebrated with her other share! QUESTIONS ABOUT THE NO NAME MUTUAL FUND PICTURED 1. How long has this fund been in operation? 2. What has been its track record? 3. In good investment years? 4. In bad investment years? 5. In the bad years, how much did it lose and how long did it take to recover to the NAV just before the down cycle? 6. What does NAV stand for? How is it computed? Is it the same as the rate of return or the yield on the fund? 7. Explain load adjusted. Why are there gaps in the numbers? 8. What kind of a fund is this? It is a growth and income fund? What does that mean, it just looks like just stocks to me, what is the difference? 9. Explain why I only see the top ten stock positions in the fund.

10. Why is there a cash position of 5%? I thought the fund invested in stocks.

11. Explain the different sector weightings. Are they always the same for this fund? How can I tell which stocks belong where? 12. What are these MPT Statistics? Can you explain them to me? 13. What is standard deviation, Alpha, Beta, R-squared, Sharpe and Traynor? This looks like some sort of math I hated in grammar school. Why do I need to know this? 14. I don't really understand these types of math concepts, how do you use these for reviewing mutual funds? 15. Explain Net Assets.

16. Explain turnover? Why would I care about that? 17. What are the admin fees? Do they get deducted from my investment, too? What about the commission? What you getting paid out of this? 18. If it isn't the top performer, why are you picking it for me? 19. How many fees are there, this says the fund has a front-end sales charge? Readers, these are some (but not all) of the questions you may want to ask your advisor. Next week in Mutual Fund Lesson 4, we will answer these questions and provide some reference sites for further investment information.

20. According to this fee schedule, if I only invest a little, my sales charge is almost three times as much as someone who invests a million dollars? Why is this, it does not seem fair? I have to work harder for my money? *** Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or any other investments. Readers needing specific assistance should seek advice from an experienced professional financial advisor.

*** Martha Harris Myron CPA CFP is a Bermudian, a Comprehensive Financial Planner, holds NASD Series 7 licence, and is a US tax practitioner. She is Programming Chair for the Financial Planning Association of Bermuda. Questions regarding this article may be sent to Email: marthamyron y northrock.bm