Newsletters May Not Be Able to Back Up Boasts

A year ago, I received a marketing brochure for an investment newsletter. It was the October, 1992, mail promotion for Personal Finance newsletter and its editor, Stephen Leeb.

“Twelve months from today you will know, beyond any shadow of a doubt, that you will retire rich,” the brochure, signed by Leeb, began.

“A year from now, you’ll have a portfolio bursting with mouthwatering, fast-growing investments,” it continued.

The Alexandria, Va.-based newsletter, according to the brochure, “rewards its loyal readers with gains of 15%, 25%, even 50%” by using “the most powerful, reliable, wealth-building philosophy ever devised.”

The brochure made one reference to cashing in on an unnamed investment opportunity featuring profit potential of 200% to 300% together with “widows-and-orphans safety.”

Those are strong words intended to tantalize. You might run across them in marketing pieces for certain investment newsletters, but you won’t see anything so boastful for mutual funds.

Fund companies are required by the Securities and Exchange Commission to tone down their marketing pieces and stick to the facts, while not omitting anything material.

A fund’s total-return numbers, for example, must be quoted in accordance with a standard SEC formula. Nor can ads make exaggerated claims or representations of future gains.

Fund ads can’t even contain testimonials or show the trappings of wealth such as mansions or yachts, since those images could give misleading signals about performance.

Investment newsletters, however, generally are not regulated by the SEC, thanks to a Supreme Court decision that said the agency didn’t have jurisdiction, according to Bob Plaze, an assistant director at the SEC.

Newsletters enjoy a lot more leeway with their marketing literature than mutual funds, although they are subject to general consumer-protection regulations.

All this raises the possibility that prospective fund shareholders could be confused when reading boastful marketing literature, especially if the newsletter editor happens to manage a mutual fund with a similar name--as is the case with Leeb, who in October, 1991, introduced the Leeb Personal Finance Fund.

Although the promotional brochure for the newsletter does not mention the fund, there’s a chance potential investors could link the two. The version of the fund’s prospectus that was available in 1992 makes 11 references to Leeb’s newsletters, including Personal Finance.

Anyone who read the October, 1992, marketing brochure might be surprised to learn that Leeb’s newsletter and fund have both lagged key market benchmarks over the 12 months since then, the “retire rich” period.

According to newsletter tracker Mark Hulbert, also based in Alexandria, Va., the average return of Personal Finance’s various portfolios came to 7.28% over the 12 months ended Oct. 31.

That compares to a gain of 17.78% for the Wilshire 5,000, the market benchmark Hulbert uses.

Over the three years ended Oct. 31, Personal Finance returned 47.99%, compared to 79.09% for the Wilshire index, Hulbert says.

Hulbert, in the investment column he writes for Forbes magazine, has criticized Leeb for “outrageously exaggerated” advertising claims for Personal Finance and a sibling newsletter, The Big Picture.

Leeb couldn’t be reached for comment. But Walter Pearce, president of KCI Communications, which publishes Personal Finance, acknowledges that the newsletter has been wrong recently about the market’s direction. “We have been waiting for a correction that hasn’t come,” he said.

Still, Pearce indicated that he’s comfortable with the advertising claims.

“Since Leeb took over, the performance has been very consistent, and there have been some tremendous stock picks,” he said. “If we had been right on the market and 100% invested, we would have had some picks that doubled in price.”

It’s important for investors to evaluate a newsletter and adviser over the long haul, in both good markets and bad, he said.

As for the Leeb Personal Finance Fund, it returned just 4.44% over the 12 months ended Oct. 31, according to the Morningstar Mutual Fund Performance Report in Chicago.

That compares to 14.91% for the Standard & Poor’s 500 index and 18.31% for growth funds, the category in which Morningstar places Leeb Personal Finance.

From the fund’s debut in October, 1991, through October, 1993, it has trailed the S&P; 500 by a margin of roughly 2 to 1, according to Morningstar.

The moral of this story can be summed up by an old investment caveat: If claims you read or hear seem too good to be true, they probably are.

Before you subscribe to an investment newsletter, you might take out a trial subscription to The Hulbert Financial Digest, which tracks other newsletters, for $37.50 (703-683-5905; 316 Commerce St., Alexandria, Va. 22314).

And be sure to check whether the editor also manages a mutual fund, as some do. Because fund performance numbers are verified and widely available, it’s easy to see which manager has the bad, good or mouthwatering returns.

California might still be stuck somewhere between a recession and a hard place, but an obscure “indicator” suggests that better times are ahead. The indicator is Franklin’s California Growth Fund, which invests in firms based or doing a large part of their business here.

The 2-year-old fund has been on a roll lately--up 12.7% from January through November, including a gain of 9.8% since midyear. The $4-million portfolio is based in San Mateo.

Robert Rodriguez, who runs the FPA Capital Fund in Los Angeles, also likes California’s prospects. A broad-based economy, an adaptable work force and close trade links with Asia and Mexico bode well, says Rodriguez, who believes the state’s economy has bottomed.

He has about 13% of FPA Capital’s assets in California stocks, triple the level of two years ago.

Funds and Newsletters

This list shows some of the stock funds managed by money management firms that also publish investment newsletters. Total-return results are for periods ending Oct. 31, 1993, courtesy of the Morningstar Mutual Fund Performance Report. Results for periods longer than one year have been annualized.

1-year 3-year 5-year Fund return return return Leeb Personal Finance +4.44% -- -- Merriman Asset Allocation +21.25% +11.12% -- Merriman Blue Chip +5.97% +7.42% -- Merriman Cap. Appreciation +11.68% +11.46% -- Merriman Leveraged Growth +6.80% -- -- Perritt Capital Growth +12.95% +17.18% +5.67% Prudent Speculator +21.80% +26.44% +0.42% Zweig Priority Selection A +21.43% +16.37% +15.24% Zweig Appreciation A +23.28% -- -- Zweig Strategy A +24.21% +17.36% --

Newsletter/ Fund headquarters Leeb Personal Finance Personal Finance, others/ Alexandria, Va. Merriman Asset Allocation Fund Exchange/ Merriman Blue Chip Seattle Merriman Cap. Appreciation Merriman Leveraged Growth Perritt Capital Growth Mutual Fund Letter, others/ Chicago Prudent Speculator Prudent Speculator/ Santa Monica Zweig Priority Selection A Zweig Forecast, Zweig Appreciation A others/ Zweig Strategy A Wantagh, N.Y.

Note: The funds listed are no-loads, except for the Zweig portfolios, which impose a 5.5% sales charge. However, B-share versions of the Zweig funds, which feature no front-end sales charge, are also available.