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Kandel on fund disclosure
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May 12, 2000: 5:52 a.m. ET
Dreyfus case raises questions about advertised short-term performances
By CNN Financial Editor Myron Kandel
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NEW YORK (CNNfn) - There's a new illustration of why mutual fund investors should not pick a fund just because of some short-term performance. Aside from the fact that last year's leaders may not always be this year's winners, there can be a story behind the figures.
This comes to mind because of Wednesday's settlement by Dreyfus Corp. on one side and the Securities and Exchange Commission and the New York State Attorney General's office on the other. The big mutual fund company had to pay nearly $3 million to resolve charges that it had made inadequate or false disclosures about one of its funds.
 The fund in question was the Dreyfus Aggressive Growth Fund, which once boasted that it soared a red-hot 119 percent in the eight months after it was started in September 1995. Not bad a performance any time. In those days, it was sensational. Ah, but there was a catch. Three-quarters of that rise came from the first-day gains of stocks that had just gone public. And that was even before the IPO boom really took off.
How did a brand-new, relatively tiny fund get so many new issues? It was because the fund's manager, Michael Schonberg, took the IPO allocations that should have been spread over several funds he managed and dumped nearly all of those hot new issues into the Aggressive Growth Fund. And because that fund was initially so small, the quick gains magnified its performance even more. And Dreyfus trumpeted how well the fund had done, without explaining why.
The truth is the fund's performance then soured, but because of its initial big gains, it looked a lot better than it really was. Take a baseball hitter who has a great first two months, and then falls into a terrible slump for the rest of the season as the pitchers discover his weaknesses. His overall stats might still look pretty good, but he wouldn't be considered a hot hitter any more.
I first became aware of the Dreyfus situation a couple of years back because my son Andrew was the chief of the New York Attorney General's Bureau of Investor Protection and Securities when it launched the investigation, which has just now been settled. I must confess that despite many years in financial journalism and a rather skeptical nature, it wasn't until then that I became fully aware of how important it was to read behind the lines of mutual fund claims. I had figured that the regulators would be keeping them on the straight and narrow. And, of course, that's exactly what they've been doing in this case, at both the federal and state levels.
But that usually takes time, and therefore investors should do some of their own homework. Some closer study would have shown that after its initial spurt, Dreyfus Aggressive Growth turned in a dismal performance. In 1998, for example, when the Standard & Poor's 500 Index rose nearly 30 percent, the fund tumbled 37 percent.
In the long run, Wednesday's settlement may have some other positive results. That's because Dreyfus is paying New York State $2 million, of which $400,000 will pay for the cost of the investigation. But the remaining $1.6 million will go to finance a new investor education program to be developed by the State University of New York. With mutual fund investing so popular these days, the more education the better.
(Myron Kandel is CNN's Financial Editor. His column appears every Wednesday on CNNfn.com.) 
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