Annual Reports Contain Valuable Information

September 22, 1999
Looking for a good read? How about the annual reports of your stocks and mutual funds? Many people limit the study of their investments to watching market values fluctuate. But if you want to know why your stock or mutual fund performs the way it does, check out its semiannual or annual report.The first thing to look for is the report to shareholders. This is a “state of the company” address by the CEO or president explaining to you, a shareholder and owner of the business, events that influenced your company’s performance in the past year. This report typically relates economic and political conditions to your investments, attempts to explain why the market reacted in the way it did, and compares your investments performance to that of similar investments.For example, the annual report of a typical bond mutual fund might discuss how the currency crisis in Southeast Asia helped keep inflationary pressures in check and U.S. interest rates low. It might further examine how the concerns about world stock markets increased the demand for domestic bonds. Finally, it would probably compare the fund’s results to the recognized bond indexes.Reports to shareholders not only review past and current conditions, they also discuss circumstances that may affect your investments future performance. These valuable discussions allow you to evaluate the reasoning and thought process of management.In a mutual fund annual report, the statement of investments provides a detailed list of financial holdings, organized by asset category: common stocks, corporate bonds, government securities, etc. These categories are further divided by industry. Here you can see the names of all the individual securities, the number of shares held and the market values at the end of the reporting period. This section reveals exactly what you own and illustrates the diversification you enjoy from your investment.
Similarly, company annual reports include a section called “Products and Subsidiary Business.” Here you can see the diversity of your company’s products and you may even discover profitable subsidiaries you might not have been aware of.Finally, look for the performance summary. This section provides the dollars and cents on company performance in investment value. Mutual fund annual reports offer an easy-to-read summary of their average annual and cumulative total returns over different time periods. Typically, there’s also a line graph comparing your fund’s performance against one of the widely accepted benchmark indexes.Companies spend a lot of time and effort to keep shareholders informed through their annual reports. They may not make the Book-of-the-Month Club, but annual reports are a must-read for any investor serious about financial.

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