| Highlights and Commentary |
| By Roy Weitz |
Monster Wealth Destroyers: Big mutual funds can do a lot of good, but they also can cause a lot of damage.....This month's FundAlarm database contains 1,601 3-ALARM funds, and 35 of those 3-ALARM funds hold at least $5 billion of assets each.....On the accompanying page, we take a look at the 3-ALARM history of these 35 large funds over the past 12 months.....Four of these large funds were 3-ALARM for the entire period, one large fund is new to the 3-ALARM list this month, and the other funds made between three and nine appearances on the 3-ALARM list over the course of the previous year.....Of the four big funds that were 3-ALARM for the entire year, the one with the largest asset base is Fidelity Growth & Income (FGRIX), which hereby earns the title of Top Monster Wealth Destroyer.
As you may recall, my recent market-timing experiment ended with a thud.....Using the market-timing system from Intelli-Timer, my return for the year came in at less than 2%, and I wondered how Intelli-Timer was going to update its Web site, and continue selling its system, after such a dismal performance......Now we have the answer: My year never happened.....With no explanation, the Intelli-Timer Web site has completely revised its historical performance information......For example, the system that I followed called for one trade between June 27 and July 26, 2006, while the new "historical" performance chart on the Intelli-Timer Web site says that I made nine [!] trades during that period (my actual loss for the month was 5.66%, while Intelli-Timer says that I gained 4.5%)......Continuing with this bizarro world, the period from August 27 through September 26 was one of my best months, with zero trades and a gain of 6.35%......But no, says the Intelli-Timer Web site, based on "historical" results someone using their system would have made six trades and lost 0.3% for the month......For the entire year that I used the program, Intelli-Timer says that its system generated a return of 47%, which would be laughable were it not so brazen and infuriating......What's going on here?.....Faced with a system that was failing, it looks like Intelli-Timer has simply backtested a new system that produces dramatically better -- and totally fictitious -- results.....And now those backtested results are presented as the "historical" numbers, while the actual (and dismal) results, like mine, have vanished without a trace.....Can they really do this kind of thing? Is it legal?......The company that runs Intelli-Timer isn't registered with the SEC as an investment adviser, so they aren't subject to federal securities laws......In other words, it's a classic case of caveat emptor....As far as I can tell, there is one acknowledgment that "some information" on the Intelli-Timer Web site "is the results [sic] of back-testing," and no doubt the Intelli-Timer folks would point to that "disclosure" if they were ever challenged about the honesty of their performance presentation.....So what can I do?.....I can warn FundAlarm readers not to use the Intelli-Timer system, although I suspect that such a warning isn't really necessary......If you are considering any other market-timing system, I can suggest that you be keenly aware of the difference between real and back-tested results, and make sure that you base your investment decision on reality rather than fiction......Finally, since this item will soon reside in the FundAlarm archive, and some prospective Intelli-Timer investor may come across it months or years from now while searching for comments about Intelli-Timer, I can provide a future public service:
| INTELLI-TIMER WARNING: As of March 2007, the historical performance shown on the Intelli-Timer Web site bears no relationship to the trades I actually made using the Intelli-Timer system. Investigate Intelli-Timer's performance claims very carefully because, in my case, those claims are totally, utterly, and completely false. Are you getting the hint? |
No kidding. This Q&A currently appears on the Intelli-Timer Web site, exactly as shown:
When "closed" might as well mean "open":
Bad enough to drag down an entire firm: In 2006, Franklin Templeton Investments received $7.7 billion less net cash than it did in 2005 across its entire family of mutual funds.....The main culprit was Templeton Foreign, which was responsible for $4.4 billion of cash outflows all by itself, compared to outflows of only about $200 million in 2005.....A Templeton spokesperson acknowledges that there has been some "short-term underperformance of the Templeton Foreign Fund," which translates as: "Templeton Foreign has sucked since 2003."
When your broker or financial planner moves from one firm to another, he or she is not required to sell fund shares that you held at the previous broker, even if those fund shares are proprietary to the previous brokerage firm, or those fund shares aren't on the new firm's list of funds approved for sale.....In fact, far from being required, your peripatetic broker should only sell fund shares from your previous account if a sale is in your overall best interest, which implies, in some cases, that it will be best to leave your fund shares at your previous brokerage firm, untouched.....In making the decision to hold or sell your fund shares at the new firm, your broker may not consider his or her personal compensation, and you should receive an explanation of all "facts and bases" underlying your broker's decision......(OK, now, back to the real world....)
The proposed new federal budget contains a sleeper provision that should be of interest to all mutual fund investors: If enacted into law, brokers and mutual fund companies would be required to keep (and report to the IRS) each investor's "adjusted basis" in mutual fund shares and certain other securities (adjusted basis is subtracted from sales proceeds to obtain the taxable gain or loss on a securities sales)......For years, many financial advisors and investors have been hankering for broker-maintained basis records, but now some of them aren't quite so sure about it.....For example, it's not clear that brokers would calculate and report basis in the most tax-advantaged way, which means that investors who report a different basis would risk creating a data-matching error with the IRS.....It's also not clear who would be responsible if there were an error in the basis calculation, especially if the error originated with a former broker and
had been carried over by a current broker.....There's even the possibility that taxpayers could create a false but audit-proof basis, by providing incorrect information on fund shares they have acquired via gift or earlier purchase.....As one observer noted, the devil is likely to be in the details and the details, if this provision becomes law, are likely to extend over several hundred pages of impenetrable regulations.
The last time the Kelmoore funds were mentioned in these pages (August 2002), we were reporting on the exploits of Kaptain Kelmoore, a cartoon character who starred in the firm's own comic books and explained the ins-and-outs of options trading:
Last month, I briefly discussed my personal fund portfolio, and I indicated that I continue to hold two funds in a taxable account, mainly because I don't want to pay the capital gains taxes that would be due upon sale.....A couple of readers took issue with my thinking, one pointing out that I was letting the "tax tail wag the investment dog".....A second reader also picked up on the canine theme:
| Roy would probably rail-on for hours about a bad fund, but he is holding onto FBR
Large Cap Financial [FBRFX] and Vanguard 500 Index [VFINX] because he doesn't want to book a
15% cap gain? Talk about the tax tail wagging the mutual fund dog.
Scenario #1: Roy has $100,000 into Vanguard 500. It has doubled and is now worth $200,000. Let's assume reinvested cap gains are $0. So, Roy has a long-term capital gain of $100,000. This results in a tax due of $15,000 on a balance of $200,000. You mean to tell me that Roy can not find a fund that he admires more than the Vanguard 500? He can not find a fund where he reasonably expects to make up the 7.5% loss due to taxes (over a 2- to 3-year period)? I guess I give Roy TOO much credit. |
Here's something we've never seen before: Back in 1994, Susan Byrne handed over her Westwood mutual funds to Mario Gabelli's firm .....Ever since, Gabelli has legally been the funds' manager, while Byrne (and her Westwood staff) continued to handle day-to-day stock picking as the funds' subadvisor.....Somewhere along the way, Byrne grew unhappy with the loads and fees that Gabelli was charging, and Byrne made several unsuccessful attempts to free the Westwood funds from Gabelli's clutches.....(Who knows, she might even have grown tired of being associated with Gabelli's image, including his recent legal and ethical problems, not to mention the exorbitant salary that he pays himself).....In late 2005, Byrne and Westwood quietly launched a family of no-load "WHG" funds, which are quite similar to several Gabelli Westwood funds, but with significantly lower fees and expenses (after voluntary limitations)......The Westwood Web site also has stopped linking investors to Gabelli's Web site, and the only phone number on the site connects to reps selling WHG funds.....The assumption now is that Gabelli will be forced to match the lower WHG fee structure on the Westwood funds, but we're not so sure.....The Westwood funds are sold by brokers, and there's a long history of broker-sold funds thriving with ridiculous-to-obscene expense ratios (can I interest you in an S&P 500 index with an expense ratio of 1.50%?).....Gabelli seems to have no notion of shame and, assuming the Gabelli fund trustees are as useless as most trustees when it comes to defending the financial interest of shareholders, our guess is that Gabelli's Westwood funds will continue with exactly the same expense ratio as before.
When you rent a portable toilet, you don't expect it to leak, and when you rent a private security guard, you don't expect an accidental, self-inflicted gunshot wound.....When small mutual funds rent a back-office service provider, as many do, they expect that their fund accounting will be handled properly, but that wasn't the case recently for QCM Absolute Return Fund.....QCM had retained Unified Fund Services, and Unified was responsible for QCM'S accounting work.....Problem is, QCM follows an event-driven investment strategy, which can involve short sales of stock, and Unified clearly wasn't up to handling that kind of complex portfolio.....According to QCM's outside auditor, Unified did not have proper "control procedures" in place "to ensure that interest income, interest expense and dividend expense on short sales related to short sale broker activity were properly recorded"......It doesn't appear that fund shareholders lost any money and, to its credit, Unified acknowledged its failings and promised to do better in the future.....But if you want to learn more about what happened, good luck finding the outside accountant's internal control report.....It's attached to an obscure document (SEC Form NSAR-B/A), and buried about as deep as a "disclosure" document can be buried and still technically comply with the law.
According to Srikant Dash, an index strategist at Standard & Poor's, historical top-quartile performance provides very little ability to predict future top-quartile performance, since so few funds currently ranked among the top 25% of their peers manage to consistently maintain their performance (for example, a grand total of zero small-cap funds have managed to maintain a top quartile rating over the past five years).....Dash suggests that investors would be much smarter to screen out the worst-rated funds, since there is "persistence...at the bottom [of the fund rankings], not at the top"......Hmmm, sounds like a great idea for a Web site.
Heartland Value is coming off a great year (2006), and its five-year record also shines, so why is mutual fund columnist Steven Goldberg so unimpressed?.....Heartland is the firm that presided over -- some would say, caused -- the biggest mutual fund writedown/meltdown in history, back in October 2000, and Goldberg is not one to forgive and forget.....(In case you don't recall, Heartland ran a couple of high-yield muni-bond funds that lost 69% and 44% of their net asset value overnight, because the underlying securities had been valued by the Fantasy Pricing Service).....Bill Nasgovitz, the founder and head of Heartland, remains long on excuses and short on personal responsibility, and Goldberg nails this one precisely: "Nothing in mutual fund investing is more sacrosanct than the accuracy of daily pricing. If even half of what the SEC says is true [in a yet-to-be resolved legal action against Heartland], I'm leery of the entire operation. Why invest with a shop you can't trust?"
Speaking of fund shops that royally screwed up, and may not deserve your trust, Morningstar suggests that it's time to remove Janus from that list.....In fact, Morningstar recently highlighted several Janus funds "that deserve a second chance," which is a long way from Morningstar's banishment of Janus during the market-timing scandals of 2003 (Janus was one of the earliest casualties, and most enthusiastic players, during that sordid mess).....Morningstar indicates that it has "worked closely" with Janus -- perhaps a problem there? -- and Morningstar now pronounces itself "convinced" that new "procedures and personnel" at Janus will protect investor interests, as they clearly did not in the past......Morningstar may be correct in its judgment , but let's face it: Unless someone at Morningstar was permanently stationed at Janus, and relatively high up in the organization to boot, there's no possible way that Morningstar, or any outside observer, can be certain that the Janus culture has changed.....Morningstar is being excessively generous to Janus, for reasons that only Morningstar knows.....As for us, we'd say that a ten-year probation for Janus would be entirely appropriate.....Assuming good behavior, we might be willing to consider buying a Janus fund sometime, say, in late 2013.