| Highlights and Commentary |
| By Roy Weitz |
They shoulda been contenders: Funds that invest only in stocks are expected to be riskier than balanced funds, because balanced funds dampen risk by investing in both stocks and bonds.....In exchange for this extra risk, stock funds are expected to generate better returns, but sometimes this trade-off doesn't hold.....The accompanying page lists 451 diversified U.S. stock funds that have returned less than the Vanguard Balanced Index fund over the past 12 months, three years, and five years.....Vanguard Balanced invests only about 60% in stocks, and the other 40% is allocated to fixed-income.....In other words, Vanguard Balanced competes against stock funds with one hand tied behind its back, yet it still sent 451 stock funds down for the count.....See the 451 diversified stock funds that couldn't even whup a one-armed balanced fund
The recent problems in the subprime mortgage market have hit close to home, as one of my personal fund holdings -- Weitz Partners Value (WPVLX) -- has taken a big hit from Countrywide Financial......Recently, Countrywide (CFC) was the fund's biggest holding, at about 7.2% of total assets, and as of March 29 CFC was down 20% for the year, meaning that CFC alone has trimmed the fund's value by about 1.4%.......So, did Wally Weitz blow this one?.....The Weitz funds have owned Countrywide Financial since at least the mid-1990s, but only in the past few years has Wally really started talking up CFC stock in his shareholder letters.....While Wally has clearly acknowledged that this stock is both volatile and misunderstood by the market (at one point, he referred to it as a "perennial Rodney Dangerfield stock"), I couldn't find a single shareholder report where Wally identified CFC as a player in the subprime mortgage industry, or a single word warning fund investors that the fortunes of CFC, at least in the short-term, are likely to rise and fall with the fortunes of the subprime market.....Was Wally unaware that the subprime market was a bubble waiting to burst?.....That seems unlikely but, if so, it was a huge failure of analysis......And if he did expect the subprime bubble to burst, shouldn't he have lightened up on his Countrywide holdings, or at least warned fund investors that there was likely to be a bumpy ride ahead?.....The next shareholder report for Weitz Partners Value will be dated March 31, 2007, and here's what we predict: Wally will call the subprime crisis overblown, he'll point out that subprime loans represent less than 10% of Countrywide's business, he'll point out that some of Countrywide's competitors will be eliminated as a result of the crisis, and he'll note that Countrywide is still undervalued based on its long-term prospects.....He may even say that he has used the market decline as an opportunity to buy more shares......All of which is great, except that it begs several important questions: Shouldn't the top holding of a concentrated, value-oriented mutual fund be the most carefully-managed stock of all?.....Is it wrong to expect even a long-term value manager to get out of the way of an oncoming freight train (in other words, shouldn't he have done something about Countrywide)?.....And, finally, shouldn't a manager who prides himself on excellent shareholder communication have done a better job preparing his clients for this crisis, so it doesn't look like he's been blind-sided?.....A couple of months ago, when I wrote about my personal portfolio, I had this to say (in part) about Weitz Partners Value:
| "Even with Wally's track record and fine last name, 2006 was the last chance for this fund, at least in my book. I'm hoping this fund will continue its upward momentum for a while. If it doesn't, I expect to be harsh on it." |
A new Web site from Northwestern Mutual Life (wreckyourworries.com) lets you put your worries in writing, and then lets you destroy those worries with either a wrecking ball, a lightning bolt, a golf club, or a hammer (there's no limit on the number of worries you may enter or how many different ways you can destroy it, unless you get fired for wasting too much time, in which case you'll have a new worry).....Here's one of Roy's biggest worries, and the satisfying destructive result:
A recent trend with exchange-traded funds (ETFs) has been to slice sectors, markets, and geographic regions into thinner and thinner slices.....Case in point: XShares Advisors has released a family of 14 medical ETFs under the "HealthShare" label, with each fund focused on a specific therapeutic area (for example, HealthShare Autoimmune-Inflammation ETF, Health Share Respiratory/Pulmonary ETF, Health Share Metabolic-Endocrine Disorders ETF).....(We're not making this up).....If there's enough interest, FundAlarm has learned that XShare Advisors will split another of its new offerings, the Cardiology ETF, into a Left and Right Ventricle ETF, while the HealthShare Dermatology/Wound Care ETF will split into an even more-focused Zit Care ETF.....(We are making this up).
Speaking of ETFs: On February 27, at the peak of the recent market craziness,
a surprising number of exchange-traded funds got out of synch with their underlying indexes.....Investors who sold that day may have received less than the true value of the index, while investors who waited a day to sell may have ended up with a windfall, as the market price of the ETF got back in line with the index and the previous day's undervaluation was erased.....Overall, on February 27, 89 of 421 ETFs fell short of their underlying index value by more than 1%, and 60 of those ETFs fell short by more than 2% (a deviation of 0.5% or less is considered normal).....Although ETFs are marketed as highly liquid investments, the reality may be different, especially on days when the stock market is fast-moving and volatile.....If you must sell an ETF on such a day, be aware that pricing may be out of whack.....Meanwhile, hedge funds and major Wall Street brokers have trading desks that try to take advantage of even minuscule pricing discrepancies in ETFs.....Guess who's making money on your ETF while you're losing it.
Back in 2003, Peter Scannell was the Putnam employee who blew the whistle on Putnam's market-timing malfeasance.....Thanks to information received from Scannell, the state of Massachusetts ultimately collected $100 million in penalties from Putnam, while Scannell received a brick to the head, presumably from a disgruntled Putnam investor, and lost his job.....Under a Massachusetts whistle-blower statute, Scannell sought a 30% share of the Putnam penalties, but the Massachusetts Attorney General denied Scannell's claim because Scannell didn't submit the paperwork in the proper manner (a court subsequently upheld the AG's position).....Scannell is now appealing the lower court's ruling, but his prospects for recovery don't look good.
Most Janus fund managers have "over $1 million" invested in the funds they manage, which is a good thing.....But several managers still lag in the I-have-confidence-in-my-fund sweepstakes.....Among experienced managers, who are very well paid, Jason Yee is the standout cheapskate, with just "$100,001 - $500,000" invested in Janus Global Opportunities (although Yee did bump his investment in his other charge, Janus Worldwide, from last year's "$100,001 - $500,000" to "over $1,000,000" this year)..... The relatively new management team at Janus Triton (Chad Meade and Brian Schaub), in place since June 2006, has a fairly light investment in their fund ("$100,001 - $500,000" and "$500,000 - $1,000,000," respectively.....Maybe they need more time.....Also on the light side is the team that that runs Janus Global Technology (J. Bradley Slingerlend and Burton Wilson), which has been in place since February 2006.....Slingerlend has an investment of "$100,001 - $500,000," while we're not sure exactly where Wilson stands (the Janus filing says he's in for "$10,001 to $500,000," which isn't one of the official categories; it's either "$10,000 - $50,000," or "$100,001 - $500,000," and we're guessing the lower category).
From Highlights and Commentary, one year ago:
| For years, the boards of the Reserve Funds and the Hallmark Funds approved numerous management contracts and agreements for 12b-1 distribution plans, all without incident.....Then, in early 2005, someone discovered that two of the funds' "independent" directors weren't "independent" after all, which effectively voided all of the contracts and agreements those directors had voted on......Almost a year later, in February 2006, Reserve Management Company (the firm that runs the Reserve and Hallmark funds) came up with a solution to the problem: A 39-page proxy document that seeks a shareholder vote, in order to fix all of its screwups......Needless to say, Reserve also wants to fix its biggest screwup: Because years of management contracts were technically invalid, Reserve wasn't legally entitled to any of the management fees that it earned from the funds in question, and Reserve needs the kindness of strangers (i.e., a shareholder vote) in order to keep the money. |
If you were subject to the Alternative Minimum Tax (AMT) in 2006, you have our sympathies (you'll know for sure by checking IRS Form 6251, and also Form 1040, line 45).....If you were subject to the AMT and an entry also appears on line 11 of Form 6251 (the highlighted area below), you might want to consider some investment planning, right now:
If it's spring, it must be time for our annual report on Mario Gabelli's obscene compensation: Super Mario received compensation of $58.2 million from his fund company during 2006, which exceeded the pay of any senior executive of any major Wall Street firm (including the CEO of Goldman Sachs, who earned a meager $54.7 million last year).....To put Gabelli's pay in perspective, his firm had approximately $35 billion under management in 2006, while Goldman Sachs increased its assets under management by that amount just in the last quarter of 2006 (Goldman Sachs managed a total of about $700 billion in 2006).....In 2007, Gabelli's total compensation should come close to, and may even exceed, a stunning milestone: Gabelli will have been paid half-a-billion dollars since his firm went public in 1999.
Warren Buffett, fund manager? Berkshire Hathaway is Warren Buffett's company and, as of December 31, 2006, Berkshire owned publicly-traded common stocks worth about $61.5 billion.....In other words, viewed as a mutual fund, Berkshire's publicly-traded stock holdings would be the eighth-largest actively-managed stock fund in the U.S., just ahead of American Funds EuroPacific A (AEPGX), and just behind American Funds Capital World Growth and Income (CWGIX)..... As you might expect, Buffett runs the fund-like portion of Berkshire Hathaway in his own, unique style -- think of it as a super-focused mutual fund.....For example, Berkshire's stock portfolio recently consisted of just 19 stocks that Buffett was willing to itemize or provide a value for, and several other stocks that Buffett chose not to itemize.....The non-itemized group of stocks is worth about $6.4 billion in total, and Buffett says that no individual holding in the group is worth more than $700 million.....If we assume that the non-itemized holdings have an average value of $350 million each, that means Buffett owns another 18 stocks, and his total stock portfolio consists of just 37 names.....By way of comparison, among conventional funds with more than $20 billion in assets, Davis New York Venture A (NYVTX) is the most concentrated offering, and it recently owned stock in 79 different companies, more than twice the number owned by Berkshire Hathaway.....In other words, there isn't a mutual fund manager around who dares to run a big fund the way Buffett runs his.
There are lots of moving parts in the typical 401(k) plan, and all those parts can make it difficult for both employer and employee to understand how the plan works, and exactly what they are paying for.....Below is a list of services provided to the typical, large 401(k) plan, in addition to investment management:
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For the ten calendar years ended December 31, 2006, a total of 626 funds outperformed the S&P 500 on an annualized basis.....But only one no-load fund both outperformed the S&P 500 (slightly) and landed in the least volatile quartile of all 626 funds (as measured by standard deviation).....That fund is (drum roll) Vanguard Wellesley Income (VWINX).....And how was that relative lack of volatility reflected in the real world?.....From 1997 through 2006, VWINX had one losing year (1999, down 4.14%), while the S&P 500 had a total of three losing years, from 2000 through 2003, which resulted in a total decline of almost 38%.
Speaking of Vanguard Wellesley (above), it's was one of only three marketable securities (all funds) owned by Presidential candidate Barack Obama and his wife at the end of 2005 (Obama's 2006 report is due May 15).....Michelle Obama, the owner of the Wellesley shares, reported a value between $50,000 and $100,000.....Barack and Michelle each reported owning between $50,000 and $100,000 of Vanguard Wellington, and they jointly owned the same amount of Nuveen Floating Rate Income, a leveraged, closed-end fund that has "broker recommendation" written all over it.....Obama is the 50th-richest U.S. Senator, helped along (no doubt) by a $1.9 million royalty advance from Random House that he received in January 2005 (Obama has indicated that he will donate $200,000 of his royalties to charity).
We love you both, but we love the one with power a little bit more: In the 2005-2006 election cycle, all three major fund companies gave considerably more to the majority Republican party than to the Congressional Democrats (Fidelity: $995,000 vs. $500,000; Capital Group/American Funds: $330,000 vs. $211,000; Vanguard: $1,719,000 vs. $1,073,000).....In the current 2007-2008 cycle, with the Democrats in control, all three companies have given considerably more to --- guess who? -- the Democrats (Fidelity: $50,000 vs. $7,800; Capital Group: $16,300 vs. $1,200; Vanguard: $66,000 vs. $9,000 -- in each case, the Democratic contribution is first).
When Robert Stansky was still running Fidelity Magellan, and the fund was struggling, the folks in charge at Fidelity preferred to look over the horizon.....As we wrote on this page back in June 2005:
| According to Robert Reynolds, Fidelity's chief operating officer, Magellan has recently underperformed because manager Stansky decided to jump into large-cap growth stocks too early.....Reynolds says that Magellan is poised to outperform once the market turns in favor of large-cap growth companies, and investors should sit tight and be patient until that happens. |
| "The large-cap-growth space, as you probably know, has been out of favor. In terms of, is [Ultra] positioned to win when that section of the market comes back in favor? I think so. We’ve put in, I think, all of the right monitoring [and] surveillance tools. And part of this industry is about just sticking with your knitting and not trying to catch all the latest waves. So I do think when large-cap-growth comes back, Ultra will perform well."* |
The S&P 500 index celebrated its 50th birthday last month and, as is customary for 50th birthday parties, there was a lot of reminiscing: "Hey, remember when the S&P had its worst one-day loss?" (October 19, 1987, down 20.5%) "Hey, remember when the S&P had its biggest one-day gain?" (That would be two days later, October 21, 1987, up 9.1%) "Hey, remember when the S&P 500 drank that bad jug wine, and ran through the frat house naked?" (That would best be forgotten).....Along with the memories came a couple of interesting observations and anecdotes..... For example, when Wells Fargo Bank was creating the first major S&P 500 index fund, back in the 1970s, the Bank's investment committee reportedly balked at buying 19 of the 500 S&P stocks, because those companies appeared to be in serious financial trouble.....The first S&P 500 index was actually created with 481 stocks -- and the excluded 19 stocks, as a group, went on to consistently and decisively outperform the S&P 481.....The moral of this story: It's really, really tough to outguess the market, even if you think you couldn't possibly be wrong*.....Here's another interesting tidbit: All of the companies in the S&P 500 are based in the U.S., but about 45% of their revenue comes from outside the U.S, and that percentage is climbing rapidly......If you own an S&P 500 index fund, you might want to keep this statistic in mind when fine-tuning your allocation to foreign-stock funds.