Highlights and Commentary

By Roy Weitz

(Originally posted May 1, 2000) [Archive Table of Contents]

No one should be surprised:


The chart above shows selected performance data for the 10 largest diversified U.S. mutual funds.....The red bar shows each fund's 1999 return, while the blue bar shows that same fund's return during the mini-bear market from March 10 through April 14, 2000:

As you can see, the funds that went up the most in 1999 also went down the most during these difficult five weeks, with almost perfect correlation.....Washington Mutual is an especially interesting case.....Its 1999 return was an (almost laughable) 1.16%, while its March/April return was 8.1%.....Yes, that's a positive number.....None of the other top-10 funds even broke 0% for the same period.....What's the significance of this chart?.....We think it's the best, most current indication of what funds in general are likely to do during the next sustained bear market.....Those funds that gaveth the most are likely to taketh away the most -- perhaps not as neatly as these 10 funds, but close enough.....If you are heavy in funds that gaveth, and you want to keep the rest of what you have, now might be a good time to listen to all those people who have been jabbering about diversification and asset allocation.


Are bear funds getting ready to rock and roll? Who knows?.....Bear funds do well when the market doesn't, so bear funds recently have been sending mixed signals.....On any given day, it might look like they are ready to take take off, but the next day they seem to be headed in the opposite direction......Even if you aren't quite ready to embrace the bear, the events of recent weeks have at least made talking about bear funds a semi-respectable activity.

Bear index funds are probably the purest bear play, and the concept is relatively simple: Take a well-known index and stand it on its head by taking short positions in options and futures......If the underlying index goes down 10%, a bear index fund should go up 10% (that's why bear index funds are also called "negative" or "inverse" index funds).....A leveraged bear index fund provides a multiple inverse return relative to the underlying index (usually double).

Bear Index Funds
Name	Underlying index	Strategy
Potomac Internet/Short (-)	Dow Jones Composite Internet	Inverse
Potomac OTC Short (POTSX)	Nasdaq 100	Inverse
Potomac Small Cap Short (POSSX)	Russell 2000	Inverse
Potomac U.S. Short (PSPSX)	S&P 500	Inverse
ProFunds Bear (BRPIX)	S&P 500	Inverse
ProFunds UltraBear (URPIX)	S&P 500	Double inverse
ProFunds UltraShort OTC (USPIX)	Nasdaq 100	Double inverse
Rydex Arktos (RYAIX)	Nasdaq 100	Inverse
Rydex Ursa (RYURX)	S&P 500	Inverse

A few actively-managed funds pass for bears, but it's probably more accurate to think of them as deep contrarians.....For example, the Prudent Bear fund was recently on the short side of "overvalued" Internet, telecom and biotech companies, and it was long defense contractors and gold mining companies.....When the market does take a prolonged dive, and gloom is everywhere, the Prudent Bear fund is likely to flip its strategy, and then it will be more long than short.....Another ursa wannabe is Comstock Capital Value, which recently didn't hold a single long position.....In fact, the fund was 115% short, which seems impossible, but is actually easy to do with leveraged puts on index options.*

Finally, we come to the inadvertent bear funds: Portfolios that have no intention of being bear funds, but have still managed to look like one.....This month's FundAlarm database contains 5 diversified funds -- all officially non-bear and non-contrarian -- that have returned less than even the Prudent Bear fund (-15.01%) over the past 12 months:

Inadvertent Bears	12 Mo. Return
Phoenix-Engemann Value 25 A (PAVAX)	-15.63
Rightime Social Awareness (RTAWX)	-15.84
Yacktman (YACKX)	-15.97
Oakmark I (OAKMX)	-18.11
Yacktman Focused (YAFFX)	-22.88

* "If You Want to Feed the Bears...", Dagen McDowell, TheStreet.com, April 19, 2000


If you're willing to consider bear funds, you'll find that there are almost an infinite number of ways to customize your fund portfolio.....

Warning: The following discussion violates one of FundAlarm's basic rules: Keep it simple. Still, we think it's pretty interesting.

.....For example, let's say you're optimistic about the prospects for tech stocks in general, but you're concerned that you might be late to the tech game, and you would like to hedge your bets......You might decide to invest 80% of your technology dollars in a relatively conservative tech fund, like T. Rowe Price Science & Technology, and invest the other 20% in a bear fund that is short the Nasdaq 100 (such as Potomac OTC/Short or Rydex Arktos).....That way, you would have significant exposure to the tech upside, albeit in a somewhat sleepy fund.....You would also stand to gain if the high-flying NASDAQ tech stocks get hammered.

Continuing on this theme, a recent article by Lewis Braham (SmartMoney.com) identifies 13 different kinds of "investment bias," and suggests a long/short portfolio suitable for each one......For example, Braham says that a "Realist" might invest 50% in Red Oak Technology (the long position) and the other 50% (the short position) in Potomac Internet Short.....According to Braham, this kind of portfolio gives you long exposure to "market leaders" and short exposure to "overpriced Web stocks".....Braham suggests that a "Cautious Optimist" might allocate 66% to Icon Technology (a "value tech fund") and 34% to Potomac Internet Short (to "short e-commerce")......Check out Braham's article (under "Selected Web Links," above) if you'd like a feeling for some creative possibilities with bear funds.


Interviews with mutual fund managers often present unexpected intellectual challenges:

"We follow a bottom-up approach with a top-down twist."

--Kenneth Fuller, co-manager of the new Pioneer Science & Technology Fund, in a recent interview.

Amy Selner

Rocky Mountain Hoo-Ha: Most Berger funds are performing well, new money is coming in for the first time in years, and you'd think that everyone would be reasonably happy.....Not so, according to Barron's.....Fund managers Amy Selner and Tino Sellitto recently tried to grab more control over the operational and administrative side of Berger's business, but CEO Jack Thompson turned them down.....Selner and Sellitto then went to the board of directors of Berger's parent company, Kansas City Southern Industries, and asked to have Thompson fired, but the board sent them back to their sandboxes.....Selner, age 31, runs Berger Midcap Growth and Berger Small Company Growth.....Sellitto, age 35, runs Berger Growth and Berger Growth and Income.....Both appear to have confused their role as minor fund managers with being Masters of the Universe, and both are now said to be sulking in the corner while they decide what to do next with their careers.....Manager turnover at these funds, while not certain, should surprise no one.

Tino Sellitto

Can you spot the problem? The chart below shows annualized returns for the Frontier Equity fund, and even novice investors are likely to notice a certain inconsistency in performance:

Over the past 12 months, Frontier Equity has been a money-tripling machine, while over the past five years investors in this fund would have been better off if their money had been in T-Bills.....Frontier Equity also boasts a breathtaking expense ratio (about 20%), a 25% position in one tiny software developer (Mitek Systems), and a manager (Jim Fay) who is "hard-pressed to describe his stock-picking methods"*.....Still, Fay has a sense that big things are about to happen, and a few dozen investors seem to agree: The fund recently took in about $250,000 of new money on an asset base of about $1.5 million .....PaineWebber is currently negotiating an agreement that would allow its brokers to sell Frontier Equity -- apparently part of PaineWebber's new "Flight From Quality" initiative.
*"Fund's latest results mask high costs, long-term losses," Frederick P. Gabriel, Jr., Investment News, April 17, 2000


We'll bet that the inventor of the coin-operated restroom was proud, too:

--From a page of "Kemper Firsts," located on the Kemper funds Web site

More wrists, ready for slapping: The SEC and the NASD are currently reviewing the marketing materials for many of last year's hot, triple-digit funds.....One of their goals: To see if print ads for those funds have the potential to mislead investors.....Van Kampen was slapped on the wrist last fall for not disclosing the impact of IPOs on its Growth Fund, and fund companies learned (once again) that what you don't say in your ads can be just as troublesome as what you do say.....So how are fund companies doing in their never-ending quest to tell the truth?.....Unlike the SEC and the NASD, we don't have a big investigative budget, so we did the next best thing: We picked up a copy of the newspaper.....In this case, the newspaper was the April 10 issue of The Wall Street Journal, which contained the Journal's quarterly review of mutual funds.....We counted 10 different ads for funds that had posted triple-digit returns over the past 12 months.....In our opinion, only two of these ads -- for Strong Enterprise and T. Rowe Price Science & Technology -- had adequate disclaimer/disclosures.....Here's what Price had to say (Strong is similar):

"Despite this outstanding record [for the Science and Technology fund], investors should be aware that the fund's triple-digit performance in 1999 is highly unusual, and cannot be sustained..."

What's so striking about the Price disclaimer?.....It's the word "cannot": Everyone in the fund industry knows that 100% 12-month returns "cannot" be sustained, but nobody else seems willing to say it.....We noted three other ads for triple-digit funds (Federated Small Company, Scudder Technology, and Dresdner RCM Global Technology) that were presented with no special performance disclaimers at all.....If that doesn't get the attention of the folks at the SEC and NASD, they might as well fold their investigations right now.....Amerindo Technology did see fit to disclose its large positions in eBay and Yahoo!, but it said nothing about unsustainable performance.....The ad promoting four hot Berger funds (Information Technology, Mid Cap Growth, New Generation, Small Company Growth) made the by-now-standard IPO disclaimer, but it also lacked any special performance warning.....Even straight-talking Peter Lynch apparently couldn't convince Fidelity to say anything more than this: "There is no guarantee that these gains will continue".....Warburg Pincus (Global Telecommunications) and Neuberger Berman (Millennium) also made mealy-mouthed disclaimers in the Fidelity mode.


"We decided to admit our error": These are words that you don't often hear in the mutual fund world, so we paid close attention when a spokesman for the Kaufmann Fund was recently caught in a mea culpa mood by a reporter for TheStreet.com*.....According to the Kaufmann spokesman, the managers of the Kaufmann Fund "definitely made a mistake" at the beginning of 1999, and were "too conservative" in their allocation to technology stocks*.....On January 1, 1999, the Kaufmann Fund was invested about 20% in the technology/communications sector.....By the end of 1999, that percentage had more than doubled, to about 45%.....We were curious how far the Kaufmann confessional spirit extended, so we took a look at the 1999 mid-year and year-end letters to shareholders of the Kaufmann Fund.....Alas, we found not a single word of explanation for this major shift in investment strategy, and not even a hint by fund managers Utsch and Auriana that they had missed the technology boat and were now scrambling to get on board.....Which raises the question: How does it happen that shareholders who generate $52 million in fees for Utsch and Auriana receive less information about their fund than the readers of an online financial publication?
* "Kaufmann Image Overhaul Begins With Improved Returns," Dagen McDowell, TheStreet.com, February 15, 2000


FundAlarm goes out on a limb, and you are there:

• Tuesday, April 11, 8:03 AM: We learn that Frank "Quint" Slattery has resigned as manager of two high-flying PBHG funds (New Opportunities and Select Equity).....Neither Slattery nor PBHG will comment on his plans, but we predict that Slattery will start a hedge fund, where he will concentrate on technology stocks.
  
  
• Wednesday, April 12, 7:22 AM: We are correct.

A guest columnist:

Porky

Roy said I could write a column this month, so here goes. UMB Scout Worldwide wants to increase its management fee from 0.85% to 1.10%. The only reason they give for the increase is that "the Fund's fees are significantly below the going market rates for comparable funds."

OK, now stay with me here, because this issue has been bugging me for a long time. If one fund in a peer group raises its management fee to the "going market rate," then the "going rate" goes up. And if other funds in the group raise their fees to the new "going rate," which they are equally entitled to do, the "going rate" goes up again. Then, wouldn't UMB Scout Worldwide be justified in raising its fee again, because it's once again below the "going rate"? And if other funds match this second UMB increase, won't the whole fee-raising thing start all over again, and won't it go on forever?

I know that I'm just "the other white meat" to most people, but here's what I think: There is no logic in raising a fee simply because it is below the going rate. Fund companies that use this reasoning are being greedy, and they insult your intelligence. They see the opportunity to grab more money, and they take it. The legal mumbo-jumbo and the rationalizations come later.

I hope I didn't offend anyone, and that I will be invited back.

Thank you for reading, and thanks to FundAlarm reader "Ashok" for bringing this item to my attention.

From the FundAlarm catalog of mutual fund merchandise:

		The Janus Funds "New Pair-o'-Dimes". A clever way to tell the world that you're a Janus investor, and that you believe in the "New Paradigm." If things keep going like they have been, these dimes may be the last money on earth that isn't invested with Janus. And just in case the market takes another dip, remember that these coins are legal tender!
Item #2001 $12.95 Order now!

When the going gets tough, the tough say bye-bye:

• James O'Shaugnessy, author of What Works on Wall Street, has made a name for himself preaching the virtues of investment tenacity and discipline.....O'Shaugnessy recently sold his two remaining mutual funds, Cornerstone Growth and Cornerstone Value.....Why?..... Because he changed his mind, and he now wishes to concentrate on managing private accounts.
  
  
• The StockJungle.com S&P 500 Index Fund has closed up shop, after raising just $800,000 in its four-month existence.....Cynical observers contend that the fund, which charged no management fee, was merely a loss-leader marketing gimmick to draw attention to the company's other funds.....A StockJungle spokesman reacted indignantly to this suggestion, saying that the fund "was an excellent product".....Here's a complete list of the other "excellent" funds that have been killed by their sponsors after only 120 days on the market:
  
  

Some additional comments about James O'Shaugnessy (above), which were recently posted on the FundAlarm Discussion Board by "wtharris":

O'Shaunghnessy Funds = HORSEAPPLES!
SHAME on you Mr. O'.. for your violation of the confidence that was placed in you by your shareholders... those who paid artifically high expense ratios on what were nothing more than modified index funds all the time being told that expenses were destined to come down to the .75% level as assets of the funds grew. SHAME on you Mr. O'.. for violating the trust placed on you by those readers who shelled out good money for your writings only to see you stay the course for 3 years or so!

I will give you a mild golf clap tho Mr. O' for you taught me one of my most valuable investing lessons... that being anyone who thinks they have found THE answer to investing and isnt constantly evolving, modifying and learning is destined to fail.. as YOU have!

At least show you have a scrap of manhood about you and apologize openly and publicly for the betrayal of those who put their trust in you and your investment style.

SUCCESS 2 U in the future Mr. O'...... NOT!


According to a headhunter who specializes in the mutual fund industry, hot managers are increasingly being allowed to work in "remote locations"......Fund managers "realize that their...compensation packages will go a lot further in Montana, say, than in New York and they're trying to dictate geography as part of the overall deal".....Fund investors, of course, never have a clue where their manager works.....Also popular these days is something called "cliff vesting".....Under a cliff vesting arrangement, a fund company puts a lump sum of cash into a manager's fund.....At the end of a pre-determined period (often three years), the entire lump sum, plus or minus market appreciation, belongs to the manager.....This allows "for a near perfect alignment of the [manager's] self-interest with the interest of the fund company, providing both stability and long-term performance incentives".....If you're considering a large investment in XYZ Fund, and the manager is going to become fully vested in a performance incentive two weeks from now, isn't that something you'd like to know before you invest?.....Arthur Levitt, Chairman of the SEC, spent much of his professional career in New York City.....Let's welcome Mr. Levitt to FundAlarm, and let him tell you what the chances are that the SEC will require fund companies to disclose cliff-vesting arragnements, as well as other details of manager compensation:



"Money Money Money Money," Mutual Fund Cafe


Briefly noted:

• Kinetics Asset Mangement, home of The Internet Fund (WWWFX), recently launched The Middle East Growth Fund, which will invest primarily in companies based in Israel and Egypt.....The new fund will be managed by Steven M. Bregman, whose main qualification for the job appears to be that he is a "former long-time resident of the region"......Bregman reportedly beat out another strong candidate for the management slot, a woman who has a cousin in Yemen.
  
  
  
• The company that runs the Montgomery funds is launching a series of focused funds with "transparent" portfolios.....All fund holdings will be posted on the Montgomery Web site (with a two-week lag), and investors will have access to the kind of fundamental portfolio data that they might otherwise expect from an individual stock account.....The U.S. Select 20 Portfolio is the first offering, to be followed by new-economy, foreign, and world funds.....It's interesting to note that focused funds -- once a risky sub-specialty -- now seem to have become a mass-produced commodity......You say that you'd like a focused U.S. fund, with a gimmick on the side?....We've got one.....How about a focused world fund?.....Coming right up.....The managers of these new Montgomery funds almost seem like an afterthought, even though the manager of a focused fund is probably the only thing that matters.....In the case of U.S. Select 20, Andrew Pratt will be at the helm.....He's a journeyman co-manager of several other mediocre Montgomery funds (Growth and Emerging Growth), and he's never run a fund of his own.....But, hey, if you give him your money, at least you'll be able to run some really neat portfolio reports.
  
  
  
• The Vontobel sex-change operation: That's how FundAlarm reader Glenn Wismer describes an astonishing switcheroo carried out by the Vontobel fund family at the end of 1999.....One day, Vontobel Emerging Markets Equity Fund was buying stocks in emerging markets.....The next day, this fund had been renamed Vontobel U.S. Equity, emerging markets were out, and U.S. stocks were in.....There are only two possible explanations for Vontobel's failure to liquidate this fund: Vontobel wants to use the old fund's track record for marketing purposes, and the firm doesn't want to lose the fund's assets.....You might think that the old fund's performance numbers were spectacular, or the fund was huge, but neither is true, which makes this episode seem even more pathetic.....Vontobel is determined to cling to a mediocre track record, and doesn't seem to care about misleading new investors with meaningless ads, just so it can hold onto about $1 million in assets.
  
  
  
• Pioneer Group owns Pioneer Investment Management, which runs the Pioneer family of mutual funds.....Pioneer Group is a publicly-traded company, and its stock has been going nowhere.....Now, an activist shareholder is trying to replace Pioneer's Board of Directors, which would be the first step in putting the Pioneer Group up for sale.....Although company management hasn't done much to help the performance of Pioneer mutual funds, company management has been able to anticipate its own financial needs quite nicely.....In the event that they are fired, Pioneer's executive officers and two of its directors will receive a total of about $13.8 million in cash, all of their restricted stock grants will immediately vest, and all of their stock options will become exercisable.....Pioneer CEO John Cogan didn't jump aboard this gravy train, but he won't go away empty-handed.....If Pioneer is merged or acquired, Cogan will receive a $1 million parting gift, which was voted by the Pioneer Board in a spirit of spontaneous generosity.
  "Fund of Information," Michael Santoli, Barron's, April 17, 2000
  
  
  
• If shareholders approve, the Oak Associates funds (Pin Oak, Red Oak, White Oak) will soon have a new Board of Trustees.....The current Board consists of seven men, not one of whom owns a single share of any Oak Associates fund.....The new Board will have four members who, in total, own about $22 million worth of Oak funds.....Red Oak is the most popular holding among the would-be trustees (about $7,700,000), PinOak is second ($7,150,000), and White Oak brings up the rear ($5,600,000).....Coincidentally or not, the twelve-month returns for these funds follow the same order as their popularity among the new directors: Red Oak first, Pin Oak close behind, and White Oak third.
  [Thanks to FundAlarm reader Ken Youngstrom, of Montrose, Colorado,
  for bringing this item to our attention]
  
  
• The average health care fund in this month's database is up 46.25% over the past 12 months.....Fidelity Select Health Care is down 1.65% for the same period.....Could the poor performance of this fund have something to do with new manager Ramin Arani, who took over last summer after running the Fidelity Select Retailing portfolio?.....Here's Fidelity's entire official explanation for Arani's poor performance: "Six weeks prior to taking over the fund, [Arani] worked closely with the fund's former manager to get up to speed on the health care industry".....What a heroic effort!.....Did he also learn how to spell "pharmaceutical" and "catheter"?.....Select Health Care holds $2.2 billion dollars -- a lot of money -- yet Fidelity blithely acknowledges that the training for the current manager consisted of six weeks of hanging around.....If this is the kind of thing that Fidelity is willling to admit about a Select fund, it makes you wonder what their dirty little secrets are like.
  "Underachievers Club," Richard ten Wolde, SmartMoney, May 2000
  
  
  

• Ryback

  Eric Ryback, former wunderkind at the Lindner funds, has been relieved of all fund management responsbilities, and he has given up the title of chief investment officer.....In other words, Ryback no longer has anything to do.....It appears that Ryback still has a telephone, although there has been some discussion about making him pay for long-distance calls. Morningstar, March 29, 2000

  
  
  
• You may recall that Mark Finn, a consultant with no mutual fund experience, was brought in about a year ago to save the Lindner funds.....Finn quickly worked his way into an executive position, and now Finn has become co-manager of all the Lindner funds (except Market Neutral and Government Money Market).....Finn will also serve as Lindner's chief investment officer.....Doug Valassis, a former dentist who helped Finn rescue Lindner from Ryback's clutches, won't be going back to a life of oral hygiene any time soon.....Valassis lost one job when the firm's investment committee was recently disbanded, but he will remain as Lindner's Chief Executive Officer.
  
  
  

• "Gee, Dad, wouldn't it be neat if we could, like, work together, and manage other people's money and stuff?"

  "I've got a surprise for you, son."

  
  Mark Finn's son, Jonathan, will join him as co-manager of Lindner Small-Cap and Lindner Opportunites.....Free dental benefits are included.....Other Lindner fund moves can be found at our page of Recent Manager Changes.
  
  
  
• What a concept! .....There are still a few "utilities" funds that actually invest in companies that deliver basic utility services.....Merrill Lynch Utility Income D holds the highest percentage of traditional utility stocks (96.6%), followed by Franklin Utilities C (91.9%) and Galaxy II Utility Index (85.5%).....Among the utilities funds with the smallest traditional utility stock base: Fidelity Advisor Utilities Growth T (17%), Fidelity Utilities (21.5%), and Eaton Vance Utilities C (23.2%).
  "For Investors Seeking Safety: Utilities Funds That Actually Invest in Utilities," Ilana Polyak, TheStreet.com, April 14, 2000
  
  
  
• iDon'tUnderstand: The new iMillennium Fund is one of dozens of funds that now focus on Internet stocks.....iMillennium has a rookie manager, an expense ratio of 2.75%, and a 2% redemption fee that lingers for an astounding two years.....Yet somebody still thinks this fund belongs on the market.
  
  
  
• Robert Bacarella, manager of several Monetta funds, has been suspended from the investment industry for 90 days and fined $100,000 by the SEC for allocating the shares of 13 hot IPOs to three directors of his funds.....During his time off, Bacarella will reportedly seek to improve his vocabulary, starting with the word "fiduciary."
  
  
  

That's it for now.....See you June 1......In the meantime, visit our Discussion Board.

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