| Highlights and Commentary |
| By Roy Weitz |
Dangerous to your wealth: People invest in stock mutual funds for many different reasons, and there are many ways to judge investment performance.....But "beating inflation" is one of the basic reasons that people invest in stock funds, and it's also one of the easiest to understand.....If your stock funds return more than the inflation rate, your "real" purchasing power goes up, and you can enjoy a better standard of living in the future.....If your rate of return consistently trails the inflation rate, your capital will be able to buy less of life's goodies in the future than it can now.....Over the past five years, through March 31, 2002, inflation in the U.S. has been running at a relatively modest rate of 2.25%*.....But even with that modest rate of inflation, a surprising number of stock funds have failed to keep up......The accompanying table lists 416 funds in this month's FundAlarm database that have returned less than 2.25% -- the inflation rate -- over the past 60 months.....At some point, you might have had a good reason for buying one of these funds, and you might even have a good reason for keeping it.....But the fact remains: Each fund on this list is slowly chipping away at your wealth, and that's not what a stock fund is supposed to do.
Come on, admit it: No matter how confident you are in your own ability to pick mutual funds, you always have a nagging suspicion that other people do it better (this nagging suspicion exists with other human activities, too, but that's beyond the scope of FundAlarm).....Wouldn't it be nice to know what funds other investors are interested in and, perhaps, buying?.....That's the idea behind a recent article in Investment News, which took a look at the most-viewed funds on the Morningstar web site.....Since Morningstar has different Web sites for professional advisors and for the public, we're also able to compare what these two different sets of eyes are looking at.....Here the list:
| Viewing rank | Most-viewed funds | % return* | |||
|---|---|---|---|---|---|
| By public | By advisers | YTD | 12 mo. | 3 yrs. | |
| 1 | 2 | Dodge & Cox Stock (DODGX) | 4.89 | 13.6 | 15.33 |
| 2 | 9 | Vanguard 500 Index (VFINX) | 0.24 | 0.09 | -2.57 |
| 3 | - | Vanguard Primecap (VPMCX) | 1.34 | -1.43 | 6.96 |
| 4 | - | Oakmark I (OAKMX) | 4.17 | 14.76 | 7.41 |
| 5 | - | Vanguard Capital Opportunity (VHCOX) | -1.52 | -3.43 | 24.62 |
| 6 | 4 | Fidelity Low-Priced Stock (FLPSX) | 6.97 | 30.4 | 22.11 |
| 7 | - | Fidelity Dividend Growth (FDGFX) | 0.81 | 5.79 | 4.07 |
| 8 | 6 | Clipper (CFIMX) | 5.71 | 15.37 | 17.53 |
| 9 | - | Wasatch Core Growth (WGROX) | 10.14 | 40.71 | 35.04 |
| 10 | - | Vanguard Health Care (VGHCX) | 3.12 | 9.88 | 17.41 |
| - | 1 | American Funds Growth Fund A (AGTHX) | -1.27 | 0.84 | 8.56 |
| - | 3 | American Funds Washington Mutual A (AWSHX) | 3.63 | 6.83 | 5.01 |
| - | 5 | American Funds American Balanced A (ABALX) | 3.47 | 10.58 | 9.86 |
| - | 7 | American Funds Investment Co. of America A (AIVSX) | 2.02 | 3.3 | 4.64 |
| - | 8 | Janus Worldwide (JAWWX) | -0.89 | -7.72 | -0.73 |
| - | 10 | Pimco Renaissance A (PQNAX) | 7.34 | 29.72 | 22.42 |
What it takes to make Jim Goff's hair stand on end:| "My hair stands on end when people say our [investment] strategy has changed." | ||
| --Jim Goff, director of research for the Janus funds, as quoted in The New York Times | ||
We make Jim Goff's hair stand on end:| "Your investment strategy has changed." |
When you buy an index fund, it's reasonable to assume that the fund is going to track the underlying index quite closely.....After all, that's the whole point of an index fund.....Likewise, when you buy one of those souped-up index funds from a firm like Rydex or ProFunds, it still seems reasonable to assume that the souped-up fund will track the underlying index as advertised.....For example, ProFunds UltraShort OTC is designed to return double the inverse (opposite) of the underlying Nasdaq 100 index, and it seems reasonable to assume that the fund will deliver what it promises over any given period of time -- if the Nasdaq goes down, say, 10% for the year, this fund should deliver twice the return in the opposite direction (+20%).....So, how do we account for the fact that in 2001, when the Nasdaq 100 lost more than 33%, ProFunds UltraShort OTC lost 7.4%? .....Shouldn't UltraShort OTC have been up 66% (i.e., 2 x 33%) for the year?.....The problem with UltraShort OTC is the same problem with every other souped-up index fund: These funds are managed only for daily results and, if you hold them for longer periods of time, all bets are off......(If you read the prospectus very carefully, you'll see that this daily management strategy is disclosed, sort of).....Compounding is the real culprit with souped-up funds, and the effect of compounding varies according to the direction and volatility of the market.....For example, consider the following chart:
| Hypothetical market behavior (six trading days) | (A) Actual change in index over period | Actual change in double-inverse index fund over period* | Expected change in double inverse fund (2x inverse of col. (A)) |
|---|---|---|---|
| Index goes down 5% each day | -27% | +77% | +54% |
| Index goes up 5% each day | +34% | -47% | -68% |
| Index goes up and down 5%, on alternating days | -1% | -3% | +2% |
From the "Fact Sheet" for Evergreen Small Cap Value:
As far as we can tell, every socially-responsible fund -- except one -- is based on the concept of screening out "sin" stocks.....The one exception to this rule is an odd little fund called Summit Apex Total Social Impact (SATSX), which is essentially a socially-enhanced S&P 500 Index fund.....SATSX invests in every S&P 500 company, no matter what its social record, but it overweights companies with good social ratings, and it underweights companies with a poor ratings.....Social ratings are assigned on a scale from 1 to 20 (best).....A stock with a social rating of 10 is given approximately the same weight that it would have in a traditional S&P 500 index fund.....A stock with a top social rating of 20 is given twice the normal index weighting, while a stock with a rating of 1 is given about
one-tenth the normal weighting.....But why would a socially responsible fund invest even a dollar in these low-rated companies?.....According to the fund's manager, Steven Dillenburg, "what gets measured gets managed"*.....We're not entirely clear what Dillenburg is saying, but we think it goes something like this: In the typical socially-responsible fund, investors have no idea what stocks have been screened out, so the managers of those sinful companies have no incentive to reform their errant ways.....In a fund like Summit Total Social Impact, a low index weighting means that a company has placed poorly in various social screens, and therefore the company is on public display as a social miscreant.....Presumably, company management feels uncomfortable being rated poorly, so reforms are instituted to help improve the company's social rating.....Here at FundAlarm, we're big believers in public humiliation, so the theory behind Summit Total Social Impact is a least superficially appealing.....There's just one problem: Nowhere in any of the fund's materials are the social ratings of the various companies published, or the various under- and over-weightings highlighted.....In other words, the element of public humiliation is totally absent.....Without this public element, SATSX is just an oddly-skewed index fund, with no apparent reason for existing.
Artist Jennie Schueler used to paint portraits of toll takers on the New Jersey Turnpike, but toll machines have mostly replaced people.....So Schueler decided to move slightly upscale on the professional ladder, and now she paints mutual fund managers*.....A recent Web search found the following Schueler work for sale at a site called neoimages.com:
Briefly noted:
| "Not revealing who manages a fund is as nonsensical as a Fortune 500 company not disclosing the name of its chief executive. The 14 million people who have $300 billion invested with Putnam should heed this development and question the firm's motives in creating 'investment teams' rather than individual managers who can be held accountable for a fund's performance." | |||||
| --Thomas Kostigan, CBS.MarketWatch.com, April 17, 2002 | |||||
 "Smalto. You make me weak." | Credit Suisse Asset Management has announced a new ad campaign designed to "broaden and raise the firm's profile" among brokers and institutional investors.....Created by the same ad agency that produced the memorable ad on the left (you do remember, don't you?), the new Credit Suisse ads will be "simple but dynamic in look and design".....Unaware, perhaps, that it is borrowing two-thirds of the very familiar U.S. flag design, Credit Suisse says that the new ads will wrap the firm's "distinctive" blue and red corporate colors around a "simple and sometimes humorous or understated text message".....Get ready to chuckle....One ad will read: "The best research is rarely found in an e-mail attachment." |