FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

(Originally posted May 1, 2005) [Archive Table of Contents]

How low can you go? Even if you don't follow mutual funds closely, you probably know that technology stocks, and the funds that invest in them, generally have been a disaster over the past five years.....What may surprise you, however, is that 11 non-technology funds in this month's FundAlarm database have performed even worse than the average tech fund.

The average tech fund has returned -6.66%, -3.39%, and -21.39% for the past 12 months, three and five years, respectively.....Each fund below has returned less than the average tech fund over these same measurement periods.....All of these funds are 3-ALARM this month, and they are sorted alphabetically.

Fund	12 mo. return (% annlz'd) Avg tech fund: -6.66%	3 yr. return (% annlz'd) Avg tech fund: -3.39%	5 yr. return (% annlz'd) Avg tech fund: -21.39%	Benchmark
American Heritage (AHERX)	-23.08	-8.37	-24.95	Schwab Intl Idx
Frontier Equity (FEFPX)	-25	-47.09	-48.78	Vang SmCap Idx
Grand Prix A (GPFFX)	-11.79	-13.23	-34.22	Vang SmCap Idx
Managers 20 B (MTWBX)	-14.12	-8.2	-25.18	Vang 500 Idx
Merrill Focus Twenty A (MDFOX)	-8.09	-4.23	-29.25	Vang 500 Idx
Merrill Focus Twenty B (MBFOX)	-8.98	-5.13	-29.87	Vang 500 Idx
Merrill Focus Twenty C (MCFOX)	-8.98	-5.13	-29.87	Vang 500 Idx
Shepherd Large Cap Growth (DOIGX)	-8.67	-5.78	-23.4	Dreyf MidCap Idx
Thurlow Growth (THRGX)	-20.11	-10.49	-27.49	Dreyf MidCap Idx
Van Wagoner Emerging Growth (VWEGX)	-26.94	-20.54	-36.96	Vang SmCap Idx
Van Wagoner Small Cap Growth (VWMCX)	-26.4	-12.09	-24.74	Vang SmCap Idx

Managers 20 is the only fund that we were surprised to see on this list.....Like all of the Managers funds, this one is subadvised (i.e., run by an outside manager).....In this case, the subadvisor is Jim Oelschlager's firm, Oak Associates, which also runs its own Oak family of funds (Pin Oak, White Oak, etc.).....Oelschlager has loaded Managers 20 with a heaping helping of tech stocks, which is exactly what he's done with his own funds, and to equally disastrous effect.....But remember, Oelschlager is a hired gun on Managers 20, and the folks who run the Managers fund family have an obligation to monitor Oelschlager's performance and fire him if necesseary.....Indeed, that's the promise made by Managers on its Web site:

The benefit to you [of investing in Managers funds] lies in our practice of adding or replacing subadvisors if we feel we are not getting the results we expected or if changes occur in the portfolio management team. This way, you know that your investments are scrutinized by multiple teams of investment professionals dedicated to providing the best investment talent available in the market.

If Oelschlager's five-year performance has been "scrutinized" by Managers experts, and if Oelschlager's results are as "expected," then perhaps Managers should revise its logo with a question mark and some quotes:

In the beginning, Fidelity waived some fees on its index funds, then Vanguard CEO John Brennan mocked Fidelity's fee cut as a marketing ploy, then Fidelity made its fee waivers permanent, and now Vanguard has eased the eligibility requirements for its super-low-cost Admiral shares.....Soon, we hear, Fidelity CEO Edward Johnson will personally deliver a "whopping wedgie" to Vanguard CEO Brennan, and seek to end this feud once and for all.....In the meantime, the big news is the Admiral change.....If your Vanguard fund account is worth $100,000 or more (previously it was $250,000 or more), you now qualify for Admiral shares, which could save you a basis point or two over the comparable Fidelity index fund (that's $10 or $20 per $100,000 invested).....If you don't qualify for the new Admiral shares, Vanguard acknowledges that your index fund expenses may rise, since some of your fund's assets will be lost to the cheaper Admiral shares, and your fund's expenses will be spread over a smaller base.....But don't fret too much: Since Vanguard's fund expenses generally have been coming down over the past few years, Vanguard says that any expense increase should only knock you back to early-2003 levels* -- plus you have the gratitude of all those Admiral shareholders, whose move you will pay for.
* "Vanguard Ups Ante In Fee Wars," Tom Lauricella, The Wall Street Journal, April 21, 2005

Be careful how you say it: Let's take a look at two socially-responsible funds -- Pax World and Domini Social Equity -- and see how each defines its investment criteria.....Pax World restricts itself, in part, to companies that:

"...are not engaged in manufacturing defense or weapons-related products or companies that derive revenue from the manufacture of liquor, tobacco and/or gambling products...[emphasis added by FundAlarm]

while the Domini fund seeks to:

"...avoid securities and obligations of corporations that manufacture tobacco products or alcoholic beverages..."[emphasis added by FundAlarm]

Pax World owns shares of Starbucks, which recently licensed its name to Jim Beam for use with a coffee-flavored, alcoholic beverage.....Oops.....Since Starbucks will now "derive revenue" from the manufacture of Jim Beam's "liquor product," Starbucks is no longer a suitable holding for Pax World and the firm must divest its Starbucks stock, whatever other investment merits the stock may have.....Domini Social Equity also owns Starbucks (or at least it did, as of the most recent portfolio report), but the Domini fund is under no similar obligation to unload the Seattle-based coffee pusher.....That's because Domini is prohibited only from holding stocks of companies that "manufacture" alcoholic beverages and, even with the Jim Beam deal, Starbucks wouldn't be considered a "manufacturer".....Here's our hunch: The folks who wrote the Pax World investment criteria had no idea that their words would ever apply to a situation like the Starbucks/Jim Beam license, and the resulting divestiture of Starbucks stock is almost certainly something they would not have intended.....But no matter: Strict prospectus rules are strict prospectus rules, and those liquor-loving devils at Starbucks have been banished.
"Agendas will define 'social' investors," Charles Jaffe, bostonherald.com, March 27, 2005

Registered Rep is a magazine for stock brokers, and the editor of RR recently asked Roy for his list of the ten absolute-worst mutual funds (the list accompanied an interview with Roy, which you can read at the Registered Rep Web site).....Herewith, Roy's top-ten losers (we were asked to limit our selections to relatively large, well-known funds):

Loser fund	Roy's comments
Columbia Utilities	An expensive, 15-year laggard.
Fidelity Aggressive Growth	Hasn’t beaten the mid-cap benchmark since Clinton was President.
Firsthand Technology Innovators	Manager’s knowledge of the tech industry was supposed to help during the bear market. It didn’t.
Kinetics Internet	Hardly an “Internet” fund. More like just another underperforming mid-cap fund.
PBHG Growth	Market-timing scandal, manager turnover, poor performance – why would anybody stay?
Putnam OTC & Emerging Growth	Year-in, year-out, probably the worst fund with over $1 billion in assets
Rydex Precious Metals	The coldest fund in a hot sector.
Sun America Balanced Assets	Recently, hasn’t been able to find the winning combination. In fact, it has never found the winning combination.
Van Wagoner Emerging Growth	Worst of a three miserable funds from the same family
Vanguard U.S. Growth	Don’t think Vanguard has any real stinkers? Take a look at this one.

Last September, FundAlarm reported that Kevin Landis, head of the Firsthand funds, was being sued in a Northern California court by his former public relations mouthpiece, Steven Witt.....One of Witt's allegations is that Landis "repeatedly represented to the public that the [Firsthand Growth Funds] were managed by a team of investment advisers. In fact, ...Landis exercised complete control of the [funds]".....Since the prospectus for these funds indicated that a management team was in charge, Landis' alleged misrepresentations weren't merely careless, but may have been a violation of federal securities law.....The SEC is apparently investigating Witt's charge.....Meanwhile, there's enough other stuff flying through the air to humble even some of our simian relatives:

An attorney for Firsthand, while examining Witt and another former executive during pre-trial discovery, spent a considerable amount of time trying to get Witt to admit that the two held "orgies" and "smoked dope" while living in a house owned by Landis.*
Several former Firsthand employees say that the firm has experienced serious internal problems in the four years since the tech bubble burst. These employees paint a picture of a CEO (Landis) whose head swelled in proportion to his own glowing press coverage, yet hired marginally competent analysts, micromanaged the firm and its research, and engaged in questionable accounting and soft-dollar practices.
An attorney for Firsthand describes Witt's lawsuit as "another chapter in a long-running extortion attempt against the firm." He says that Witt's job performance had been declining before his termination, and that Witt had racked up nine "code of ethics violations."

The trial in this case, originally set for April 18, has been postponed until June, presumably so the judge can install a suitable Plexiglass shield.
* Bullet points from "Landis' Fall," Mark Veverka, Barron's, April 18, 2005

John Montgomery runs the Bridgeway funds, and his company has a rule: The salary of the highest-paid Bridgeway employee (who is Montgomery) can't be more than seven times the salary of the lowest-paid Bridgeway employee.....Montgomery's salary for 2003 was just over $267,000, which means that the lowest-paid employee earned about $38,000.....Over at Mario Gabelli's eponymous fund and money management firm, it's clear that no similar compensation rule is in place.....Gabelli's total compensation for running his firm was just over $55 million in 2004.....If we assume that Gabelli's lowest-paid employee also earned about $38,000, then Super Mario paid himself 1,447 times that amount.....Gabelli's income breaks down approximately as follows: $16.3 million for "creating" and managing several mutual funds, $11.0 million as an incentive-management fee (imagine the incentive he would need if this wasn't his own company!), $16.4 million for managing and "attracting" a "large number of separate accounts," $8.0 million for "creating" and managing his company's closed-end funds, and about $3.2 million for providing "other services".....Gabelli also received a contribution of $496 to his company's profit-sharing plan (which will apparently fund his post-retirement hair cuts), but he received no separate compensation for his incomprehensible television interviews.

Every year, Steven Goldberg of Kiplinger's magazine produces a short, thoughtful list of favorite mutual funds, and you can view the entire list at the Kiplinger's Web site .....This being FundAlarm, however, we're more interested in the offerings that have fallen off Kiplinger's list since last year.....Three funds were dropped because they're now closed to new investors (Aegis Value, Masters' Select Equity and Vanguard Health Care).....Nine other stock funds were dropped by Kiplinger's for more substantive reasons, as follows:

Fund name (on Kiplinger's "favorite" list last year, dropped this year)	Why it got the boot
ABN AMRO/Montag & Caldwell Growth N	Concerns about asset growth in this fund (and similarly-managed private accounts), as well as lagging performance
Brandywine	As a momentum-oriented mid-cap growth fund, not as good as Meridian Growth (which made the list this year)
Olstein Financial Alert C	Run by a great stock-picker, who isn't quite worth this fund's 2.16% expense ratio
Selected Special Shares	Performance hasn't quite measured up to that of the very best mid-cap blend funds
TCW Galileo Select Equities I	Glen Bickerstaff is no longer calling the shots as day-to-day manager, and there are plenty of other good, large-cap aggressive growth funds
Oakmark	Dropped in favor of its sibling, Oakmark Select, because the latter is more focused (i.e., limited to manager Bill Nygren's favorite stocks)
Artisan International	Lagged its benchmark for the past three years, lagging again this year
T. Rowe Price International Discovery	Dropped in favor of Third Avenue International Value, which has a more flexible charter, and is allowed to buy mid-cap stocks
Tweedy Browne Global Value	Trailed its peer group in recent years, mainly because it hedges away its exposure to foreign currencies; in Kiplinger's opinion, unhedged is a better way to go

"25 Favorite Funds: What's In, What's Out," Steven Goldberg, kiplinger.com, April 5, 2005

Last month, as you may recall, I ranted about a proxy statement I had recently received from Allianz (formerly PIMCO) RCM Global Technology, which is my largest personal fund holding.....While I was in a ranting mood, I also sent a letter to the fund's trustees (directors), and in mid-April I actually received a response to my missive from E. Blake Moore, Jr., who is President of Allianz Global Investors.....Mr. Moore's letter seems like it's written by a lawyer (which is appropriate, since he is one), and here's the bottom line according to Mr. Moore: The proposed merger of Allianz RCM Global Technology (GT) with Allianz RCM Innovation is "in the best interests of both Funds".....Mr. Moore also assures me that the GT trustees considered the "potential limitation" on Global Technology's capital loss carryforward "if the Merger is consummated," but the trustees concluded that the small, post-merger reduction in GT's expense ratio would outweigh any economic harm to shareholders as a result of the vaporized capital loss carryforward.....What Mr. Moore didn't provide, and what I had specifically requested, was some way to quantify the cost of the capital loss limitation, so I could compare that cost to the benefit of the expense reduction, and thereby cast an intelligent vote for or against the merger.....Overall, I'm still dissatisfied with the way the GT trustees handled this proxy statement, and I see nothing positive from the merger of Global Technology with the larger Innovation fund.....Global Technology has performed well for me, and there aren't a lot of good tech-fund alternatives, so I'll be a reluctant seller.....But sell I will: I've lost confidence in the fund's trustees and, ultimately, I believe the merger will hurt the performance of Global Technology......Sometimes, you've got to do what you've got to do......I should have a new tech fund soon, and I'll post an update when I do.

Briefly noted:

Talk about your rapid turnover: Delaware Investments, manager of the Delaware mutual funds, recently lifted out (i.e., stole away) four large-cap growth managers from Transamerica (Jeffrey Van Harte, Christopher Bonavico, Daniel Prislin and Kenneth Broad).....Delaware was so proud of its booty (no, not that kind of booty), the firm quickly gave the new team a couple of funds to manage (Delaware Diversified Growth and Delaware Select Growth), and amended each fund's prospectus to reflect the manager change.....But for some reason (incompetence? infighting? full moon?), Delaware reinstated the former management team after just four days, and amended the prospectuses again.
If you go to the Delaware Web site and call up the prospectus for Diversified Growth or Dividend Select, you won't see a hint of the on-again/off-again manager changes, discussed above.....When Delaware serves up a "prospectus" on its site, and that document omits two amendments formally filed with the SEC, we wonder if Delaware is fulfilling its legal obligation to provide a current and complete prospectus?.....We doubt it.
Hello? Independent fund directors? Has anyone heard about economies of scale? In 1989, American Century Ultra had $345 million in assets, and its expense ratio was 1.00%.....In 2004, the fund's assets were up to $22 billion, and the expense ratio had dropped one basis point, to 0.99% -- in other words, the expense ratio was virtually unchanged, after a 64-fold increase in assets.....Assets at Templeton Growth A have jumped almost eight-fold since 1989 (from $2.4 billion to about $19 billion), but the expense ratio has actually increased, from 0.66% to 1.10%.
Fund Spy, morningstar.com, April 7, 2005
The Homestead Nasdaq-100 Index Tracking Stock Fund seeks to track (you guessed it) the Nasdaq 100 stock index.....To achieve this goal, the fund employs three managers, and it carries an expense ratio of 1.50%.....Recently, however, almost 99% of this fund's assets were invested in the QQQQ, an exchange-traded index fund that also tracks the Nasdaq 100, and carries an expense ratio of just 0.20%.....The Homestead fund raises a number of interesting questions: (1) Are the directors of this fund morons, or merely clueless? (2) What do the three fund managers do all day? and, (3) How could anybody own a fund that charges $150 for each $10,000 invested, when they could buy the identical underlying investment for just $20 per $10,000.....Faced with a product like this, even P.T. Barnum might have been speechless.
Gus Sauter is Vanguard's index-fund guru, and Vanguard's index-fund prospectuses have quietly been revised to remove Sauter's name as sole, day-to-day manager*.....Sauter is now listed as the big-picture ("oversight") guy, and a team of five will handle what had been Sauter's daily responsibilities.....Investors should notice little or no change in fund performance, which is good.....What's not so good is that Sauter apparently has been phasing out of day-to-day management for some time.....Until now, however, Vanguard hasn't seen fit to share this information with its customers.
* From a series of posts by Jeffrey Ptak, on the Morningstar discussion boards, April 24, 2005
Almost six years ago (July 1999), we welcomed the birth of AIM Dent Demographic Trend with the following, skeptical item:

Taking AIM: After paying for college, plastic surgery, and relaxed-fit Dockers, aging baby boomers now have another place to send their money: the AIM Dent Demographic Trends Fund.....Dent, of course, is Harry Dent, who predicts that spending by aging BB's will drive the Dow to 40,000 by the end of the next decade.....Dent will be the fund's big-picture guy (technically, subadvisor), providing deep insights as needed..... AIM, not previously known for pandering, will be the fund's main advisor and marketer.

Since then, AIM Dent Demographic has occupied a regular spot on our list of 3-ALARM funds, it has consistently underperformed its large-cap growth peer group, its asset base has steadily declined, and its expense ratio has risen to an absurd level (2.47% for the B-class and C-class, 1.82% for the A-class shares).....AIM is now seeking to merge Dent Demographic into AIM Weingarten, apparently hoping that anyone who stuck with a gimmick/loser fund won't notice when the gimmick part is removed, and only the loser part remains.
First Command made a fortune selling garbage financial products to American military personnel, but the company recently decided to stop hawking its most lucrative garbage product, contractual mutual funds, after being slapped with regulatory fines and getting some intense heat from Congress.....Faced with a shrinking pool of gullible military clients, First Command recently announced that it's "expanding the market it serves to include non-military families".....In a move almost certain to be met with equal indifference, we hear that Saddam Hussein's Baath party is also "expanding the market it serves," to include non-Iraqi citizens.
Let's go back to March 2000: Most of the 50 hottest-selling mutual funds were focused on technology stocks and, since then, those 50 funds have lost an average 42%.....At the opposite extreme in March 2000 were the 50 funds that saw the most assets flee in the preceding year.....Since then, those once-unpopular funds have gained an average 21.4%......Does anyone else see a contrarian indicator here?
"Top-selling funds of 2000 deep in red," John Waggoner, USA Today, April 6, 2005
The CEO of a large U.S. fund company was recently invited to address a major gathering of Native Americans. He spoke for almost an hour on how mutual funds could increase every Native American's standard of living. He spoke of his firm's honesty, integrity, and concern for its customers. He referred to his firm’s charitable donations to Native American causes. He said that his firm would be designing special mutual funds tailored to the unique needs of his "Native American brothers and sisters." At the conclusion of his speech, the tribes presented the executive with a beautiful plaque inscribed with his new Indian name: Walking Eagle. Shortly after the proud CEO departed in his limo, a news reporter inquired of the group of chiefs of how they came to select the new name. They explained that Walking Eagle is the name given to a bird so full of s**t it can no longer fly.
Thanks to Ken Kivenko, an investor advocate, management consultant, and engineer in Canada. Ken's web site is mutualfunds4u.com. Ken informs us this story is not true, even though we were ready to believe it.