Highlights and Commentary

By Roy Weitz

(Originally posted May 1, 1999) [Archive Table of Contents]

Stalled at the light: As a group, large-cap growth funds have left other funds in the dust, especially over the past three years.....But even this hot group has its laggards.....This month's FundAlarm database contains 329 large-cap U.S. growth funds, and almost one third of them are 3-ALARM.....Investors in 3-ALARM growth funds have a right to be frustrated ("If not now, when?").....Meanwhile, the managers of these funds have 50 years or so to prepare for the next once-in-a-lifetime bull market, when they can once again try to beat their benchmark.....The accompanying page contains performance information on all 329 large-cap growth funds in our database, including 104 that have stalled at the light, and 34 that lead the pack ("NO-ALARM").
[Go to the complete list of large-cap growth funds]

Speaking of growth funds: "Socially responsible" mutual funds often tilt towards the growth style of investing, and writer Nick Pachetti recently identified the reason:* Companies in growth sectors, such as health care and technology, tend to survive social screens fairly well.....Cyclical, value-oriented companies, such as paper, automobiles, and energy, often get screened out of socially responsible funds, mainly for environmental reasons.....So how are socially responsible funds doing?.....Not great, even with their built-in growth bias.....This month's FundAlarm database contains 28 socially responsible funds.....20 of them have been around for at least five years.....Of these 20 funds, 12 are 3-ALARM and only five are NO-ALARM.....Calvert, in particular, might want to start encouraging prayer in the workplace.....Calvert has four mediocre funds on our socially responsible list, plus one fund that is a monster 3-ALARM (Social Inv Equity A).
* "Social Studies," Worth, May 1999

[The accompanying page contains a complete list of socially responsible funds
in this month's database, with related performance information]

"I wake up optimistic and aggressive every morning. That's why I like myself"

The quote above is from Harold Baxter, who runs the PBHG funds with Gary Pilgrim*.....If you've never been able to tell Pilgrim and Baxter apart, here's a little mnemonic: The "P" in Pilgrim stands for "productive" -- he's the guy who comes to work every day, and keeps plugging away.....The "B" in Baxter stands for "Barcalounger" -- he's the marketing guy who travels on the corporate jet, plays a lot of golf, and spends weeks at his $4 million house on Nantucket.....Baxter is also the guy who hired his daughter Christine as a fund manager, one month after she graduated from college with a philosophy degree.....In 1997, when Christine's Emerging Growth fund was down 3.7%, she reportedly received a $1.75 million bonus on top of her $200,000 base salary.
*"Lost Momentum: How the Relentless Pursuit of Hot Money Finally Caught Up with PBHG's Gary Pilgrim and Harold Baxter," John Helyar, Money, May 1999. A terrific story, highly recommended.


My, what big assets you have: Fidelity Magellan recently passed the $90 billion mark in net assets.....Laid end-to-end, we have absolutely no idea how far 90 billion dollars would stretch.....But we have come up with some interesting ways to start a conversation (or stop one, depending on your social circle):

• The technology holdings of Magellan ($18.9 billion) are more than 3 1/2 times the size of the largest stand-alone technology fund (T. Rowe Price Science and Technology).
  
  
• The technology piece of Magellan, by itself, would be the 14th-largest stock mutual fund in the U.S.
  
  
• The "utilities" holdings of Magellan ($6.5 billion) are 2 1/2 times the size of the largest stand-alone utility fund.
  
  
• The "health" holdings of Magellan, by themselves, would be the second-largest health care fund in the U.S., just behind Vanguard Health Care ($9.3 vs. $10 billion).
  
  
• The single largest holding of Magellan* is, by itself, larger than all but 91 domestic stock mutual funds.
  * General Electric, at an estimated $3.6 billion
  
  

For the sake of argument, let's assume that Bob Stansky, Magellan's current manager, is the most talented stock picker in the world.....Also for the sake of argument (although not much), let's assume that Roger Clemens is baseball's best pitcher.....If you tied 40-pound weights to Clemens' arms, he still might be able to make a few good pitches.....But eventually, he'd lose it.....Stansky is laboring under a $90 billion financial weight.....Over short periods, he will undoubtedly beat the S&P 500 .....Over long periods, it's more likely that I'll appear in a movie as the evil twin brother of Alec Baldwin.


I'll have whatever he's smoking: The FidelityAdvisor.com newsletter recently rated Fidelity Magellan an "Aggressive Buy".....In light of what we've just said about Magellan, this seems like quite a stretch.....But publisher Donald Dion has his short-term reasons: For the three months ended March 31, 1999, "Magellan returned 7.4% to investors, vs. 5.0% for the Vanguard 500 Index Fund." As Dion breathlessly (and somewhat incoherently) notes, "That's a 48% better gain on your returns".....Should we also buy Magellan because it performs better on Tuesdays?.....We eagerly await Dion's next advisory.


Fresh meat: In the early 1970s, Ron Baron made his career on the short side of the stock market.....Now, according to Caroline Waxler (Forbes), "Baron's big bets and dogged refusal to cut his losses" are attracting the attention of professional short sellers.....Think of Baron more as a beacon than a target: He's had a recent string of bad investment luck, and he holds concentrated, relatively illiquid positions.....Short sellers are simply playing the odds by keeping an eye on his holdings.....If Baron starts to flail -- and large-scale fund redemptions could do it -- the carnivores are prepared to strike.
"Sharks in the water," Forbes, April 19, 1999


Beware of brokers bearing funds: The mutual funds sponsored by large brokerage firms have a bad reputation.....A review of this month's FundAlarm database shows that the reputation is mostly deserved.....According to the chart below, funds from PaineWebber, Prudential, and Smith Barney are the worst of the bunch, and just about equally bad.....On average, for every ten times these funds are compared to their respective benchmarks, they underperform eight times:

Broker	# of Funds in FundAlarm Database	Total # of "Measurement Periods"	% of "Measurement Periods" that are Negative vs. Benchmark
Explanation of "measurement period": In the FundAlarm database, a fund in existence for at least 5 years has three measurement periods -- 5 years, 3 years, and 12 months. A fund in existence less than five years might have two measurement periods (3 years and 12 months), one measurement period (12 months), or none.
Merrill Lynch	60	138	67%
Morgan Stanley Dean Witter (MSDW)	30	70	68%
PaineWebber	13	36	80%
Prudential	27	61	82%
Smith Barney	32	79	81%

Looking at ALARM status (below), Paine Webber and Prudential also show up at the bottom of the heap.....Both brokers have a high percentage of 3-ALARM funds, and not a single NO-ALARM fund can be found at either firm:

Broker	# Funds in Existence at Least Five Years	# of 3-ALARM Funds	# of NO-ALARM Funds
Merrill Lynch	26	13	4
Morgan Stanley Dean Witter (MSDW)	17	8	1
PaineWebber	10	8	0
Prudential	14	11	0
Smith Barney	18	12	2

What's the matter with brokers' funds?.....That's the title of a recent Forbes article by Thomas Easton, who offers two explanations: The whole psyche of a brokerage firm is built around selling, not buying.....Also, broker-sold funds tend to have steep expense ratios, which chip away at long-term performance.....FundAlarm suggests another reason: Good money managers tend to be geeks (we mean that as a compliment), and brokerage firms have never been congenial places for nonconformists.....Geeks go to work for smaller shops, and brokers get the bland leftovers.


"If I hurry, I can still hop on the bandwagon": Robert Markman runs several funds-of-funds, under the Markman name.....In a recent discussion with writer Mary Rowland, Markman declared that asset allocation is dead.....Markman believes that asset allocation models based on 75 years of history are no longer valid, mainly because they are based on history.....Therefore, Markman is filling the entire stock portion of his client portfolios with focused large-cap U.S. growth funds, such as Janus 20, White Oak Growth, Rydex OTC, Marsico Focus, and Papp America Abroad....."If these are the best funds I can find, why should I use worse funds?".....To which one of Markman' s clients might respond, "If all you do is buy the hottest funds, why do I need you?".....To which Markman might reply, "Experience".....To which his client might respond, "But experience has no value in a world without history, and you just said that investment history doesn't matter".....To which Markman might reply: "What are you, some kind of philosopher? Do you mind if we change the subject?"
"Why asset allocation doesn't cut it anymore," Mary Rowland, moneycentral.msn.com


Searching the world to bring you Europe: Laptop computer in one hand, financial statements in the other, racing to catch a plane in some remote but booming foreign outpost.....That may be the image international fund managers would like to cultivate, but the reality is quite different.....As writer Jackie Day Packel recently noted in SmartMoney, a surprising number of (officially) diversified international funds are making a surprisingly large bet on Europe.....That has worked pretty well over the past three years, but some of these funds will have a lot of repositioning to do if and when other regions come into favor.....Navellier International Equity was recently about as un-international as you can get, with 100% of its holdings in Europe, and several "International Growth" funds were recently invested 90% or more in Europe (Harbor, Waddell & Reed, United, Montgomery).....The average international fund now holds about 68% European stocks, the highest concentration in five years....Below is a list of all diversified international funds in this month's FundAlarm database which recently had more than the average 68% European holdings:

80% to 100% European
BEA Instl Intl Equity (RBIEX)
BT Instl Intl Equity I (BEIIX)
BT Investment Intl Equity (BTEQX)
Federated Intl Equity A (FTITX)
Federated Intl Equity B (FIEBX)
Founders Intl Equity (FOIEX)
Gabelli International Growth (GIGRX)
Hancock International A (FINAX)
Harbor International Growth (HAIGX)
Harbor International II (HAIIX)
Legg Mason Intl Equity Prim (LMGEX)
Montgomery Intl Growth R (MNIGX)
Oppenheimer Intl Growth A (OIGAX)
Oppenheimer Intl Growth B (IGRWX)
State St Research Intl Eq B (SSNBX)
Touchstone Intl Equity A (TIEAX)
Touchstone Intl Equity C (TOQCX)
United International Growth A (UNCGX)
Waddell & Reed Intl Growth B (WRGIX)
The list continues...

Here's a very short list of NO-ALARM diversified international funds which currently have less than average exposure to Europe:

NO-ALARM International Fund	% in Europe
EuroPacific Growth (AEPGX)	49
Nicholas-Applegate Intl Sml I (NAGPX)	64
UMB Scout WorldWide (UMBWX)	66

Therefore, Fidelity decreed that 25,000 customers could no longer speak to customer service representatives, because they called too much, and sought too much knowledge; and these customers were ordered to use Fidelity's Web site and automated phone system; and many of the banished were mightily pissed, for did not Fidelity earn enough to allow a few phone calls? And some of the banished left the land of Fidelity, and dwelt in the land of Vanguard and T. Rowe Price; and their calls were not limited, and they were happy.

If you invest through a commission-based broker or financial planner, and especially if you have more than $50,000 in mutual funds, you should be familiar with the term "breakpoint".....If not, your broker has some explaining to do.....As Jonathan Burton notes in a recent article,* breakpoints are basically volume discounts for investors in Class A shares of load mutual funds.....For example, the first breakpoint for the Mutual Qualified fund is $50,000.....If you invest up to $49,999, you pay the highest commission (5.75%).....But if you invest even one dollar more, you qualify for a lower commission (4.5%) on your entire purchase.....Commissions keep dropping at each of several breakpoints.....Above $1,000,000, you pay no commission at all.....Breakpoint policies vary by fund family, but here are some common features:

• "Combined purchase privilege": If your total investment with a fund family exceeds a breakpoint, you qualify for the lower commission on your next fund purchase, no matter what the amount.
  
  
• "Cumulative quantity discount," or "right of accumulation": Under this plan, the growth of your fund can help push you past a breakpoint.....For example, say you invest $40,000 in ABC Internet Fund, and it grows to $48,000 by next Thursday.....If the first breakpoint for this fund is $50,000, you qualify for a lower commission if your next investment is at least $2,000.
  
  
• "Letter of intent," or "statement of intention": This breakpoint policy is tailor-made for periodic investors.....If you agree to hit a breakpoint over a period of time (usually 12 months or more), all of your investments along the way qualify for the lower commission rate.....If you fail to hit the breakpoint, perhaps because you just turned 47 and fell for a sports car named Lorelei, you are simply charged the higher rate, with no penalty.

Breakpoints create one of the classic conflicts of interest in the financial industry.....That's because the commissions that you don't pay come directly out of your broker's pocket.....Most major brokerage firms have procedures to prevent breakpoint abuses, and they do a pretty good job.....But one of the easiest scams is also one of the toughest to police.....Let's say you have $120,000 to invest, and your broker recommends three funds from three different fund families.....At $40,000 each, none of these funds qualify for any breakpoints.....On the other hand, if your broker had recommended three funds from the ABC family, you would have met a $100,000 breakpoint for combined purchases, and you would have saved about $2,700 in commissions.....Did your broker innocently recommend the best funds he could find, or did he try to keep you from hitting the breakpoints?.....Sometimes, it's hard to tell.....Your best defense is to understand breakpoints.....You should also ask your broker to explain the breakpoint implications of every significant recommendation.
* "A Cut Above," Bloomberg Personal Finance, May 1999


Changes at the Lindner funds:

• New management team: All portfolio managers, except Eric Ryback, have been fired.....Both analysts have also been fired.....All of the Lindner funds (other than the money market fund) will be run by a committee consisting of Ryback, Mark Finn (one of the consultants brought in to save the company, who has no mutual fund experience), and Doug Valassis (a dentist).
  Source: Morningstar.net
  
  
• New logo:
  
  
  
  
  
• New marketing slogan: "Floss daily, invest monthly"
  
  
• New mascot:
  
  
• New Web address: rinse-and-spit.com

[FundAlarm sends its regards to Dr. B., a fine dentist and loyal reader.
See you soon. Please don't hurt me.]
Take a hike: That's pretty much what the new bosses at Lindner have told Eric Ryback.....Fortunately, he's been there before.....From Ryback's official Lindner biography:

Eric was the first person to hike all three of the trans-national wilderness trails; he hiked the 2,155-mile Appalachian Trail in 1969, as a 17-year old; the following summer he hiked the 2,500-mile Pacific Crest Trail; two years later, he completed backpacking’s "Triple Crown" by hiking 3,000 miles along the Continental Divide. He authored a book about his achievements – "The High Adventure of Eric Ryback."

A reader's review of Ryback's book, "The High Adventure of Eric Ryback," found at Amazon.com:

Excellent story, but didn't tell the exact truth Eric Ryback wrote the story about his adventures on the Pacific Crest Trail, but failed to mention why he was able to hike 30 miles a day. He was catching rides from people along the way and taking short-cuts without documenting them in his book. Eric Ryback is somewhat of a phony in the PCT hikers community. Nobody has a problem with catching an occasional ride, but you had better make that part of your story if you do.

Briefly noted:

• First his diapers, now his funds: It was a close call, but family harmony has been restored.....Karen Damato (The Wall Street Journal) reports that Bill Nasgovitz recently convinced his mother not to bail out of Heartland Value.
  
  
  
• Freedom's just another word for undiversified: Author Suze Orman (The Nine Steps to Financial Freedom) recently revealed her personal portfolio to Money magazine.....Orman says that she owns "more than 25 stocks, almost all large-caps".....She doesn't own any mutual funds or bonds.
  
  
  

• Janus funds continue to have a significant amount of common stock ownership.....This fact partially explains why 12 of 14 Janus funds were recently beating the market.....It also suggests that you might want to take a close look at diversification (or lack thereof) if you own more than one Janus fund..... Even Jim Craig, Janus chief investment officer, was recently hard-pressed to distinguish among his five Dolly funds (right)..... Which stocks are most commonly owned by these Janus invest-alikes? .....Cisco Systems, Microsoft, Time Warner, and Pfizer.

  Janus Fund

  Janus Twenty

  Janus Gr&Income

  Janus Mercury

  Janus Olympus

  
  
  
• If you're an index fund investor, and you're feeling oh-so-rational these days, here's a tidbit to give you pause: Yahoo (with a P/E of 1,900 ) was recently the second-largest holding of Vanguard Extended Market Index.
  Source: John Waggoner, USA Today
  
  
  
• Soon he'll be recommending Studebaker: In a recent Barron's article about MFS, the firm's director of equities (Kevin Parke) was trying to explain why his in-house analysts are better than Wall Street analysts.....Parke was also trying to explain why his analysts go through the trouble of developing their own earnings models, and he used General Motors as his clinching example: "You really start to get a feel for how much a Chevette or a Suburban adds to the bottom line when you do the analysis yourself...".....You also get a feel that Parke isn't exactly hunched over his computer screen, crunching numbers with the troops.....The Chevette hasn't been sold in the U.S. since 1987.
  
  
  
• The managers of the Permanent Portfolio family of funds have been suspended for three months, ordered to reimburse investors $2.8 million, and slapped with an additional $140,000 in civil fines.....According to the decision by an SEC administrative judge, Terry Coxon and Alan Sergy improperly used money from the Permanent Portfolio funds to cover expenses of their own management company.....Coxon and Sergy are appealing to the SEC.....If the ruling is upheld, the Permanent Portfolio funds will need to find a new manager for three months, and Coxon and Sergy will have the opportunity to take some accounting classes.
  
  
  
• Last month, we reported that the manager of Pioneer International Growth had been replaced.....This month, Pioneer goes on a rampage: Pioneer Small Company manager: Gone.....Pioneer Micro Cap manager: Gone.....Pioneer Real Estate Shares manager: Gone.....Details at Recent Manager Changes.
  
  
  
• For the first quarter of 1999, it's estimated that 96% of the net new investment in stock and bond mutual funds went to only 25 names.....As Paul Lim of the L.A. Times points out, that means more than 10,000 other funds fought it out for the remaining 4% of the pie.
  
  
  
• The company that manages the Internet Fund (WWWFX) was recently bought by Lepercq de Neuflize, itself a small investment company....A Lepercq spokesman said that there are no immediate plans to change the fund's operations or fee structure, although the rusted-out Chevy on the front lawn will probably have to go.
  
  
  
• If you ran the hottest mutual fund on the planet, perhaps in history, would you sell out after only a year?.....Maybe the owners of the Internet Fund believe that the value of their asset has peaked?
  
  
  
• If you haven't already dumped your small-cap funds, there's a good chance you've been tempted.....Before you do, here's something to think about: There are approximately 10,000 publicly-owned companies in the United States.....90% of them still have market caps of $1 billion or less.
  "Questioning Small Caps' Status as a Core Buy," Paul J. Lim, Los Angeles Times, April 6, 1999
  
  
  
  
• GROW is the cruel and mocking ticker symbol for U.S. Global, a publicly-traded company which runs the U.S. Global funds (and the Bonnel Growth Fund) out of San Antonio, Texas.....CEO Frank Holmes has run the company for almost 10 years, and he apparently just realized that he has a problem....."The performance sucks," according to Holmes.....Holmes also admits that some of U.S. Global's portfolio managers have suffered from "lack of discipline," and that portfolio management at times has bordered on the "haphazard"....."I have a plan," says Holmes. "If I didn't have a plan I'd be very worried. I understand money management and what it takes to drive performance".....Right off a cliff, judging from past results.
  "Home-Grown Mutual-Fund Firm Tries to Shake Dismal Numbers," Jonathan Weil, The Wall Street Journal, April 7, 1999

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