FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

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

We're introducing a new data table: [For the Archive, this item has been deleted. For an explanation of the FundAlarm data table, please review the following:
Deciding to Sell a Mutual Fund
How to Read the FundAlarm Data Table ]

More on the new data table: The new data table continues to compare the performance of each fund to a benchmark, and this benchmark comparison is still the basis for our 3-ALARM and NO-ALARM ratings.....Thus, in Section "A" below (taken from a new data table), we see that ABC Fund has underperformed its benchmark for the past 12 months, 3 years, and 5 years, and therefore it earns our 3-ALARM rating:

Portion of new data table for ABC Fund:

Section "B" (above) is new, and it should give you a better understanding of your fund's performance in comparison to its peer group, which we define as all funds with the same benchmark and style.....In this example, ABC fund belongs to the large-cap/value peer group, and Section B tells us that ABC Fund has generated a higher return than the average fund in its peer group for the past 12 months, 3 years, and 5 years ("Higher Higher Higher").

Looking at Sections A and B together, we get a more complete picture of ABC Fund performance: Although this fund has consistently trailed the large-cap benchmark, and therefore earned a 3-ALARM rating, it also has consistently outperformed the average fund large-cap fund with a value orientation (i.e., its peer group).....If you are committed to the large-cap value style of investing, you might be willing to cut some slack for ABC Fund, since it's performing well in comparison to its peers.

3-ALARM funds can exhibit many combinations of peer group performance......Here are some of the most common combinations, and how we would interpret them:

Alarm Status	Total Return of Fund Compared to Peer Group 12 Mo \| 3 Yrs. \| 5 Yrs.	Comments
3-ALARM	Higher \| Lower \| Lower	Fund is on a rebound relative to peer group. You might want to give it more time.
3-ALARM	Lower \| Higher \| Higher	The opposite of a rebound. Could be the start of a long slide, or just a temporary stumble. Either way, it's time to start watching this fund closely.
3-ALARM	Lower \| Lower \| Higher	Fund is hanging on by a thread within its peer group. It could turn around, but it also could be heading for "Lower \| Lower \| Lower"

Not that the Janus funds need another advantage, but according to a recent column in Fortune magazine, they have one: The sexiest recorded male telephone voice in the mutual fund industry....."The Janus guy--well, the Janus guy sounds like a cross between Dick Cavett and George Clooney," according to reporter Erin Kelly. "I imagine him wearing a pair of old Top-Siders, sipping Glenlivet..." Janus has never been known to pass up a marketing opportunity (for example, the new Strategic Value fund), and Phone Man has reportedly grabbed the attention of senior Janus executives.....In the works: A revamp of the Janus institutional sales staff.

Janus marketing trainees

By law, mutual funds are required to disclose their portfolios only once every six months.....Via the Internet, it's now possible for mutual funds to disclose their portfolios every minute.....Herein lies a conflict.....Investors -- at least some of them -- want more current information about their fund holdings.....Fund companies -- perhaps most of them -- like the current reporting requirements just fine.....The managers of the OpenFund, who already report their holdings in real time, recently wrote an (appropriately) open letter to the Investment Company Institute (ICI), suggesting that it might be time for the fund industry to consider at least quarterly portfolio reporting.....In response to the OpenFund letter, the president of the ICI rolled off a couple of beautiful, bureaucratic sentences: "The issue [of more frequent reporting] has generated discussion for many years, and the institute has considered it with many members on several occasions. Based on these discussions, we have expressed the view that the current requirement to disclose portfolio information semiannually remains appropriate"*.....The ICI president did say that he would be glad to put the disclosure issue on the June 20 agenda of the ICI rules committee.....In other words, look for the mutual fund industry to initiate more timely disclosure about the same time as the first John Bogle music video hits the stores.
*"Fund chiefs reject disclosure call," Mike Molinski, CBS.MarketWatch.com, May 19, 2000

Speaking of portfolio disclosure, fund investors already have access to one little-known document that can be either incredibly useful, totally useless, or somewhere in between.....It's Schedule 13G, which fund companies are required to file with the SEC within 10 days of any month during which they acquire more than 10% of a company's stock.....Fund companies are also required to amend previously-filed 13Gs, within the same time period, to reflect subsequent purchases or sales of a security.....There aren't many 13Gs filed during any given month, because 10%+ positions in any single stock are still relatively rare......But you could argue that the rarity of Schedule 13G also makes it a valuable document, since (by definition) the 13G highlights only major portfolio swings.....Why are 13Gs sometimes not-so-useful?.....In some cases, the 13G is filed by the fund management company, and it can be difficult to determine the individual funds that hold the security in question.....Janus does this all the time.....For example, on May 10, "Janus Capital Corp" filed nine 13Gs (original or amended), but none of the filings indicated how the stocks had been allocated among the various Janus funds.....Harris Associates (manager of the Oakmark funds) is an example of a multiple-fund management company that does indicate specific fund allocations.....And some filings are inherently easy to interpret.....For example, when Kaufmann files Schedule 13G (and they file a lot of them), it's obvious what fund it relates to, since there's only one fund in the Kaufmann family......If you'd like to set up a Schedule 13G watch list for your fund, it's easy to do with services like FreeEdgar.com

Henry Weingarten runs the private Astrologers Fund, and he's currently looking for backing from a U.S. bank to create a public mutual fund.....(No word yet on which banks are competing for this prestigious business).....Weingarten claims that financial markets have horoscopes just like people.....The Euro, for example, was born in January, so it's a Capricorn.....We visited Weingarten's Web site and, as usual with this kind of stuff, we have absolutely no idea what he is talking about.....Weingarten claims that he has an "investment track record second to none".....Good luck trying to find it.
"Astrologers Fund looks to stars," Dunstan Prial, Associated Press, May 23, 2000

How do fund managers screw around, when fund managers want to screw around?.....There are probably more ways than we know, but a recent SEC investigation of Dreyfus Corp., and former fund manager Michael Schonberg, offers one revealing example.....In late 1995, about the time that Schonberg began managing Dreyfus Aggressive Growth, he also managed three other Dreyfus funds -- Strategic Growth, Capital Growth, and Special Growth.....Although the Aggressive Growth prospectus stated that "investment opportunities" (such as IPOs) would be allocated "equitably" among competing Dreyfus funds, Aggressive Growth ("AG") was clearly Schonberg's darling.....During the first 12 months of AG's existence, the SEC discovered that AG was allocated 89 percent of all IPOs that Schonberg had access to.....By February 29, 1996, five months after inception, AG had appreciated an impressive 67%, but slightly over three-quarters of this return was due solely to first day IPO gains.....Ordinarily, investors might expect that Dreyfus senior management would have been measuring the impact of IPOs on fund performance, and also reviewing Schonberg's IPO allocations.....Instead, the SEC found that Dreyfus was asleep at the wheel (that's our technical legal term, not the SEC's).....For being asleep, as well as for other supervisory and advertising infractions, the SEC found that Dreyfus had "willfully violated" federal securities laws.....Dreyfus was censured by the SEC and slapped with a $950,000 civil penalty.....Dreyfus was also ordered to hire a consultant, who is supposed to teach the company everything it should have learned 40 years ago about running a mutual fund company.

And now, a rant: The results of the SEC's Dreyfus investigation, discussed above, were presented in the form of "findings," which the SEC allowed Dreyfus to accept "without admitting or denying".....It would be nice if the SEC would some day explain to consumers why fund companies are consistently allowed to get off the ropes like this.....As Business Week columnist Gary Weiss noted, the findings against Dreyfus were unusually clear-cut, and it would have sent a powerful message to the fund industry if Dreyfus had been required to issue just a three-word statement: "We were wrong"......Instead, on the same day that the SEC issued its findings, Dreyfus issued a smug press release noting that the company had "resolved" some "inquiries" related to the Aggressive Growth fund, and that Dreyfus would "remit" $950,000 to the SEC (sounds like they were just paying a big electric bill, doesn't it?).....Dreyfus even boasted in the press release that the SEC "did not find intentional wrongdoing" -- a cold-comfort spin if there ever was one, but a spin that Dreyfus never should have been allowed to make.

According to a recent Cohen & Steers ad, "there are a lot of innovators and trailblazers that pool their talents to emerge as the acknowledged expert in their field".....To illustrate their point about dynamic duos, the Cohen & Steers ad contained the following list of famous pairs (left), which we have attempted to put in context (right):

On May 10, Janus closed three more of its funds: Worldwide, Olympus, and Global Life Sciences.....Jim Craig, Janus Chief Investment Officer, noted that the closings ensure "that the portfolio management team can maintain the flexibility to find the most dynamic companies around the world in which to invest".....Two reporters, writing about the closings, noted that Janus now has virtually no flexibility in redesigning or moving its fund portfolios: "It would take months to steer [Janus] funds into less growth-oriented stocks without disrupting the market. For example, in mid-April, when Global Life Sciences made a move away from biotechs into pharmaceuticals, it put pressure on the entire biotech sector..."* So who's got it right when it comes to flexibility, Jim Craig or the reporters?.....Living in Los Angeles, as we do, we can't help thinking of the LaBrea Tar Pits:

A lesson for Janus?

Large animals, accustomed to dominating their territory, went out looking for a drink or a meal.....They came to the Tar Pits, which looked like just another lake, stepped in, and got stuck forever -- perhaps the ultimate loss of flexibility.....In other words, we think the reporters have called this one correctly.....We predict that you'll be hearing more about problems at Janus due to the size and visibility of its funds, problems that weren't on anybody's mind when Janus was still dominating its territory.
* "Behind Closed Doors, Is Janus Turning Bearish?", Ilana Polyak and Ian McDonald, TheStreet.com, May 10, 2000

At the beginning of May, Hakan Castegren was the manager (actually sub-manager) of Ivy International and Harbor International, and both funds were closed to new investors.....By the end of May, Castegren was gone as Ivy manager, yet he was still firmly ensconced at Harbor, and both funds had reopened to new investors.....What's going on?.....Castegren's departure from Ivy was announced on the same day that Ivy reopened, and at first it seemed like he was quitting because he didn't want to manage a larger fund -- a classic (and expensive) act of professional conscience.....But a few days after the Ivy news broke, Harbor also reopened, and Castegren stayed put, even though Harbor has over twice the assets of Ivy, and Harbor is now certain to grow even larger.....All of a sudden, it looked more like Castegren was fired from Ivy, for poor performance, and the reopening of Ivy was a cover that served both parties well: Castegren could make it look like he was leaving on principle, and Ivy didn't have to draw attention to Castegren's recent, dismal performance.....Castegren's replacement is Sheridan Reilly, formerly of Scudder International Growth and Income.....More details on our page of recent Manager Changes.

We're trying something new: It's the FundAlarm eFinancial Makeover.....The name comes from Kristen, our high-salaried volunteer, and you can find the first eFinancial Makeover on the accompanying page.....The idea of the Makeover is to combine a couple of features that (as far as we know) have never been combined before, and see what happens.....Almost everyone enjoys a good financial case study, so the heart of the Makeover is a detailed study of a real FundAlarm reader, prepared by financial planner Bob Cochran, CFP.....Around the case study, we've wrapped a Discussion Board (which is separate from the main FundAlarm Board).....We hope that you will read the case study, and then get involved with it: Use the built-in Discussion Board to ask a question, agree or disagree with the planner's analysis or recommendations, comment on your own situation, provide a useful link to another site, etc.....If the eFinancial Makeover works, it could be a unique, collaborative creation.....We'd appreciate your feedback on the Makeover, pro or con.....If you're a financial planner, and you'd like to volunteer to work on a future makeover, we'd also like to hear from you.

Briefly noted:

Two nice photographs of Roy's home office recently appeared in The Wall Street Journal and Money magazine, accompanied by even nicer profiles of Roy.....Thanks to the writers (Bridget O'Brian and Deborah Lohse of the Journal, Laura Lallos of Money) for their interest in doing these stories and thanks, too, for making me seem interesting.....An abbreviated version of the WSJ story (sans photo) can be found at dowjones.com.....The Money article isn't online yet, but it should be available in a couple of months.
The Journal article appeared on May 1, 2000. The Money article appears in the June 2000 issue, page 166.
If at first you don't succeed, replicate your model on a larger scale: Barr Rosenberg Market Neutral, perhaps more properly called Market Negative, has been a spectacular flop since it opened in December 1997.....Managers and executives at Barr Rosenberg whine that the fund has been hurt by its bias towards smaller companies and its value style of investing, so now they've come up with a new idea: A "style neutral" fund that will buy small-, mid-, and large-cap stocks trading on exchanges in the United States, Japan, and the United Kingdom.....The fund will be called the AXA Rosenberg Global Market Neutral Fund, and it will be run by the same team that couldn't get it right domestically.
"Barr Rosenberg Stuck in Neutral," Dan Culloton, Morningstar.com May 11, 2000

This director supports teleconferencing		Fund directors, apparently staggering under the load of their job responsibilities, are increasingly asking for permission to attend board meetings by teleconference, rather than in person.....Both the SEC and the fund companies are telling them to forget about it.....Still, one professional consultant to fund directors is undaunted: "Some directors are extremely busy," he says. "Teleconferencing offers them an alternative."
	--"Directors' Requests to Use Teleconferencing Getting Shot Down," Gavin Daly, Ignites.com, May 3, 2000

Coming soon: A Vanguard Internet fund? Probably not.....But in the past few weeks, Vanguard has taken two other trendy steps that would have been difficult to predict even a year ago.....Trendy step one is Vanguard's upcoming socially-responsible index fund.....Trendy step two is Vanguard's entry into the arena of exchange-traded funds (ETFs).....Vanguard's first five ETFs -- with the acronym "VIPER" -- will be offered as clones of existing Vanguard open-end index funds: the 500 Index fund, Total Stock Market Index, Growth Index, Value Index, and Small Cap Index.....As with all ETFs, VIPERs will be available only through brokers, and they will be priced continually throughout the trading day.....Expense ratios haven't been announced, but each VIPER is expected to incur costs that will be significantly lower than the corresponding open-end fund.....Vanguard's official line is that VIPERs are being offered mainly to draw active traders away from the company's open-end funds, which makes you wonder why Vanguard didn't just call the new offering PARIAHs.....In any event, Vanguard's official line fools almost no one: Barclay's has just rolled out its own line of low-cost ETFs, and Vanguard is clearly responding to the competitive pressure.
You've got to give Vanguard credit for one thing: VIPER is a snappy acronym and, unlike some acronyms, it even makes linguistic sense (Vanguard Index Participation Equity Receipts).....Vanguard can also be fairly certain that other fund companies won't jump on the " -IPER " bandwagon, and start offering their own Index Participation Equity Receipts.....Westcore, for example, is unlikely to be tempted by WIPER, and Dreyfus will almost certainly pass on DIPER.
At least six mutual fund firms are said to be exploring the idea of offering actively-managed exchange-traded funds.....A senior official at the American Stock Exchange predicts that the first actively-managed ETF will debut before the end of this year.....The AMEX has a hot product here, so it's clearly in its interest to keep the buzz going.....When actively-managed ETFs do appear -- if not this year, then soon -- the first ones are likely to look more like enhanced index funds, rather than free-wheeling, go-anywhere funds.
"Non-Index Exchange-Traded Funds On the Horizon," Dagen McDowell, TheStreet.com, May 17, 2000

"So far, all ETFs have traded at net asset value--the market value of the shares, divided by the number of shares outstanding. This is what differentiates them from closed-end funds and is possible because of the influence of market makers and specialists on the Amex...The explosion of new offerings could change that, however, if less-popular funds experience wide differences between buy and sell orders. Such ETFs would come to resemble closed-end funds, which often trade above or below their net asset value."

--"Xtreme Indexing," Mark McLaughlin, Kiplinger's, June 2000

According to an analysis provided by Amex, there is almost no deviation between the underlying net asset values and market prices of existing domestic ETFs, such as SPDRs, Diamonds, and Nasdaq-100 (QQQ) shares.....For example, the average daily deviation for SPDRs, which track the S&P 500, has been -0.016%, and the average daily deviation for Diamonds (the Dow Jones Industrial average) has been +0.0004%*.....However, single-country ETFs have often traded at discounts (investors, presumably, can handle premiums).....The discount/premium issue was a concern for at least one consumer-protection group, and Barclay's reportedly agreed to post the net asset values of its new ETFs on its Web site (ishares.com)....As of May 30, 15 days after Barclay's ETFs started trading, we still couldn't find any NAV data.
* "Webs, Diamonds and iShares, Oh My," Hayley Green, SmartMoney.com, May 22, 2000

As we predicted in April, Fidelity has agreed to lower the redemption fee on its Small Cap Stock Fund from 3% to 2%.....Fidelity claimed that the fee was necessary to discourage short-term traders, while the SEC claims that any redemption fee in excess of 2% violates one of the basic principles of the open-end mutual fund (i.e., redemption at net asset value).....Fidelity says that it dropped the fee to avoid a protracted legal battle with the SEC,* which makes very little sense.....Fidelity certainly has the resources to go head-to-head on this issue if it thinks that it's important enough -- perhaps even an obligation to do so, as the largest mutual fund company.....Even if the legal fees were paid out of the fund, it's unlikely that they would have added more than 10 or 20 basis to the expense ratio.....We think Fidelity knew that it had a loser, and it simply didn't want to see the answer in black-and-white.
"Fidelity Reluctantly Yields to SEC, Cuts Exit Fees," Frank W. Stanton, Morningstar.com, May 9, 2000
The sales arm of the Kemper funds was recently fined $100,000 for a series of advertising screw-ups.....It seems that Kemper placed a total of eight ads in major newspapers that ~~misteakenly~~ mistakenly overstated fund returns.....The first misteak appeared in April 1997 and, even after Kemper was warned by regulatory authorities not to run the ads again, the misteaks continued to appear in ads through September 1997.....Kemper refers to the misteaks as "unintentional technical violations," and says that new procedures are in place to prevent similar misteaks in the future.
Back in January 1998, we ran an item about a 50% increase in management fees at the Acorn funds.....At the time, the increase was said to be necessary so that the management company could add "additional client servicing staff, and improve internal systems".....There was no mention about making the company more attractive to a potential buyer, but one wonders if that wasn't just a teensy bit on the mind of Ralph Wanger, who runs the Acorn funds management company.....The Acorn funds are now reported to be up for sale, and at least one serious offer is being considered.
"Potential Buyer Steps Forward In Wanger's Acorn Fund Talks," Ken Brown, The Wall Street Journal, May 11, 2000
UniCredito Italiano has agreed to buy the Pioneer Group, manager of the Pioneer family of funds, for $1.2 billion.....Please, oh please, won't some European company pay a ridiculous amount for the T. Rowe Price funds?
Disclosure: Roy Weitz owns shares of T. Rowe Price Associates.
If your fund grew 150% last year, and it's down 30% so far this year, is it correct to say that you're still up 120% (i.e., 150% minus 30%)?....The answer is "No".....Because returns are compounded, you can never simply add or subtract multi-year returns to determine a multi-year rate of return.....If you have any doubt, try a simple example with an initial investment of $1,000.....An increase of 150% would grow that amount to $2,500, and a decrease of 30% would trim $750 in value, resulting in a current balance of $1,750.....That still represents a respectable 75% compounded rate of return, but it's a far cry from the 120% rate of return that results from simple subtraction.....Here's an equation to calculate (proper) compounded returns in a case like this:

(1+ Year One Return) * (1+ Year Two Return)= 1 + Total Return
"Compounding Matters: Why Simple Percentages Don't Add Up Year to Year," Dagen McDowell, TheStreet.com, May 12, 2000
A research study by Kemper Funds concludes that Yuppies aren't greedy after all -- their materialism is "really a result of an intense desire for financial independence" ..... (www.TAGHeuer.com) ..... Born in the mid-1950s and 1960s, Young Boomers -- identified in the study as Yuppies -- are allegedly driven to accumulate material wealth and possessions as a means of insulating themselves from life's uncertainties, which many experienced in their early years in the form of inflation, oil shortages, and corporate downsizings ..... (www.Bang-Olufsen.com) ..... The study describes Yuppies as "proactive, self-sufficient, and motivated by practical strategies to ensure financial security" ..... (www.BMW.com).
Mario Gabelli's view of the world:

Relative 1999 salary levels at Gabelli Asset Management
Two of your favorite accountants are about to embark on a life of marital bliss, and you have absolutely no idea what to get them for a wedding present.....Don't panic.....If the couple has registered with StockGift.com, why not pick up a few shares of their must-have stocks or mutual funds?.....Even if you're not seriously shopping, this site is a great way to waste some time....Registrations so far seem scarce, but if you type in enough common surnames you'll eventually hit voyeuristic pay dirt.....For example, we stumbled upon a bipolar bride and groom in Washington, DC, who want shares of either T. Rowe Price High Yield bond fund or CAIS Internet Inc., a volatile, money-losing tech stock.....Wonder if they also disagree over open vs. closed bedroom windows?.....Even more fun, you can find plenty of opportunities on this site to second-guess.....Our favorite is the couple who registered the Vanguard 500 Index fund and three individual stocks (Charles Schwab, Pfizer, AOL), after "consulting with some people" at Harvard.....Let me see: I'll bet one of the people they talked to was a Finance professor...
Now, only the Quasar fund will stink: Alliance Capital Management, the company that runs the Alliance funds, recently felt the need to distribute a 22-page Business Etiquette Handbook to its employees.....Among other things, there's a Basic Hygiene section, which provides guidance on bathing and dental care.
New York Times, May 7, 2000