| Highlights and Commentary |
| By Roy Weitz |
Alberto Vilar, head of the Amerindo funds and self-appointed technology seer, never could figure out what inning it was (in fact, if you believed Vilar, the technology game was actually going backwards):
 | "[The tech market is]...in the second or third inning of a new ball game." -- Alberto Vilar, of Amerindo Technology, quoted on December 13, 1999 |
| "We're still in the bottom of the first inning." -- Alberto Vilar, of Amerindo Technology, quoted on May 30, 2000 | |
| [We're] not even in the bottom of the first inning." -- Alberto Vilar, of Amerindo Technology, quoted on July 17, 2000 |
The Investment Company Institute (ICI) is the mutual fund industry trade and lobbying group.....One of the following is an actual description of the "General Session," from the ICI's recent annual membership meeting, and one is not.....Can you tell which is which?
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James Riepe is chairman of the Investment Company Institute (above), and he's also a managing director at T. Rowe Price.....Wearing his ICI hat, Riepe recently complained about the "disclosure stampede" facing the fund industry, and Riepe has suggested that the solution to the problem lies online: "One of the solutions to the [disclosure] problem has to be the Internet. Now is the time for us to move into the 21st century. I can assure you the public is ready"*.....Well, the public may be ready for online disclosure, but Mr. Riepe's own firm apparently isn't.....T. Rowe Price Media & Telecommunications recently shuffled its management team, and there's not a single mention of this change anywhere on the T. Rowe Price Web site.....Here's some unsolicited advice for Mr. Riepe: Before you advocate online disclosure for the entire fund industry, you might want to make sure that there's proper disclosure on your own firm's Web site.
When it comes time to sell an underperforming mutual fund, the "what ifs" can drive you crazy: "What if I'm selling just before the fund turns around?"....."What if the manager finally gets his act together?"......"What if I haven't given the manager enough time?".....In reality, you never have enough information to unload a mutual fund, because you never know what's going to happen in the future.....When selling a fund, we suggest that investors generally get comfortable with being uncomfortable, and simply try to make the best decision with the information available at the time......If you're thinking about selling a fund and you really can't pull the trigger, write down a reasonable, short-term performance target for your fund (e.g., "In June 2006, I will sell my fund if it hasn't outperformed its benchmark for the previous 12 months").....Pull out the slip of paper at the end of the period, and there you have it: A target that your fund either has met or not met, and your final justification to either hold or sell your fund.
We interrupt the preceding theoretical discussion to bring you a real-life example: Fidelity Magellan has been underperforming for years and, over that time, we suspect that many Magellan shareholders have considered bailing out.....But then come the "what ifs": "What if manager Robert Stansky is just getting ready to turn things around?"....."What if Stansky has been planting good ideas throughout the fund, and I haven't given them time to grow?"....."What if the current market cycle is about to turn, and Magellan will perform better in a different market?".....Faced with what-ifs like these, as we noted above, we would encourage you to write down your performance goals for the fund and check back later to see if those goals have been met.....Fortunately, in Magellan's case, one of Fidelity's top executives has established performance goals for you.....According to Robert Reynolds, Fidelity's chief operating officer, Magellan has recently underperformed because manager Stansky decided to jump into large-cap growth stocks too early.....Reynolds says that Magellan is poised to outperform once the market turns in favor of large-cap growth companies, and investors should sit tight and be patient until that happens*.....If and when the market starts to favor large-cap growth stocks, and Magellan is still lagging, we suggest that you hold Reynolds to his words.....Consider that Magellan's final failure, and unload it.
At large fund companies, mutual fund directors can be responsible for overseeing as many as 200 or 300 funds at a time, but recently there have been rumblings about limiting the number of funds that an individual director can be responsible for.....Since independent mutual fund directors can earn a lot of money for very little work, and overpaid people generally fight hard to protect their position, it's not surprising that an organization of independent fund directors recently issued a report opposing any set limits on director oversight of multiple funds.....The report is a fascinating document to read, because it must walk a very thin line.....On the one hand, the report needs to show that a fund director's work is easy, so that even a semiconscious director can stay on top of 300 funds.....On the other hand, the report needs to argue that directors have unique roles and skills, and any attempt to inject new blood into the fund boardroom would be expensive, chaotic, and counterproductive.....Ultimately, the report shoots itself in the foot.....The report's main argument is that a single board, responsible for all of a fund company's offerings, will have more clout with fund company management, and fund directors can deal with any work overload by using "sophisticated methods for transferring information," including director-only Web sites, CD-ROMs, and even (gasp!) e-mail.....The report ignores the fact that "sophisticated" technology also could help multiple fund boards coordinate their efforts and, in the process, maybe (just maybe) introduce some new faces, energy, and investor-friendly ideas into the fund world.....But let's face it: If you were earning $300,000 a year for easy, part-time work, would you write a report suggesting that your job should be shared?
We're always suspicious when a packaged food boasts of its "new and improved taste": We wonder if the food company knew all along that their product was lousy, and they were too lazy to fix it.....Or did some executive at the food company finally try to eat the product, and discover that he couldn't get it down?.....All of which brings us to the subject of some recent changes at the Fidelity mutual funds (really).....Fidelity has announced that it's rethinking its approach to research.....Instead of hiring only wet-behind-the-ears college grads, Fidelity plans to start hiring experienced analysts.....Fido also has announced that it wants to retain more of its experienced analysts, by creating a career analyst position (before, it was always up-or-out, where "up" meant promotion from analyst to portfolio manager).....Finally, in a move that also recognizes the value of experience, Fidelity says that it's looking to turn some of its more important Select (i.e., sector) funds into permanent managerial assignments, instead of way stations for analysts who are waiting to run more prestigious, diversified funds*.....In other words, Fido is in the process of rolling out a "new and improved" research department, and that raises some of the same questions as a "new and improved" Hungry Man frozen dinner: Did Fidelity know all along that its old research structure was flawed, and did they just let it slide, or did someone finally pay attention to Fidelity's fund performance and decide "Hey, this sucks, and we need to fix it"?.....We may never know the answer, but we do know this: For as long as we can remember, it's been the conventional wisdom among many fund watchers that Fidelity's dizzying managerial turnover wasn't a major concern for investors, since the firm had such a strong staff of analysts backing up its managers.....Now, Fidelity is telling us that its analyst group wasn't so strong after all, and that manager turnover -- including the laughable turnover at some of the more important Fidelity Select funds -- almost certainly hurt investment performance more than many people realized.....Fidelity can't be faulted for trying to improve its operations today, but the firm can (and should) be faulted for not recognizing -- and fixing -- this problem sooner.
David Snowball is one of the excellent regular contributors to the FundAlarm Discussion Board.....He's also a close and perceptive observer of the fund scene....."For those long, languid summer afternoons," David suggests that a fund's Statement of Additional (SAI) might make the perfect companion, especially since SAI's now list, within ranges, managers' holdings in the funds they run.....David has been checking websites to see which of his fund companies make SAIs available, and whose money is aligned with his.....Some of David's observations:
The following notice currently appears on the Web site of the Thurlow Funds:
| "Because of the expense involved in managing a small mutual fund, the management at The Thurlow Funds, Inc. has decided to close the Thurlow Growth Fund as soon as possible. If you are a shareholder in the Thurlow Growth Fund, please contact the transfer agent to discuss redeeming your shares." |
| "It's nice to know that Mr. Thurlow wasn't discouraged from this activity by any recognition of hubris, breathtaking ineptitude, or the discouragement that comes from underperforming 99% of his peers." |
| " I tried to use Morningstar's premium fund screen to look for funds with poorer five-year records than Thurlow Growth (THRGX). I selected "5-year return < ticker: THRGX". The program refused to accept the input, with the note that "THRGX has no value." You know you're in trouble when even software packages have you figured out . . ." |
Briefly noted:
| "Fidelity collects a management fee for each of the underlying funds, and it also tacks on eight basis points for assembling the funds in each Freedom portfolio (most other large fund firms take only the underlying management fee). Come on, Fidelity: These are highly desirable, long-term investment dollars. Can't you be a sport, and give up that additional eight basis points?" |