| Highlights and Commentary |
| By Roy Weitz |
Is your large-cap index fund alarming? FundAlarm occasionally gets irate e-mails, and FundAlarm also gets e-mails from readers who are puzzled by something they've read on our site.....Sometimes we get correspondence that is both irate and puzzled, and those e-mails consistently come from owners of index funds, especially owners of large-cap index funds that track the S&P 500 Index....."How" these folks write (and occasionally "How the ****"), "can FundAlarm rate my index fund 3-ALARM, which means that it has trailed the benchmark, when my index fund is the benchmark?".....It's a fair question, with a fairly straightforward answer: FundAlarm compares the performance of all large-cap domestic funds, including all large-cap index funds, to the Vanguard 500 Index fund (VFINX).....Because of expenses, and certain operational issues, Vanguard 500 Index typically trails the "official" S&P 500 index by a few basis points each year, but VFINX consistently comes as close to the "official" S&P 500 as almost any fund available to retail investors (the Admiral class of Vanguard's 500 Index fund comes even closer, because its expenses are lower, but the minimum investment for the Admiral class is out of reach for many people).....Most non-Vanguard S&P 500 index funds have higher expenses than Vanguard 500 Index, or they don't trade as cleverly, and therefore most other S&P 500 index funds perform worse than VFINX, year after year.....In the FundAlarm world, there's no special treatment for index funds, and a large-cap index fund that has trailed its benchmark for the past 12 months, three years, and five years gets the 3-ALARM designation, just like any other fund with the same kind of track record.....The accompanying page lists all 32 S&P 500 index fund in this month's FundAlarm database.....Twenty-four of these funds are 3-ALARM, although some have come extremely close to the Vanguard 500 Index benchmark.....Other index funds have missed Vanguard 500 Index by such a wide margin, you'll probably wonder how (or why) anyone would still be invested with them.....We certainly do.
Fidelity opens a new international fund (thud).....A not-quite-new-fund doesn't want you to call or write, but it could be an interesting play.....Lance Armstrong gets your face (or is it the other way around?)....A Bridgeway fund receives encomiums.....Another Exeter fund is dragged out of the shadows.....All this, and much more, in the third edition of the FundAlarm Annex -- David Snowball's monthly exploration of new and undiscovered mutual funds..... If you want to get an edge on fund investing, but you don't want to be bored, patronized, or left in the dust, David's excellent news and views are just a click away.
We're coming up on the third anniversary of the mutual fund scandals and Putnam, one of the scandal's biggest, early victims, continues to reel.....As of March 31, 2006, Putnam's fund assets under management dropped below $100 billion for the first time in a decade, which means that investors have pulled out about $100 billion from Putnam since its troubles began.....Despite all the talk of a turnaround at Putnam, the firm's two largest offerings (Putnam Fund for Growth and Income and Putnam Voyager) continue to post mediocre-to-dismal performance numbers, and it's tough for investors (or their advisers) to have confidence in a fund company when it can't even get the big ones right*.....It also might be tough for outsiders to have confidence in Putnam's turnaround, when the firm's own cheerleading CEO, Ed Haldeman, doesn't seem to believe in it.....Haldeman earned $13.5 million in 2005, yet Putnam's most recent SEC filings show that he personally had invested no more than $50,000 in each of his firm's two largest funds (that's the equivalent of about one day's earnings for each).....FundAlarm's suggestion for financial advisors: Next time the Putnam wholesaler visits your office, and starts talking up the Putnam turnaround, ask why Haldeman doesn't invest in his own funds.....Maybe word from the field will get back to the top.
ICAP runs three terrific mutual funds yet those funds, combined, have the same total assets under management (about $2.3 billion) as the American funds family takes in over an average week.....ICAP's wallflower status is about to change, now that Institutional Capital Corporation (ICAP) has agreed to merge with New York Life Investment Management (NYLIM), the company that runs the MainStay funds.....ICAP's portfolio managers have signed long-term employment contracts and, if NYLIM execs have a scintilla of brains, ICAP professionals will be left alone to do their very successful thing.....But the real reason for a deal like this -- and a NYLIM press release makes this clear -- is to grow the asset base of the ICAP funds by plugging them into NYLIM's "multiple distribution channels".....ICAP offerings will be rebranded as MainStay funds, and existing ICAP investors will be rolled into a new no-load class of their respective fund.....Then, the MainStay sales force will go to work, and market the living **** out of ICAP's track record, and these small gems will soon be neither small nor gems.....ICAP fund investors presumably will be able to stop this deal by voting against it, but they probably won't.....The directors of the ICAP funds will come up with some bogus reasons for backing this deal, they'll throw in a fee reduction worth maybe $5 for every $10,000 invested, then ICAP investors will vote in favor of the merger, against their self-interest, and say "Thank you fund directors, may I have another?"
Another sellout: RS Investments, which runs the RS mutual funds, has agreed to sell 65% of itself to The Guardian Life Insurance Company of America, which runs the Guardian family of funds.....In this case, it looks like the acquired company (RS) will absorb the funds of the acquirer (Guardian), which is the opposite of the ICAP/MainStay outcome, above.....In any event, RS fund investors will now have access to such offerings as Guardian Park Avenue, where about 850 million investor dollars have gone to die, and Guardian S&P 500 Index, where investors pay up to ten times as much as they would for Vanguard 500 Index for the right to perform worse.
And still another: As David Snowball reports in this month's new-fund Annex, the firm that runs the Artisan funds has sold off a piece of itself to an outside investment fund.....A press release talks about the benefits of the transaction to the firm's "founding generation," who will now be able to "diversify their personal portfolios," but the press release fails to note that the members of this hoary-sounding group all appear to be about 50 years old.....When faced with a transaction like this, fund investors have a right to be selfish: "No, Mr. or Ms. Artisan Owner, I don't want you to diversify, especially at age 50. I want every one of your marbles to be in the Artisan bag, and I want your fortunes to rise or fall exclusively with the success of the firm. That way, you'll focus like a laser on managing my funds, and you'll do well only if I do well. Sorry again, Mr. or Ms. Artisan Owner, but I don't want you to have the cash to build that dream home, or that vacation home, and start spending those long weekends, and that month in the summer, away from the office. Sorry for a third time, but I want you to stay nervous about your financial future, just like I am, and when people receive piles of cash from selling their business I've noticed that they tend to be a lot less nervous".....Artisan claims that the transaction will facilitate "increased ownership by the younger generation of partners over time," and help maintain "the firm's commitment to long-term independence"......Maybe, maybe not: As usual, fund investors are asked to accept assertions without being given enough of the underlying facts to draw their own conclusions......If I were an Artisan fund investor, I'd assume there's nothing in this deal for me.
 If you're lucky, your fund manager's office will look like this | "The average transaction lowers a portfolio's investment return": At least one major academic study has confirmed this hypothesis, and there's been evidence from time to time that new fund managers actually remove value from the portfolios they inherit.....Now, the same effect has appeared in the world of investment newsletters.....According to Hulbert Financial Digest, the newsletter portfolio created by the Closed End Country Report produced a 54.2% annualized return during the 18 months ended April 30, 2006, versus 14.7% annualized for the Dow Jones Wilshire 5000 index (Closed End Country Report was Hulbert's fifth highest-ranking newsletter over the period).....Funny thing is, the newsletter hadn't published a single new issue during those 18 months, and the portfolio that scored so highly in Hulbert's rankings was the same portfolio, unchanged, that appeared in the newsletter's October 2004 issue.....Hulbert's conclusion, with which we concur: Since the average transaction lowers a portfolio's investment return, it makes sense to undertake as few of them as possible.
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| "Don't just do something, sit there," Mark Hulbert, marketwatch.com, May 17, 2006
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Never mind, that wasn't such a good idea after all: After 15 years as an index fund, Domini Social Equity will switch over to active management.....Wellington will handle the day-to-day stock picking, guided by Domini's social criteria, and the fund's expense ratio will also increase (by 20 basis points, or 0.20%).....What's the reason for the change?.....Domini told Chuck Jaffe, of MarketWatch.com, that her fund "has been constrained by the indexing formula," and she noted "that the way an index is weighted affects any fund based on it, as well as the way the fund measures up to benchmarks such as the Standard & Poor's 500. We have had a period of a number of years that have been quite frustrating, where our screening added value but the weightings we had to follow prevented us from delivering all of that value".....Here's the FundAlarm translation: "Just because someone creates an index, and then someone creates a fund to follow that index, there's still no guarantee of good investment performance".....ETF investors also might want to take note of this.
Never mind, that wasn't such a good idea after all (Part II): Morgan Stanley wants to change the name of the Morgan Stanley Information Fund to the Morgan Stanley Technology Fund.....As recently as 2003, Morgan Stanley merged another Morgan Stanley Technology Fund out of existence and -- you guessed -- the soon-to-be-renamed Morgan Stanley Information Fund was the surviving fund from that merger*.....Morgan Stanley at first refused to comment on the name change, then said it would, then said it wouldn't, then said it would, then said it wouldn't.
The Potomac funds have been renamed Direxion and, by the end of this year, Direxion says that it will offer up to 16 new index funds with 250% leverage -- that means each of these funds will move up or down 2.5% for every 1.0% move in the market (the direction depends on whether you own a "bull" or "bear" fund).....The logo for this new line of leveraged funds will consist of a handgun and a size 10 1/2 dress shoes, as follows:
Harry Dent is one of America's biggest stock market cheerleaders: In his 1998 book, The Roaring 2000s, Dent predicted that the Dow Jones Industrial average would reach 35,000 by the year 2010 (recently, the Dow has been in the range of 11,000).....These days, Dent is even more optimistic: He sees the Dow "headed to a high of 35,000 to 41,000" by the year 2008, which would represent about a 330% increase over today's level.....Dent does much of his prognosticating and speechifying through his own non-profit organization, the H.S. Dent Foundation, and the 2004 tax return for the Dent Foundation (the latest one publicly available) showed that the organization had investment assets of about $7.9 million.....Of course, given Harry Dent's high-flying predictions for the stock market, all of the assets of the Dent Foundation were invested in broadly-diversified mutual funds that seek to track the performance of the U.S. stock market.....Ha, bet we had you believing us there!.....As it turns out, less than 8% of the Dent Foundation assets were invested in any vehicle that might even remotely track the broad U.S. stock market (the Dent Strategic Sector Fund, which appears to be Dent's own hedge fund).....The rest of the Foundation's assets were invested in an undiversified portfolio of privately-held companies (for example, 25% in Alchemix Corporation, "the bridge to the hydrogen economy," and 30% in GoldK, a 401(k) service provider).....If Dent really believes that the stock market is going to increase three or four times over the next few years, isn't it reasonable to expect that he'd put his own money where his mouth is?
Hang on, Van Wagoner investors, relief is less than five years away: Van Wagoner Emerging Growth is down about 91% from its September 2000 high, and Van Wagoner Small Cap Growth is down 75% over the same period, but manager Garrett Van Wagoner is still optimistic.....Van Wagoner is willing to "bet" that "we'll be at new highs" before 2011.
Different standards of progress: Sixteen years ago, in 1990, you would have paid about $13 for each megabyte of computer hard drive memory, and the average retail mutual fund carried an expense ratio of 0.95%.....In late 2005, that same megabyte of memory would have set you back less than one-tenth of a cent, while the average fund expense ratio was about 0.91% (meanwhile, from 1990 to 2005, overall assets of the mutual fund industry increased from $1.06 trillion to $8.9 trillion).....Granted, these are very different industries, with very different business conditions, but one of them exists in a world of real price competition, while the other exists in a world where price competition is mostly a myth.....Can you tell which is which?.
Another intensive, worldwide search for investment talent has ended, and the winner is.....the owner's son: Will Nasgovitz, son of Bill Nasgovitz (who founded and oversees the Heartland funds), has been named to the team that manages Heartland Select Value.....We're guessing that other candidates for the job included no one.
The Free Enterprise Action Fund was founded about a year ago, to help counteract the perceived influence of "left-wing social and political activists" on America's publicly-held companies.....The Fund recently sponsored a shareholder resolution, calling for Goldman Sachs to provide more details on a corporate charitable donation.....The resolution by the Free Enterprise Action Fund managed to garner 178 votes in support, which was not enough to carry the day against the 473 million votes that opposed to the resolution......Don't give up the fight, ye valiant storm troopers of capitalism!.....The first putsch is always the hardest.
 | Month Eight: Grim ==> Grimmer |
| Month | Date of signal | Type of signal | Fund bought/held (2) | Acct value (beginning) | Acct value (ending) (3), (4) | Change in acct value for month | Change in acct value since inception |
|---|---|---|---|---|---|---|---|
| October, 2005 | 10/16 | Long | OTPIX | $5,000.00 | $5,080.09 | +1.60% | +1.60% |
| November, 2005 | No new signal | Long still in effect | OTPIX | $5,080.09 | $5,484.89 | +7.97% | +9.70% |
| December, 2005 | 11/29 | Short | SOPIX | $5,484.89 | $5,381.32 | -1.89% | +7.63% |
| January, 2006 | No new signal | Short still in effect | SOPIX | $5,381.32 | $5,378.51 | -0.05% | +7.57% |
| February, 2006 | 1/29 | Long | OTPIX | $5,378.51 | $5,186.30 | -3.57% | +3.73% |
| March, 2006 | No new signal | Long still in effect | OTPIX | $5,186.30 | $5,193.62 | +0.14% | +3.87% |
| April, 2006 | No new signal | Long still in effect | OTPIX | $5,193.62 | $5,257.84 | +1.24% | +5.16% |
| May, 2006 | May 16/ May 25 | Cash/ Long | OTPIX | $5,257.84 | $4,938.37 | -6.08% | -1.23% |
| Notes: (1) Signal was executed (i.e., fund bought) on the next business day. (2) OTPIX=ProFunds OTC Inv.; SOPIX=ProFunds Short OTC Inv. (3) Cut-off for valuation and account activity is 26th day of the respective month. (4) Account value includes value of fund shares only. Cash in the account, as well as interest earned on the cash, is ignored. Brokerage commissions are paid out of this free cash, and commissions are not included in return calculations. Dividends are reinvested. | |||||||
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| Current month (4/27 thru 5/26) | Since inception (10/17/05) | |
|---|---|---|
| Schwab International Index Inv (SWINX) | -2.28% | 18.48% |
| Vanguard Small Cap Index (NAESX) | -4.16% | 14.70% |
| Dreyfus Mid Cap Index (PESPX) | -4.05% | 12.52% |
| Vanguard 500 Index (VFINX) | -1.75% | 8.76% |
| Vanguard Balanced Index (VBINX) | -1.08% | 6.02% |
| Roy's market-timing account | -6.08% | -1.23% |