Highlights and Commentary
By Roy Weitz
(Originally posted July 1, 2000)
[Archive Table of Contents]

When all signs point to the manager: If you own a 3-ALARM fund, do you also own a 3-ALARM manager?.....It depends.....To understand the difference, consider two hypothetical funds.....ABC Fund is 3-ALARM, but its manager has been on the job for only one year..... XYZ Fund is also 3-ALARM, but it's run by a manager with a six-year tenure.....Since a 3-ALARM rating requires at least five years of underperformance, the one-year manager of ABC fund is responsible, at most, for one-fifth of ABC's poor performance......On the other hand, the six-year manager of XYZ bears full responsibility for that fund's 3-ALARM rating.....The accompanying page lists all 3-ALARM funds in this month's database where the current manager has been in charge for at least five years.....With these funds, it's fair to say that you do own a 3-ALARM manager.....And, unless you know something we don't, do you have any reason to believe that performance over the next five years will be any better?


Last month, we reported on a research study by Kemper Funds which concluded that Yuppies aren't greedy after all -- their materialism is "really a result of an intense desire for financial independence" .....This month, Kemper turns its keen analytical eye on the "Leading Baby Boomers," a.k.a., the Woodstock Generation.....According to Kemper, Leading Boomers (age 45-55) "retain the idealism that earmarked the 1960s," and they "clearly prefer investments that reflect the sense of independence and individuality that was the hallmark of their youth".....Like most people, older Boomers are also more inclined to "listen and respond to an investment opportunity if it speaks directly to their life-stage experience"......Which means, exactly, what?


Instead of all this demographic mumbo-jumbo, perhaps Kemper should ask its survey respondents one very simple question:

"If we could bring you funds that consistently outperformed their respective benchmarks and peer groups, would you invest with us?"

The answer, of course, would be yes.....In fact, we'll wager that all demographic groups, from Elders (75+) to Young Boomers (35-45) would be united in their allegiance to any company that truly made them wealthier.....Alas, it's much harder to produce a top-performing fund than it is to design a marketing strategy, so the search goes on for the perfect Leading Boomer investment:



"Would you like some risk with your risk?" At this late date, we probably don't need to remind you that technology funds are risky investments.....We also probably don't need to note that market-timing is essentially a crap shoot.....So, what do you get when you take a technology fund and add a healthy dose of market-timing?.....A risky crap-shoot fund, of course, which in this case goes by the name of the Thurlow Growth fund.....To get an idea how Thurlow Growth works, consider this: Manager Tom Thurlow moved from a 99% equities position at the end of 1999 to an 80% cash position in early April.....This move apparently spared the fund some pain during the March swoon, but Thurlow jumped back into stocks on April 25, just in time to grab another 10% of downside....Oops....By mid-May, Thurlow had again retreated to 80% cash, just in time to miss the biggest few days of upside in Nasdaq history.....Double-oops, since whatever Thurlow gained from his favorable March timing move was given back, and then some, during May.....Defending his timing call, Thurlow says that "at some point, when the market is acting up, nothing will work,"* which appears to be the stock market equivalent of another famous and indisputable saying: "In the long run, we'll all be dead".....How, some of you may ask, can a fund manager make such huge timing bets, unbeknownst to fund shareholders?.....In fact, these gambles are beknownst to shareholders, or they should be......Here's an excerpt from the Thurlow Growth prospectus:

"The Fund may take temporary defensive positions and invest substantially all of its assets in cash."

Which proves, once again, that it sometimes pays to read a prospectus.....Now: Do you know if your tech fund is a closet market-timer?.....You might want to take a look.

*"It's Not Easy Bein' Green: Cash Bets Pound Thurlow Growth Fund," Ilana Polyak, TheStreet.com, June 8, 2000


The incredible, backwards baseball game:

"We're...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



What Vanguard
is over
 		Right now, some Vanguard lawyer is thinking, "Darn, I should have paid attention during that class on trademark licensing": Last month, we reported that Vanguard was getting ready to roll out a line of exchange-traded funds, called VIPERs, and that one of the VIPERs would track the Standard & Poor's 500 stock index.....Standard & Poor's promptly sued Vanguard in federal court, alleging that the S&P 500 VIPER represented trademark infringement, breach of contract, and unfair competition.....What's going on?.....Vanguard already licenses the "S&P 500" name for the Vanguard 500 Index fund, and Vanguard plans to treat the new VIPER as an additional class of its existing index fund.....Vanguard lawyers assumed that their mutual fund license would carry over to the VIPER.....Uh, not exactly.....Like Metallica in its suit against Napster, S&P claims that its Vanguard lawsuit isn't about money, so much as the right to control its intellectual property (...All together now: "Liar, liar, pants on fire...").....Anyhow, this lawsuit will almost certainly be settled before it goes to trial, and Vanguard will almost certainly have to pay S&P an additional licensing fee.....In other words, the VIPERs will be a bit more expensive than Vanguard was expecting.


In the world of money management, it's a semi-dirty secret that many mutual fund managers also run hedge funds.....To understand why this can be a problem, consider the following:

"If someone offered you $1 to shine his left shoe and $10 to shine his right shoe, which would get more elbow grease?"*

In the investment world, a conventional mutual fund is equivalent to the $1 left shoe.....That's because a mutual fund manager rarely has the opportunity to earn more than a fixed fee, which is typically 1% of assets or less.....A hedge fund is equivalent to the $10 right shoe, since the manager has much greater income potential -- typically 20% of the fund's profits.....Forget about laws and rules and regulations for a moment, and put yourself in the position of a money manager: If you are managing both a mutual fund and a hedge fund, which is going to get more of your attention, more of your time, and your best ideas?

Among the well-known managers who double-dip with mutual funds and hedge funds: Tom Marsico (of the Marsico Funds), Kevin Landis (of the Firsthand Funds), and Ryan Jacob (of the Jacob Internet Fund).....Under current law, mutual fund managers aren't required to disclose their potential hedge fund conflicts of interest, and few managers are even willing to talk about it.....So, what ultimately prevents a manager from favoring a hedge fund over a mutual fund?.....As a mutual fund investor, you are protected only by general principles of fiduciary fairness, the internal controls of the firm that manages your money, and the occasional SEC inspection.....Large money management firms swear that they maintain the proverbial Chinese wall between hedge funds and mutual funds, and maybe they do.....At smaller firms, it's simply a matter of common sense that the wall is going to have a few holes, and abuses will occur.....Some industry observers are at least willing to acknowledge that a problem exists, and that's a step towards solving it.....Other industry observers deny that there's any problem, and their comments read like a deadpan comedy routine .....For example, here's what one Washington attorney and former SEC-staffer had to say in defense of double-dipping money managers:

"I suspect that all people [who run both a mutual fund and a hedge fund] are extremely sensitive to the need for treating each of [their clients] with an equal amount of fiduciary respect."

* "Divided Loyalties: Fairness Can be Tested When Fund Managers Run Hedge Funds," David Dietz and Ian McDonald, TheStreet.com, June 22, 2000


"I sold out of Baron Asset earlier this year. I just couldn't stand shaking my head thinking "WHAT IS [RON BARON] DOING?" any more."

The preceding comment was posted by "Bobbi" on the FundAlarm Discussion Board (June 20).....One of the things that may be puzzling Bobbi is Ron Baron's continuing defense of Sotheby's Holdings Inc., which recently made up 6.4% of the Baron Asset portfolio.....Sotheby's, a high-end auction house, is the target of a Justice Department criminal probe, which alleges that Sotheby's and it's main rival, Christie's, conspired to fix their commission schedules..... As a result of this investigation, Sotheby's stock has taken a huge hit, but Ron Baron remains a strong Sotheby's supporter.....In his most recent shareholder letter, Baron reiterated basically the same points he made when he first bought Sotheby's for the fund back in late 1997: Sotheby's has no inventory, and therefore never has to take a markdown.....Sotheby's has a 256-year old reputation for "integrity and expertise".....Sotheby's will be one of the prime beneficiaries of "rising worldwide affluence and prosperity".....Sotheby's could "double or triple" its earnings from its new Internet auction division.

Just a few days before Ron Baron mailed his shareholder letter, a front-page article in the Wall Street Journal painted a very different picture of the high-end auction business, including Sotheby's.....According to the Journal, auction revenue is inherently unpredictable.....Customers demand expensive services, and the demands are growing, so net income typically runs about 3% of sales.....Sellers of major collections are insisting on much more favorable terms.....Competition among auction houses, already fierce, is increasing.

There's nothing unusual about this kind of dueling analysis, and it goes on all the time.....But these two dramatically different views of the same company do highlight a consistent problem facing mutual fund investors: Even when your fund manager tells you what he's thinking, in detail, what are you supposed to do with the information?.....If you think Baron is dead wrong with his Sotheby's analysis, should you sell the fund immediately?.....Or is this exactly the kind of bold bet that you want from your fund manager, even if you disagree with him?.....If you decide to hold the fund, and Baron turns out to be wrong about Sotheby's, how many more big, bad decisions does Baron get to make before you finally bail out on him?.....And if Baron's call on Sotheby's does work out, should you be willing to cut him even more slack in the future?

Here comes the typical journalistic disclaimer: We don't have answers to any of these questions.....But it did occur to us that nobody is currently holding fund managers publicly accountable for their big bets, and especially for their big, troubled bets, like Sotheby's.....So, starting next month, FundAlarm will add an occasional feature called "Out on a Limb":



Our idea is to identify fund managers, like Baron, who have taken strong public positions in support of individual stocks, and track the performance of those stocks over time.....The managers could end up with egg on their face, or they could turn out to be geniuses, but at least you'll be able to follow how they're doing.


The Monterey Murphy Technology fund, run by self-proclaimed tech-stock wizard Michael Murphy, still doesn't have a Web site.
At Monterey Murphy Technology, mail call is the most exciting time of day .


As a mutual fund investor, you're already comfortable sending your money off to be managed by someone else.....If you're also charitably inclined, you might consider contributing to a "donor-advised fund".....A donor-advised fund isn't exactly a mutual fund, but it has some of the characteristics.....Technically, a donor-advised fund is an independent charitable organization that is formed to act as a conduit for charitable contributions.....Fidelity, Vanguard, and Schwab each currently sponsor one, and here's how it works: You make an irrevocable contribution to a donor-advised fund, and you get an immediate charitable deduction for the full value of your contribution, subject to the usual tax rules.....Your contribution goes into a separate account within the fund, which you can then use to make contributions ("grants") to other U.S. charities.

Donor-advised funds aren't just for heavy-hitters.....For example, let's say you typically give about $1,000 per year to charity......Let's also assume that you make a one-time contribution of $20,000 to a donor-advised fund, and you informally decide to pay out 5% of your account value each year to charities of your choice.....In the first year of your donor-advised fund, your 5% payout would allow you to support your favorite charities to the tune of $1,000 -- exactly the same amount that you were paying out of your personal checkbook.....But if your underlying account grows by more than the annual payout percentage, next year's 5% payout will be larger than $1,000, and so on.....In 10 or 20 years, your 5% payout could amount to a significant annual contribution.

Assuming that you're in the 30% tax bracket, a $20,000 contribution to a donor-advised fund could generate immediate tax savings of as much as $6,000.....This compares to tax savings of just $300 per year if you continue to make your contributions in annual $1,000 installments.....Of course, you shouldn't establish a donor-advised fund merely for the tax savings.....But if you are otherwise interested, the tax saving is a nice bonus.....Where will you get the chunk of cash that you need to start a donor-advised fund?.....We can't answer that question, but here's a suggestion: Consider donating appreciated mutual funds (as a FundAlarm reader, you should have several of these).....You'll generally be able to take a charitable deduction for the full market value of your funds, without paying capital gains tax on the built-in appreciation.

Once you have established your donor-advised account, you need to invest it.....Schwab and Vanguard each offer three investment choices, built around in-house mutual funds, which roughly correspond to "aggressive," "moderate," and "conservative" portfolios.....(For example, the "aggressive" investment option for Vanguard's donor-advised accounts consists of 80% Vanguard Total Stock Market Index and 20% Vanguard Total Bond Market Index).....Fidelity offers four investment options, also made up of in-house mutual funds.....Schwab's donor-advised investment pools have only been around since August, 1999, and Vanguard's for not much longer (December 1997), so neither has much of an investment track record.....Fidelity is the veteran in the donor-advised area, and the performance of its investment pools has been quite respectable......For example, for the five years ending 3/31/00, Fidelity's "growth" pool returned 25.8% annualized, which would have placed the pool among Fidelity's top-15 equity funds for the period.

Summary Information: Donor-Advised Funds
NameMinimums:Annual
Expenses*
(1 bp = 1 basis point = 1/100%)		Web address
For initial
contribution		For a donor-advised grant
Fidelity Charitable Gift Fund$10,000$250Investment account:
45 - 70 bp
Overall admin:
100 bp		www400.charitablegift.org
Schwab Fund for Charitable Giving$10,000$500Investment account:
32 - 38 bp
Overall admin:
75 bp		www.schwabcharitable.org
Vanguard Charitable Endowment Program$25,000$500Investment account:
20-30 bp
Overall admin:
45 bp		www.vanguardcharitable.org
* Accounts above $500,000 may qualify for lower fee schedules



Briefly noted:
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FundAlarm © Roy Weitz, 2000