| Highlights and Commentary |
| By Roy Weitz |
If you are so inclined on July 26, please feel free to face California and raise a glass: That's the day, ten years ago, that I posted the first issue of FundAlarm to the Internet.....For the ensuing 120 months, FundAlarm has been free to users, and we've never run an ad or received a dollar of support from any commercial or industry source.....Alas, "free to users" doesn't mean "free to Roy," and I do incur significant expenses each month to produce and maintain FundAlarm....Since May 2000, I've been asking readers to help cover the site's direct expenses, and several thousand of you have responded by making a voluntary payment, or by purchasing items through our link to Amazon.com.....I'm grateful for your support and, as I've said many times, FundAlarm never would have made it this far without you.....Unfortunately, the number of people who support us each month is still a tiny fraction of the number who use the site on a regular basis.....If you've never supported FundAlarm, perhaps you've been waiting for a special occasion.....We hope you agree that the 10th anniversary of a still-free, still-non-commercial, still-pro-investor mutual fund Web site qualifies as a special occasion, and we hope you'll take this opportunity to join your fellow readers in supporting FundAlarm.....The accompanying page explains several support options, and we thank you in advance.....And at the end of this month's Highlights and Commentary,, we take a little trip down FundAlarm's Memory Lane.
Speaking of anniversaries, this is the four-month anniversary of David Snowball's New-Fund Annex (without FundAlarm, I never would have met an interesting guy like David, and David would have missed the opportunity to have a hectic life made considerably more hectic by taking on this project).....This month, David discusses new funds from Leuthold and Wasatch, and he finally weighs in on David Winters' Wintergreen fund.....As usual, David also looks into the shadows and comes up with two stars you might never have heard of.
If you can't beat them, become them: Most managers of international funds keep a close eye on the MSCI EAFE index, which is perhaps the most popular benchmark for investors who venture overseas.....But not Peter Hill, manager of HighMark International Opportunities (formerly Bailard International Equity), who says that he doesn't even look at the EAFE index, or care how his fund is performing in relation to EAFE.....Instead, most of Hill's stock picks and portfolio weightings are dictated by what managers at competing international funds are doing, and Hill is concerned only with beating the performance of his international-fund peer group......While many fund managers are aware of what their competitors are buying and selling, and they might make minor portfolio adjustments based on that information, we've never heard of a manager, like Hill, who focuses so single-mindedly on his peers, and admits it.....Hill says that he gets his competitive intelligence from public SEC filings, which is the first weakness of his strategy: Some of these filings are almost certainly out-of-date by the time Hill gets them, which means that he's shooting at a moving, or even nonexistent, target (Hill claims to adjust for this problem by giving more weight to more recent filings, as well as those of better-performing funds).....A second problem with Hill's strategy is that it requires at least two large leaps of faith: Not only do his peers have to be right in what they are doing, but Hill must have the insight and talent to improve on their work.....The prospectus for HighMark International Opportunities barely hints at Hill's peer-following strategy, and we think that's quite revealing.....We suspect Hill knows that investors would be uneasy about his strategy if it were fully disclosed, which suggests still another problem with this fund: It just feels sleazy and intellectually dishonest.....Investors don't mind paying for talent, skill, creativity, and unique systems.....What consumers do mind paying for is an imitation product, a knock-off, or someone else's work passed off as original.....Remember, as a kid, that low rung of social hell to which "copycats" were consigned?.....Some of those kids apparently grow up to become mutual fund managers.
Several months ago, when Fidelity hired former Beatle Paul McCartney as a spokesman, we couldn't figure out what McCartney had to do with mutual fund investing......Recently, Fidelity also hired rocker Rick Derringer as a company spokesman, and here the connection to the financial world is much more obvious......Derringer's hit, "Rock and Roll Hoochie Koo," was considered "junk" and "really stupid" when first released, but musical scholars and financial experts have since determined that "Hoochie Koo" is a major contribution to investment literature.....Kudos to Fidelity for featuring Mr. Derringer, and his song, in a recent TV commercial.....Here's an excerpt from "Rock and Roll Hoochie Koo," which demonstrates Mr. Derringer's credentials as a Fidelity mutual fund representative:
A portfolio so nice, they used it twice: If you own both Old Mutual Select Growth and Old Mutual Large Cap Growth Concentrated, you might think that you hold a diversified portfolio.....Unfortunately, you don't:
| Top-ten stock holdings of Old Mutual Select Growth* | Top-ten stock holdings of Old Mutual Large Cap Growth Concentrated* |
|---|---|
PepsiCo 3.1% | PepsiCo 3.1%
|
| Chicago Mercantile Exchange Holdings 2.7% | Chicago Mercantile Exchange Holdings 2.7%
|
| National-Oilwell Varco 2.7%
| National-Oilwell Varco 2.7%
|
| Qualcomm 2.6%
| Qualcomm 2.6%
|
| Google 2.5% | Google 2.5%
|
| Apple Computer 2.5% | Apple Computer 2.5%
|
| General Electric 2.5% | General Electric 2.5%
|
| eBay 2.5% | eBay 2.5%
|
| Nii Holdings 2.0% | Nii Holdings 2.0%
|
| Nabors Industries 2.0% | Nabors Industries 2.1%
|
Claire Young (40 years old) has announced that she's retiring as manager of Janus Olympus, and Blaine Rollins (38 years old, and recently booted from the flagship Janus fund) is "retiring" as manager of Janus Triton.....According to well-placed FundAlarm spies, Jason Yee, manager of Janus Worldwide and Janus Global Opportunities, was recently seen curled up in a ball in a corner of his office, muttering "I'm next to go, I'm next to go".....Mr. Yee may know whereof he speaks, since Worldwide has been a major drag on Janus for several years now.....If Yee had a real flair for the stock-picking game, you'd think it would be on display at Global Opportunities, a small, concentrated fund that should be a showcase for his best ideas.....Instead, Global Opportunities has actually performed worse than Worldwide over the period that Yee has been in charge of both.
This should clear things up:
| "Schwab Institutional is changing the name of the "Transaction Fee" on our trade confirmations for liquidation equity and option orders, to help you and your clients better understand the nature of this fee. Beginning June 22, "Transaction Fee" will be renamed "Exchange Process Fee." " | ||
| Thanks to Adam Bold, founder of The Mutual Fund Store | ||
Conventional wisdom:
| "Fund closures are good for existing shareholders because a torrent of cash can overwhelm the managers, resulting in bad decisions as they put the money to work." | ||
| From a recent story at businessweek.com | ||
Reality:
| "...Fidelity Diversified International [which has been closed since October 2004] netted $2.9 billion of inflows in this year's [2006] first quarter, its highest quarter for flows ever" | ||
| From a recent story at investmentnews.com | ||
In a recent interview, Putnam CEO Ed Haldeman noted that he was pleased with the performance of his firm's international funds, because "that's an area where some managers did have to leave us three years ago"......Oh yes, how delightful, why it sounds like they were called away for a tea party....Here's what we think Haldeman meant to say: "Those Putnam international managers were fired because they market-timed their funds and defrauded their investors, all under the nose of the firm's former CEO."
Now, it's only the investors who don't realize how bad these funds are: Not one manager at any principal-protected fund has invested a dime of his own money in the fund that he runs*.....If you're even slightly tempted to invest your own money in a principal-protected fund, be sure to read the extraordinary warning that still appears on the NASD Web site.
Fortune magazine recently published its "ultimate mutual fund portfolio," and we were surprised to see Dreyfus Appreciation as the sole recommendation under "large-company stock fund"......As far as we can tell, this fund has only two things going for it: Less-than-10% portfolio turnover (which Fortune mentions), and better-than-average performance during the 2000/2001 bear market.....Well, maybe Dreyfus Appreciation has one other thing going for it: The fund is run by well-known manager Fayez Sarofim.....But what good is a well-known manager if he's underperformed his benchmark for the past one, five, ten, and fifteen years?.....Dreyfus Appreciation has plodded its way to mediocrity under Sarofim for over a decade-and-a-half.....While it's certainly not the worst fund out there, it doesn't deserve to come near anyone's "ultimate mutual fund portfolio."
Something we didn't know about Mario Gabelli:
| Gabelli has co-hosted fifty-five times on CNBC's Squawk Box. He says that the network folks call him "Dr. Love," because he's the guy "who just loves it when companies court one another." |  Mario Gabelli |
Something else we didn't know about Mario Gabelli: He is (or was) good friends with T. Gibbs Kane and his wife, Victoria ("Tory").....Gibbs runs the Sound Shore fund, Tory is an aerobic-dance instructor, and Tory was involved in highly-questionable bidding for discounted cellphone licenses that was orchestrated by one of Gabelli's companies.....Gabelli has now settled federal fraud charges against him and the other defendants (including the Kanes), but the Kanes didn't go easily......The amount of the final settlement was $100 million but, back in March, Gabelli's lawyers were close to settling for well under that amount.....Then the Kanes, who were represented by their own lawyer, tried to extricate themselves from the case, and the deal fell through.....Now the Kanes, along with other defendants, are bickering with Gabelli over who should pay legal fees, and how much each party owes.*
As the market for exchange-traded funds (ETFs) gets sliced into ever smaller and more ridiculous pieces, we thought it might be time for a little fun.....The list below contains the names of five new PowerShares ETFs, which are for real, and five PowerShares ETFs that exist only in our imagination.....See if you can tell them apart:
| PowerShares Buyback Achievers |
| PowerShares Arbitrage Allocators |
| PowerShares MagniQuant |
| PowerShares OptiChart |
| PowerShares Cleantech |
| PowerShares EnviroLeaders |
| PowerShares Autonomic Allocation Research Affiliates |
| PowerShares Neural Networking Equity Associates |
| PowerShares FTSE RAFI US 1500 Small-Mid Portfolio |
| PowerShares EENY MEENY Miney Mo |
Looks like they could have used some Rogaine: Vanguard CEO John Brennan likes to set BHAGs ("big, hairy aggressive goals") for his managers, but at least one of those goals
has failed to sprout.....Many Vanguard employees have been awarded "partnership units," and each year those units are assigned a dollar value, which is used to calculate the employee's bonus (i.e., number of units owned x dollar value per unit = amount of annual bonus)......Back in 2002, when a partnership unit was worth about $54, Brennan set a goal of $100 per unit by 2005.....Now that the 2005 partnership unit has been valued, at $81.40, it's apparent that Brennan's $100 goal has been badly trimmed.....Faced with this embarrassing setback, Brennan is reportedly combing through lists of tired business jargon, trying to come up with a new way to motivate the many follicles under his control.
Before you toss your fund's shareholder report in the file (circular or otherwise), you might want to glance at the Statement of Changes in Net Assets (it's one of the financial schedules, located towards the back of the report).....The Statement of Changes ("SOC") can tell you a number of things about your fund, but probably the most interesting information is how fast your fund is growing (or shrinking), and how large it has become......One nice thing about the SOC is that its name and format are fairly standard from fund to fund, so it's relatively easy to locate and decipher.....For example, consider the following SOC for the Fairholme Fund, which covers the two fiscal years ("F/Y") ended November 30, 2005 and 2004 (the arrows have been added by FundAlarm):
 | Month Nine: The Ship's Going Down, and the Captain is Changing the Rules |
| 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% |
| June, 2006 | June 12 | Cash | NA (Cash) | $4,938.37 | $4,659.14 | -5.65% | -6.82% |
| 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. | |||||||
| Current month (5/27 thru 6/26) | Since inception (10/17/05) | |
|---|---|---|
| Schwab International Index Inv (SWINX) | -4.71% | 12.90% |
| Vanguard Small Cap Index (NAESX) | -3.49% | 10.70% |
| Dreyfus Mid Cap Index (PESPX) | -2.71% | 9.47% |
| Vanguard 500 Index (VFINX) | -2.58% | 5.95% |
| Vanguard Balanced Index (VBINX) | -2.39% | 3.48% |
| Roy's market-timing account | -5.65% | -6.82% |
As we mentioned above, this month marks FundAlarm's 10th anniversary.....Over those ten years, we figure we've written about 800 pages of Highlights and Commentary.....Below, we've selected a few representative, shorter items from the Highlights and Commentary archive.
We've always had a soft spot for cranks (from the September 1997 Highlights & Commentary):
| "The fund industry is taking advantage of the public on a massive scale. It really is not an investment operation at all. It's an asset-gathering, fee-imposing, and expense-generating system. It's providing a great living for tens of thousands of people who should be doing something else. The fund industry spends zillions of dollars on research, and then you get turnover in popular funds of 100% a year. What's the difference how much you know about a business if you don't keep it for a year? | |||
| Robert Torray, manager of the Torray Fund, interviewed in Dow Jones Investment Advisor (August 1997) | |||
A big FundAlarm "Thank You" goes out to all the creators of dumb, gimmick mutual funds. This was one of the first dumb funds that we wrote about, in September 1998, and the supply of material seems endless:
 After a night of heavy beer drinking, is it still possible to come up with an idea for a new mutual fund? We don't know for sure.....But circumstantial evidence strongly suggests the affirmative, as Pegasus Sports Marketing announces the introduction of the Motorsports Growth and Income Fund.....According to The New York Times (2/22/98), this fund will invest in companies which have ties to car racing, and the fund will be sold with a 5.75% front-end load.....Before you conclude that the focus of this fund is ridiculously narrow, you'll be relieved to know that it can also hold stocks in auto-racing sponsors, such as McDonald's and Procter & Gamble. |
This experiment appears to have worked out (from the July 1998 Highlights & Commentary):
| Do you have a mutual fund question, gripe, or opinion?.....For the next couple of months, we're going to experiment with our own Bulletin Board, which has been up and running since June 15... |
A hint of things to come (from the September 1998 Highlights & Commentary):
| Not surprisingly, Janus Fund and its cousins -- Twenty, Growth & Income and Olympus -- now look very much alike....If you own more than one Janus domestic fund, you may be getting a lot less diversification than you think.....But you'll be comforted to know that Jim Craig, Janus chief investment officer, isn't concerned.....Craig insists that every Janus fund is still "a little different". |
Remember these fund companies? All were around for the first issue of FundAlarm, in July 1996, and all are now gone:
This was the first rant of its kind in FundAlarm, and nothing has changed (from the October 1998 Highlights & Commentary):
MFS Massachusetts Investors Trust is seeking an increase in its management fee.....Previously, this fund was able to scrape by on income of $8.7 million per year.....Now the trustees are asking for a 72% increase, which would allow the fund to scrape by on about $15 million per year.....Proxy materials offer the usual excuses for a fee increase, which we have taken the liberty of paraphrasing:
FundAlarm is getting weary: Will shareholders ever learn to say "NO" to this kind of shameless money grab? |
Little did we know, the party was just beginning (from the February 1999 Highlights & Commentary):
| What can we say?.....That the Internet Fund was the top-performing mutual fund for 1998, with a total return of 196.1%?.....That, at this rate, $10,000 would become $1 billion in 11 years?.....That The Internet Fund returned an average of 2.25% per trading day during November 1998 and, at this rate, $10,000 would become $1 trillion in less than two years?.....That you wouldn't pay $5 to attend a concert given by a garage rock band, but that folks have eagerly thrown $70 million hard-earned dollars at a garage mutual fund?.....That you shouldn't buy a mutual fund just because it's coming off a good year?....That some day you will feel more embarrassed because you invested in this fund at its peak than the embarrassment you feel from all the clothes you wore in the 1960s?.....(If you weren't alive or old enough to wear clothes during the 60s, please make up your own embarrassing generational equivalent).....Sure, we could say all that, but those who know don't need to hear it....Those who don't care won't listen anyway.....So, we have nothing to say about the Internet Fund.
|
We got this one right, or at least part of it (from the January 2000 Highlights & Commentary):
| We think exchange-traded funds (ETFs) will be one of the big investment stories of the new decade, and the 51 ETFs coming soon from Barclays should help kick off the action.....Scott Cooley, a Morningstar analyst, disagrees.....In a recent column, he referred to the Barclays challenge as "another bogus threat" to traditional mutual funds.....According to Cooley, transaction costs are one of the main reasons ETFs will never catch on in a big way.....Because ETFs trade like stocks, and investors have to pay a brokerage commission each time they buy or sell, Cooley feels that ETFs will always be at a disadvantage to no-load, open-end funds.....But what happens when online brokers offer free trading of ETFs?.....If this isn't already in the works at one of the online brokers, then the marketing people must be working too hard on their look-alike ads.....Free ETF trading (even five or 10 free trades per month) would be a chance for some online broker to stand out in a crowded field, and take the lead in a major new investment area.....It's coming: That's our first fearless prediction of the new century. |
Of the hundreds of items we've published in Highlights and Commentary, our August/September 2000 items about TomMarsico.com probably got the most media coverage:
| Last month, we reported that the Internet address TomMarsico.com had been grabbed by Marsico's former employer, Janus, more than two years after Marsico left the firm.....New York Times reporter Danny Hakim picked up on our story, and it turns out that the tale is even better than we thought.....Jim Goff, a Janus fund manager, apparently decided on his own to take the Marsico name, and Marsico wasn't aware that his name had been hijacked until the Times reporter told him.....Marsico was not amused by Goff's caper, especially since Marsico originally recruited Goff, and helped him get his Janus job.....Anyhow, at a "chance" country club meeting several days after the story broke, Goff apologized to Marsico, and offered to return TomMarsico.com for free......Marsico still sounded a bit peeved: "This is a guy who I brought to Janus. I got him into a country club he lives right on. He doesn't say, 'It's nice you sold your business, congratulations.' It was, 'By the way, since The New York Times called me, I bought your domain name.'" |
One of our many honors (from the November 2000 Highlights & Commentary):
 | We're pleased to announce that FundAlarm is one of "300 Incredible Things for Women on the Internet," according to a new book of the same name.....Eat your heart out, George Clooney. |