FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

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

Time to give up? This month's FundAlarm database contains just over three hundred 3-ALARM funds that each holds less than $100 million in assets.....So, why should you care if you own a small 3-ALARM fund?.....Besides the fact that a larger fund might give you more company in your misery, small funds are inherently inefficient, and expense ratios are generally higher than for comparable, larger funds.....Also, small funds are more likely to be merged out of existence, especially if they are part of a multi-fund family.....Finally, small 3-ALARM funds are unlikely to receive much in the way of corporate resources, and their hopes for recovery seem especially dim.....The best fund managers, the best stock ideas, and the best efforts will almost certainly be allocated somewhere else.
[Go to the list of small, 3-ALARM funds]

Roy finally makes a decision about Longleaf Partners fund: I've personally owned Longleaf Partners since February 1995.....Six months ago, when I last posted my personal portfolio on FundAlarm, I was still whining about Longleaf performance, but edging closer to a decision.....Here's what I had to say:

I've just about had it with Longleaf Partners...Here's a public promise: If this fund doesn't start showing signs of life by June 1, I'm out. I used to look forward to their annual and semi-annual reports, but now I'm getting pretty tired of the "We're in this together" and "We're picking great stocks that somehow continue to suck" thing.

Well, I missed the June 1 deadline, but it's not like I wasn't working at it.....The rational part of my brain knew for months that it was time to sell, but the part of my brain that hates change did everything possible to avoid making a decision (this may sound familiar to some of you).....Let's go back to mid-July, and eavesdrop for a minute as two major parts of my brain -- Mr. Spock and Mr. Slug -- debate whether I should bail out of Longleaf Partners:

Mr. Spock says:		Mr. Slug says:
"Longleaf Partners is a 3-ALARM fund.		"Yes, but it's been performing pretty well over the past few weeks."
"A few weeks don't matter. You've owned this fund for five years, and it has let you down. It's time to move on.		"As soon as I do, I just know that it's going to take off."
"Illogical. The fund doesn't know that you've sold it."		"You know what I mean. Maybe value investing is starting to come back, and maybe Longleaf Partners will lead the way."
"Maybe I'll stand on my head and sing "Zippity Do Da."		[Silence]
"If you think that value investing might be on a rebound, you can always sell Longleaf and put the proceeds in a better-performing mid-cap value fund.		"Well, I have been keeping an eye on Weitz Partners Value, Weitz Value, and Oakmark Select. Each is a mid-cap value fund, and each has a better long-term record than Longleaf Partners."
"What about their performance over the past few weeks?		"Those funds have been performing pretty well, too. Sometimes a little better than Longleaf, sometimes a little worse, but no dramatic differences."
"As I suspected. So, are you ready to make a move?		"Wait! What about taxes?"
"May I remind you that you hold Longleaf in an IRA?		"But if I sell, I'll be admitting that I made a mistake."
"And if you don't sell, will the mistake go away?		"Did I ever tell you that you can be really annoying?"

On July 21, I sold my entire investment in Longleaf Partners, and reinvested the proceeds in Weitz (no relation) Partners Value.....It was a close call between two Weitz funds -- Partners Value and just plain Value -- but I finally chose Partners Value better because it's smaller and more concentrated.....Oakmark Select was another attractive candidate, but the Weitz funds have a longer (and slightly better) track record.....Besides, if I ever need to call Weitz funds customer service, maybe the operators will think that I'm the long-lost brother of their boss.

		The Golden Gate Fund, introduced on July 10, plans to invest exclusively in companies located in the San Francisco Bay Area......Where does the fund name come from?.....According to a press release, San Francisco's Golden Gate Bridge "stands as a constant reminder of opportunities" (also, we might add, suicides) .....The press release goes on to describe the Bay Area as "the epicenter of technological development," a somewhat unfortunate choice of words for a fund located on the San Andreas fault.

It ain't easy: Back in July 1993, The New York Times asked five mutual fund gurus to construct hypothetical "retirement savings portfolios" from any combination of funds they wished.....The Times has allowed the portfolios to be tweaked once a quarter since then.....The following table shows portfolio returns through June 30, 2000.....For the sake of comparison, the table also shows how three buy-and-hold index funds would have performed over the same period:

Mutual Fund Expert	Claim to fame	Value of $50,000 portfolio: 7/93 thru 6/00
A computer	Vanguard 500 Index	$185,050
A computer	Vanguard Total Stk Mkt Index	$171,890
Eric Kobren	Investment advisor/ newsletter editor (Fidelity funds only)	$155,093
Sheldon Jacobs	Editor, No-Load Fund Investor	$152,209
Jack Brill	Investment advisor who created a "socially responsible" fund portfolio	$150,052
A computer	Vanguard Balanced Index	$124,735
Russel Kinnel* (latest sacrificial victim; other M experts previously handled this portfolio)	Editor, Morningstar Fund Investor	$123,487
Harold Evensky	Investment advisor	$111,816

Expert portfolios and performance data from The New York Times, July 9,2000.
All portfolio values as of June 30, 2000.
As you will note, the two stock index funds (Vanguard 500 and Vanguard Total Market) handily beat all of the experts.....Even Vanguard's Balanced index fund (with a 40% allocation to fixed-income) would have outperformed two of the expert portfolios, including the one designed by Morningstar.

In a supreme act of mercy, the Times has declared an end to this exercise.....Note: It is unlikely that FundAlarm will ever participate in a model portfolio contest.

The Backwards Baseball update:

Where we stood last month:

"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

NEW quote!

[We're] not even in the bottom of the first inning."

Alberto Vilar, of Amerindo Technology, quoted on July 17, 2000

NEW quote!

"If you want to know what inning we're in, I'd say we're just suiting up."

Jeff Provence, of Value Trend Wireless, quoted on July 19, 2000

The "wireless" sector is hot -- maybe the next Next Big Thing -- and wireless mutual funds are also hot.....But sometimes, it can be tough to figure out what "wireless" even means, let alone how to invest in the sector.....Herewith, FundAlarm's Wireless Cheat Sheet.

What is "wireless"? As you probably know, voice and data communication no longer require "wires." Cellular systems and satellite systems are among the developing forms of wireless communication, and companies are growing up at every step of the wireless communications process, from handsets, to integrated circuits, to transmission towers, to data security. The Internet is still largely a wire-based medium, but it's only a matter of time before Internet access also becomes wireless. Therefore, some Internet companies are now considered wireless plays, and vice versa.

What are some examples of "wireless" companies? We took a look at four fund portfolios specifically identified as "wireless,"* and Nokia is the only stock common to all of them. An additional five stocks appear in at least three of the wireless portfolios: Ericsson, Motorola, Nortel Networks, Triquint Semiconductors, and Vodafone AirTouch. For now, at least, the fund managers have spoken, and these six stocks represent the pick of the wireless sector. Here's a brief description of what these companies do:

Wireless company	Nature of business
Ericsson	Leader in mobile infrastructure; also manufactures handsets and "Bluetooth" devices (new technology that allows all devices -- cellphones, palmtops, laptops, and desktop computers -- to communicate without physical connections).
Motorola	Software-enhanced wireless telephones, radio and satellite communications, embedded semiconductor products, and embedded electronic systems.
Nokia	30% market share in handsets; leading developer of next generation handsets and related software.
Nortel Networks	75% of North America's Internet traffic travels across this company's high-speed optical networking systems
TriQuint Semiconductors	Integrated circuits for cellular phones and pagers, fiber optic telecommunications equipment, and satellite communications systems.
Vodafone AirTouch	World's largest mobile telecommunications company.

How can mutual fund investors play the wireless boom?
- Alternative #1: Pure-play wireless funds: Four pure-play wireless funds are currently available to investors:
  - Investec Guinness Flight Wireless World
  - Value Trend Wireless
  - ProFunds Wireless Communications Ultra Sector
  - Turner Wireless and Communications
  The oldest of these funds, Guinness, started on February 28, 2000, so none of them has a meaningful track record. There are also at least two wireless unit investment trusts (Nuveen Defined Sector Portfolio - Wireless and Van Kampen Global Wireless Portfolios). Fidelity plans to introduce a Select Wireless fund in September.
- Alternative #2: Communications funds: Only a handful of communications funds specifically indicate the percentage of their portfolio that is considered "wireless." The rest don't, and the marketers are definitely missing the boat here. Rydex Telecommunications recently had the highest concentration of our top-six wireless stocks (Ericsson, Motorola, Nokia, Nortel, TriQuint and Vodafone), with almost 30% of its portfolio invested in these issues. It's safe to say that the managers of almost all communications funds are closely watching the wireless sector, and you can expect other communications funds to significantly increase their wireless exposure.
- Alternative #3: Conventional funds with a wireless punch: Several funds that aren't specifically communications sector funds also have significant wireless exposure (again, this is based on their ownership of our six bellwether stocks). Among the funds with 15% or more wireless exposure: Eastcliff Total Return (21%), Dresdner RCM Europe (20%), Janus Twenty (16%), Aetna Technology (all classes)(15%), PIMCO Select Growth (15%), and Federated Large Cap Growth (15%).
  
  Janus Twenty, on the list above, is just the tip of the Janus wireless iceberg. Nokia, for example, is a top-ten stock in ten of the 15 Janus funds. Ericsson is also one of the 15 stocks that Janus bought the most of during the first quarter of this year.**
Should you invest in a wireless fund? It depends. If you already own a technology or communications fund, and you want to concentrate your bets, a wireless fund might make sense. But you should be prepared for extreme volatility. If you don't already own a tech or communications fund, we wouldn't recommend a wireless fund for your first plunge into the area. A communications fund with a strong wireless tilt might be as far as you want to go.

The following comments are directed to the do-it-yourself wireless investor (who probably won't listen anyway): If you are tempted to buy individual wireless stocks (or if you already own some), a wireless fund might be a much better idea. Unless you're an expert in the wireless industry, and unless you truly understand the technology that wireless companies are dealing with, you're almost certainly in over your head when you buy individual wireless stocks. Even FundAlarm has to say that wireless is one area best left to professional managers.

* The portfolios are: Investec Guinness Flight Wireless World, Value Trend Wireless, Nuveen Defined Sector Portfolio - Wireless, Van Kampen Global Wireless Portfolios.

** "Janus Makes Big Bet on Telecom Sector," Ian McDonald, TheStreet.com, June 22, 2000

Not Jean Buttner

Imagine if he had called her "insecure and vindictive": Christopher Bischof used to run a fund for Value Line, until he was fired.....About a year after his departure, according to The Wall Street Journal, Bischof participated in an online discussion about his former Value Line boss, Jean Buttner.....Bischof called Ms. Buttner an "old dodo," and apparently suggested that she got her job only because she was the daughter of the Value Line founder.....Bischof deleted the messages at the request of Value Line, and he apologized for his comments, but Buttner is still suing him for $3 million.

Master of its domains: In addition to amassing a nice collection of cash, the Janus fund family has also developed quite a collection of Internet domain names......Apparently trying to head off cyber-squatters, Janus has quietly claimed the dot-com version of most of its funds (janusfund.com, janustwenty.com, etc), even to the point of grabbing such snappy, eye-appealing names as janusfederaltaxexempt.com and janusshorttermbond.com.....The only fund names that Janus hasn't dot-com'd are Global Life Sciences, Strategic Value, and the new Orion fund.....A domain name can't exceed 26 characters, so the full name of "JanusGlobalLifeSciences.com" doesn't fit.....JanusOrion.com was grabbed on June 4, 2000, by an individual from Farnham, Virginia.....We contacted the new owner of JanusOrion.com, and asked why he bought it....."Because it was available, and because Janus might want it," was basically what he told us.....JanusStrategicValue.com does fit within the 26-letter limit, but it looks like somebody at the company simply forgot to reserve it.....As a good citizen of the Internet, we notified Janus that JanusStrategicValue.com was still available, and we suggested that they might want to register the name before someone else did.....We never heard back from Janus, and the name was still available 10 days after we e-mailed them.....Therefore, we took the initiative, and FundAlarm is now the proud new owner of JanusStrategicValue.com......If Janus wants the name, we'll be glad to transfer it for the $60 we paid.....Someone just needs to contact us.

Not satisfied merely with fund names, Janus has also reserved a slew of dot-com manager names......All you Scott Schoelzels out there will be disappointed to learn that Janus owns the name scottschoelzel.com, as well as the dot-com names for almost all of its other fund managers.....For some reason, Janus seems to think that Jim Goff (of Janus Enterprise) is a particularly hot property.....Jim Goff is the only name that Janus has reserved as a dot-net and dot-org, in addition to JimGoff.com.....In what appears to be a stunning in-your-face move, Janus has also claimed TomMarsico.com.....Janus acquired this name on December 6, 1999, long after Marsico had quit Janus to start his own successful fund firm.

Not fast enough for this one: JanusSucks.com is owned by a company in Secaucus, NJ, which also owns FidelitySucks.com.....Vanguard, not known for its technological savvy, grabbed VanguardSucks.com way back in July 1998.....At the time, both JanusSucks.com and FidelitySucks.com were still available, if someone from those firms had been alert enough to grab them.

Out on a limb with WASTE MANAGEMENT: Last month, we asked FundAlarm readers to alert us to fund managers who have taken a strong public position on individual stocks in their portfolios, preferably troubled stocks.....(The idea is to track these stocks over time, and see how well the managers perform with their most high-profile picks).....We received a good response to our request and, according to our readers, Mason Hawkins et al., of Longleaf Partners, is by far the manager most out on the limb, thanks to his very public defense of Waste Management Inc......For a quick review of how Hawkins got out on his limb, and how his big bet has been performing lately, check out the accompanying page.

FundAlarm readers also noted that several managers are out on a limb for their defense of Philip Morris (MO) -- Don Yacktman of the Yacktman fund, James Gipson of the Clipper fund, David Dreman of Kemper-Dreman High Return, and Ken Heebner of CGM Focus.....In an upcoming issue of FundAlarm, we'll take a look at how these managers are doing with their big bet on MO.

Briefly noted:

Remember Bob Dole, before the Viagra ads?.....Four years ago, he received the Republican presidential nomination and, coincidentally, FundAlarm published its first monthly issue (August 1996).....We've been doing our thing every month since then, and the response has been greater than anything we could have imagined: Over 500,000 page views per month, 100,000+ user sessions, 25,000 names on our mailing list, and several selections as a "best" mutual fund site by publications that people might have heard about (Forbes, Money, Kiplinger's, Fortune, Mutual Funds, Online Investor, Consumer Reports).....Thanks to everyone for your interest, your many kind words and -- if you are so inclined -- your purchases through Amazon.com, which help pay the FundAlarm bills.
We love good, fun writing about mutual funds, and from time to time our readers submit items that are, well, good and fun.....On the accompanying page, you'll find some miscellaneous comments by David Snowball about the current mutual fund scene.....For those of you who don't already know David, he's one of the excellent regular contributors to the FundAlarm Discussion Board.....Bob Kronish, publisher of the KronishChronicle.com Web site, provides a financial update to that old Broadway song, "Send in the Clowns".
If you're the kind of person who likes to play interminable games with mind-boggling rules, you'll want to hurry over to the new Marketocracy.com Web site.....The site is the creation of Ken Kam, co-founder of the Firsthand Funds, and it gives users the opportunity to construct and manage up to five of their own fantasy mutual funds, starting with $1,000,000 play dollars each.....We read the official rules several times, and we still don't understand all of them, but the whole thing seems reasonably well-designed to simulate the trading environment of a real-world mutual fund.....After three years of watching the fake funds perform, Kam says that he plans to hire the best fantasy managers to run several real funds.....And what if one of the best managers turns out to be hygienically challenged, or a convicted felon?.....If you look closely, you'll see that the meritocracy gimmick gets a little fuzzy at the end, and Kam never actually commits to hiring strictly on merit.....All he says is that the ultimate selection of managers will be based "largely" on performance.
Ken Kam's next potential blow-up:

Who Wants to Marry
a Fund Manager?
Surely (you're thinking) all of the mutual fund audience participation gimmicks have been taken by now.....Ah, but surely they haven't: MutualMinds.com is getting ready to roll out a fund that will build its portfolio around the stock picks of its investors, but with a twist.....Stock recommendations from the peanut gallery will be graded.....In building the fund's portfolio, more weight will be given to stock suggestions from individuals who are highly-rated.....An actual spokesman for the fund -- not, as you might think, an enemy or competitor -- willingly compared the MutualMinds investment process to the audience lifeline on "Who Wants To Be A Millionaire."
cbs.marketwatch.com, June 27, 2000
Robert Pozen, Fidelity president, has long and self-righteously opposed a Fidelity Internet fund, but it looks like the marketers have finally worn him down.....Starting in September, Fidelity will offer a Select Networking & Infrastructure fund, which is basically a sliced-and-diced Internet fund.....As we noted above, Fidelity will also offer a new Select Wireless fund.....Preliminary filings with the SEC did not name a manager for either fund, which proves that even Fidelity views Select managers as an afterthought.
A lot of people apparently aren't reading FundAlarm: Through May 31, 2000, Fidelity Aggressive Growth was the #3 mutual fund money magnet, gathering $5.8 billion of new cash (Janus Worldwide was first, at $7.4 billion, and Fidelity Growth Company was second, at $7 billion).....Presumably, a good chunk of that money flowed into Aggressive Growth after February 14, when manager Erin Sullivan quit to join a hedge fund.....It's possible that Bob Bertelson, the new Aggressive Growth manager, has thousands of fans who were just waiting to shower him with cash.....It's more likely, however, that many recent investors in Aggressive Growth were simply chasing last year's performance, and they still don't know that the manager responsible for that performance is gone.

On the other hand, maybe someone is reading FundAlarm.....Here are some of our musings from the February 2000 Highlights and Commentary:

Speaking of rewards, how about a separate, low-cost class of shares for investors who have been in a fund for at least five or ten years?.....Or, how about a special dividend for long-term investors, payable by the management company, on the ten-year anniversary of an initial investment?......These are simple ideas, yet they seem startling -- mainly because no fund company has ever thought of them.

On July 26, Vanguard announced a new "Admiral" class of shares, which will reward some long-term investors with lower expenses.....To qualify, you need to have held at least $50,000 in a fund account for at least 10 years, $150,000 in an account for at least three years, or at least $250,000 in an account for any period.....The cost savings from the Admiral shares won't move up anyone's retirement date -- about $180 per year on a $300,000 account -- but it's a nice gesture that's long overdue.....Your move, American funds, Fidelity, Putnam, etc. etc.

According to a recent survey, 52% of investors believe that the U.S. economy will remain strong as long as Alan Greenspan is head of the Federal Reserve .....By a remarkable coincidence, 52% also believe that if they step on a crack, they will break their mother's back.
Here's something we don't understand (the latest in a long series): The Evergreen fund just made a huge capital gain distribution (34% of NAV), and it's clear that Evergreen has known for months that this distribution was coming.....Yet nowhere in the Evergreen fund prospectus, or supplement, does Evergreen warn new investors that they are purchasing a huge tax liability.....How can this kind of disclosure not be required?
While we're on the subject of large capital gain distributions, the Nicholas fund recently paid out gains equal to about 18% of the fund's value.....The gains were generated as Nicholas sold off its old economy stocks, and the fund moved from a 5% technology position to a 30% position.....Co-manager David Nicholas now says that "technology is here to stay,"* and that appears to be the major insight behind this huge (and painful) portfolio shift.....In the category of "Up-and-Coming Huge Capital Gain Distributions," keep your eye on the Oppenheimer Enterprise Fund.....Jay Tracey, the former manager, led this fund into small-cap territory.....New manager David Hyun plans to take an all-cap approach, and he also may buy foreign stocks, all of which means turnover.
* "Nicholas Fund's Tech Move Brings Double Dose of Pain," Christopher Oster, The Wall Street Journal, July 3, 2000
Inexperienced managers of new mutual funds might want to consider enrolling in Prospectus 101, a course periodically offered by FundAlarm University.....Among the topics covered in this course: "Yes, Kids, It Really Does Matter What You Say".....Many moons ago, as you may recall, Ryan Jacob was shown as lead manager in the Internet Fund prospectus.....After Jacob left the fund, the people who took over tried to argue that they had always been part of the management team, even though they forgot to mention that fact in the prospectus.....More recently, the folks at StockJungle.com, a somewhat struggling fund firm, announced that chief investment officer Michael Petrino was leaving after only one year on the job.....Petrino had been listed in the StockJungle prospectus as co-manager of its funds but, in a parting interview, Petrino tried to downplay that description, arguing that he wasn't important to the fund after all.....According to Petrino, "We should've made more clear what my role was"*.....Uh, yeah, Mike, that's exactly what we teach at FundAlarm U: When one of those big-time federal securities laws calls for disclosure, it's always a good idea to pay attention to what you write.
Ariba-derci to diversification: According to theStreet.com, each of the five Van Wagoner funds recently had about 20% of its assets committed to the same top-five holdings.....Ariba was the #1 or #2 two holding for all Van Wagoner funds, at a hefty 6% of each portfolio.....Also high on Van Wagoner's hit parade: Interwoven, Netro, Cobalt Networks, and Storage Networks.....Van Wagoner is notorious for not having much staff support, and this kind of concentration appears to be one of the byproducts of his do-it-yourself mentality.....A Van Wagoner spokesperson acknowledges that investors have pretty much been left in the dark about the significant overlap at these funds.....But the spokesman says that someone has been hired to work on the Van Wagoner Web site, and the overlap issue will soon be addressed.
"Mirror Moves Reveal Funds in Van Wagoner Family Have Similar DNA," Ian McDonald, July 18, 2000
Who's the mutual fund manager with the longest tenure?.....According to Morningstar, it's Robert Brody, of the American Growth Fund, who might have bought this car, new, when he first got his job:

1958 Corvette
Unfortunately, Brody is still trying to get the engine started.....Over the past five years, the fund has returned just 7.9% (annualized).....Over the past three years, an investment in U.S. T-bills would have returned slightly more than this large-cap stock fund.....The mess at American Growth might seem like the kind of situation where fund directors would take a more active role, but they are apparently waiting until Brody's 50th anniversary before they rush to judgment.
A recent full-page print ad for Smith Barney Aggressive Growth Fund includes the photo of a very serious, forty-something fund manager, who is repeatedly referred to as Richie Freeman, as in, "Can Richie come out and play?" .....In our opinion, people who manage money should avoid all childhood nicknames, including Richie, Billy, Tommy, Joey, and Stinky.
Mark your calendars: Jean-Marie Eveillard (First Eagle Sogen Global, First Eagle Sogen Overseas, First Eagle Sogen Gold ) has announced that he will retire at the end of 2004, when his five year employment contract is up.
In one of his recent online "Reports," Morningstar's John Rekenthaler highlighted a particularly flaky IPO, and then nominated the company's flaky president "as the Chicagoan I'd most like to export to California".....Here at California-based FundAlarm, we believe that no dumb geographic stereotype should go unanswered.....Therefore, John, we are currently looking for a boring steak-eater, whom we will promptly export to Chicago.
Janus has announced that it's building a new 35-acre, $150 million office complex on the site of the former Lowry Air Force Base in Denver.....As part of the Janus quest to dominate the world, some competitors were concerned that Janus might also try to acquire nuclear weapons.....That now appears unlikely.