FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

(Originally posted August 1, 2002) [Archive Table of Contents]

Essence of bad: In a stock market as bad as this one, it can be difficult distinguishing the truly awful fund from the fund that merely underperforms or loses money (which, alas, describes most of them).....Each month, our list of Most Alarming 3-ALARM Funds attempts to highlight the worst of the worst, but even that list of losers is based only on performance numbers.....So we got to thinking: Are there additional ways to identify truly awful funds, funds that define the essence of a bad fund?.....We think there are, and here's what we came up with:

The fund must be 3-ALARM (of course)
The fund must have trailed its peer group for the past 12 months, three years, and five years (such funds are indicated as Lower | Lower | Lower in the FundAlarm data table)
The fund must have a FundAlarm risk rating of +2 (the worst possible)
The fund also must have been 3-ALARM in the August 1999 issue of FundAlarm (in other words, three years ago, in a very different kind of market)

A total of 76 funds in this month's database meet these exacting standards of misery.....If you have the strength, you might want to take a look at the list.

It's the bear's turn to bat: As we noted a couple of years ago, at the tail end of the millennial tech frenzy, Alberto Vilar (manager of Amerindo Technology) couldn't find a baseball metaphor that he didn't like, although he did seem a bit confused about the order in which the game was progressing (note the innings and dates):

"[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

Vilar, of course, was utterly wrong, and his fund has lost 53% of its value since the second or third inning (December 1999).....Undeterred by Vilar's foolishness, a number of other money managers have recently started lobbing bear-market baseball metaphors, and more can certainly be expected:

"I think we're closer to the eighth inning of [the bear market], rather than the second."
-- Tom McKissick, of TCW Galileo Large Cap Value, quoted in the L.A. Times, July 8, 2002

"We think we're probably in the third inning of this bear market."
-- David Tice, of Prudent Bear, quoted by The Wall Street Journal Online, July 11, 2002

"We're in the seventh inning of the pain game...."
-- Money manager Jim Awad, interviewed on CNN Money Morning, May 28, 2002

As Vilar's experience suggests, it's likely that none of these bear-market metaphorians has the slightest idea what inning it is or even, perhaps, what game is being played.....If you had let yourself be swayed by Vilar's baseball babble, your portfolio would have been decimated, and we can pretty much guarantee that one, two, or three of the above bear-market seers, along with dozens of their compatriots, are also uttering dangerous nonsense.....In a market like this, your best bet is still to have a long-range plan and stick to it, because no one -- no one -- knows where this market is going, or when.

In addition to spinning baseball metaphors, Alberto Vilar (above) likes to give away large sums of money to charitable organizations, especially ballet, orchestra, and opera (for example, $25 million to the Metropolitan Opera in New York, and about $225 million in total over the past decade or so).....Gifts like this are immensely commendable, but let's face it: Anyone who donates this kind of money, and doesn't do so anonymously, is asking to be in the public eye, and he's also asking for the kind of media scrutiny that goes along with being a public figure.....This is the kind of deal that Vilar doesn't seem to understand.....Ever since the tech bubble burst in early 2000, and his firm lost about 80% of its assets, a petulant Vilar acknowledges that he's been late paying some of his charitable pledges, and he's also exercised the "skip-year" provision in several of his multi-year grant agreements.....But Vilar's $25 million "gift" to the Berlin Philharmonic, which he made (or didn't make) in October 2001, has created the most controversy, and it also makes Vilar whine the most.....On the one hand, the folks in Germany seem to have a pretty clear idea what Vilar committed to last October: "A youth program" designed "to attract young people to classical music" that was scheduled to begin in 2002*.....According to a very specific German press release, Vilar "indicated that his donations would be tied to the progress of the youth program...The project will involve introducing orchestral music to children and teenagers through school concerts and guest appearances...The Internet will also play a significant role in the program"*.....For his part, Vilar says that no specifics have been discussed, and there is no deal.....Vilar claims that he went public with the youth program only because he was in Berlin on other business, and his October "announcement" was only an "intent to announce" the gift once he and the Berlin Philharmonic had gotten beyond the "concept" stage.....Blame it on language differences, jet lag, or strong beer, but someone's version of the facts is way off, and the Philharmonic still hasn't received a penny of Vilar's money.
* "The Week in Germany," a publication of the German Embassy in Washington, DC, October 26, 2001
** "Giving Till It Hurts," Diane Haithman, Los Angeles Times, July 9, 2002

Kaptain Kelmoore

The firm that manages the Kelmoore mutual funds has just issued an investment comic book.....In the first book, "Kaptain Kelmoore" explains the finer points of puts and calls to "Citizen Investor Jane".....In the second book, FundAlarm has learned that Jane will accuse Kaptain Kelmoore of being a "patronizing sexist".....And there's still more trouble on the horizon: Apparently miffed by the competition, Cap'n Crunch has issued a statement blasting Kaptain Kelmoore as "a fat Jay Leno lookalike in tights".....According to the Cap'n, he's currently negotiating with "several" undisclosed parties who are interested in starting a family of Crunch mutual funds....."Then I'll show that Kelmoore fellow what it means to be a real Cap'n."

Cap'n Crunch

Wrong person for a holier-than-thou quote? According to Jerome Dodson, who runs the Parnassus Fund, accounting scandals have made members of his firm highly cautious about the stocks they select for investment....."If there is a hint of an accounting problem at a company," puffs Dodson, "we would probably avoid the stock"*.....Dodson doesn't provide a time limit for his ban, which is smart, since he and his fund have had their share of nasty headlines and litigation.....Here's how the SEC describes part of a 1998 case in which it imposed sanctions on the Parnassus Fund:

"In one action...the [Parnassus] fund's directors continued to fair value a portfolio security at its last available NASDAQ market quotation for a significant period of time, notwithstanding that the directors knew, among other things, that the security had been de-listed from the NASDAQ, the issuer had experienced continuing losses and repeatedly failed to meet income projections, and actual sales prices during the period were lower than the fair value used by the directors to calculate NAV."

By Dodson's standard (a "hint of an accounting problem"), it looks like he would have to avoid his own fund.
* "Bush's Tough Talk Leaves Investors Wanting Action," The Wall Street Journal, July 10, 2002

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Samuel Isaly runs Eaton Vance Worldwide Health Sciences, and Ed Owens runs Vanguard Health Care.....Over the past five and 10 years, Isaly's fund has performed well, but Owens' fund has performed even better......The intensely competitive Isaly isn't happy about this result, so he's come up with a unique spin: "If you add back our expenses, we are clearly ahead of [Vanguard Health Care]"*.....A quick review of the numbers shows that Isaly's conclusion is probably correct, but so what?.....Do we now give Owens an opportunity to recompute his performance by eliminating all of the bad stock picks that he made on Friday afternoons?....A portfolio is a portfolio, expenses and all, and Isaly (who drives his staff relentlessly) would never accept this kind of mental sloppiness from one of his employees.....If Isaly wants to beat Owens in the real world -- the only way that counts -- Isaly should put pressure on Eaton Vance to cut expenses, or resign his subadvisory role and hook up with a no-load firm that can cut the fund's expense ratio to his satisfaction.....Even better, now that Isaly has publicly identified his fund's expenses as a performance concern, the directors of Worldwide Health Sciences should step in, and negotiate a better expense deal for the fund's shareholders.....If neither happens, Isaly might want to take some lessons in graciously tipping his cap to Mr. Owens.
* "Sam's Club," Charles Butler, SmartMoney, August 2002

What you got for your management fee: The following paragraph is lifted from the Janus Web site.....It appears under the heading "Janus' Investment in Enron," and FundAlarm has added the underlining:

Section 529 college savings plans were born from a relatively obscure provision in the tax code, and they've since become a big business with some equally big benefits....."Individual 401(k) plans" will never be as big as Section 529 plans.....But for the right person, the benefits of this new (and still obscure) retirement plan can be substantial.....Basically, an individual (a.k.a. "one-participant") 401(k) plan is designed for the sole business owner and spouse who operate through any kind of business structure (corporation, sole proprietorship, or partnership).....Administrative requirements are minimal, contribution rules are flexible, and contribution limits are considerably higher than other retirement plans (such as the SEP and SIMPLE) currently available to owner-run businesses.....The advantages of an individual 401(k) can be especially dramatic for relatively low-grossing, sideline, or part-time businesses -- for example, if you earn $20,000 from your business, you can contribute up to $16,000 to an individual 401(k).....Currently, only a few fund companies (including Scudder, Pioneer, John Hancock, and AIM) will help you start an individual 401(k) and, as far as we know, all of them require you to invest your 401(k) in their load funds bought through a "financial adviser".....But Fidelity is reportedly moving into this area, and Fidelity will undoubtedly sell directly to individual business owners and offer a much wider fund selection.....In the meantime, if you want to learn more about this vehicle, the Scudder Web site has the best information.....When you get to Scudder.com, scroll down to the link that reads "Introducing Scudder Personal(k)."
Sources: Scudder Web site, Kiplinger's (August 2002), SmartMoney (August 2002)

Briefly noted:

"Our goal is always to be as forthcoming as possible, and we want all sources of information on team management to be consistent and clear. Therefore, we will also be adding the names of the Portfolio Leaders and Portfolio Members to prospectuses going forward."

With these words, Putnam recently ended its Hide the Manager adventure.....As you may recall, several months ago Putnam decided to stop listing individual members of management teams in its fund prospectuses.....Putnam's decision came in for a flood of media criticism and, we hope, lots of angry words from the people who own and sell its funds.....FundAlarm reader David Snowball writes to ask how Putnam's original decision to hide the names of its managers relates to the firm's goal "always to be as forthcoming as possible".....We might also note that any problems with the consistency and clarity of Putnam's information were entirely self-inflicted.

Giving credit where it's due: Beginning immediately, the AIM funds will identify the lead- and co-managers of each mutual fund in its prospectus (previously, AIM listed only the managers' names, without indicating their responsibilities).....The prospectus will also direct shareholders to the AIM Web site, which will provide information about the analysts who support each fund -- something that we can't recall seeing at any other fund.....According to an AIM spokesman, "A shareholder has a right to know that [information]...Sometimes managers perform well, and at some point, they may not perform well. But if they leave, that change should...be broadcast to the shareholder. That's an important piece of information."
"AIM funds will highlight more about stock pickers," Reuters, July 1, 2002
"Is it too late to make a change?"

In early 1998, Morgan Stanley rolled out a fund that was supposed to invest in the "best ideas" of its stock analysts.....Do we need to tell you that it didn't work out?.....Even against the relatively lame international benchmark, Morgan Stanley Competitive Edge Fund - Best Ideas Portfolio has been a dismal performer.....Now, Morgan Stanley has decided to revamp its fund (to a plain-vanilla, worldwide portfolio), and change its name, to Morgan Stanley Global Disadvantage.
(OK, you jokers, that's Advantage, not Disadvantage.)
According to a recent survey, 30 out of 33 top-ranked mutual fund managers base their investment decisions, in part, on executive pay practices at they companies they are investigating*.....Meanwhile, of course, none of those managers has ever revealed how he or she is compensated, and probably never will.....If you're sick and tired of corporate double standards, and you have room for one more, how about adding this one to your list?
* "Fund managers scrutinize CEO pay," Craig Tolliver, CBS.Marketwatch.com, July 1, 2002
The ProFunds family of funds is run by three directors.....According to recent SEC filings, none of these directors, including chairman Michael Sapir, owns a single share of any ProFunds offering.....You'll find a similar situation over at the Monterey Murphy New World funds.....There, none of the five directors owns a single fund share, including fund namesake and tireless technology huckster, Michael Murphy.
"Looking After No. 1," John Shipman, Barron's, July 8, 2002
Putnam says that it has hired "consultants" from "government intelligence agencies" to enhance the interviewing techniques of Putnam's stock analysts.....According to a Putnam spokesman, training analysts to spot signs of deception is "one of a number of tools" that Putnam is making available to its professional staff*.....Just to be on the safe side, we've learned that Putnam is also providing each analyst with a copy of Mattel's Lie Detector game, which first appeared in the early 1960s:

Reliable sources tell FundAlarm that even the toughest corporate executives will "turn to jelly" when confronted with the Lie Detector probe and truth meter:

* "Putnam Analysts Being Trained to Spot Corporate Lies," John Shipman, Dow Jones Newswires, July 17, 2002
Vanguard Total Bond Market Index has had a tough year, and many other bond index funds have suffered as well.....The major culprit is an underlying benchmark (Lehman Brothers Aggregate Bond Index) that has suffered an unusually high percentage of downgrades in corporate bond ratings.....As bonds are downgraded, they are often quickly dropped from the underlying index, but it can take the managers of index funds considerably more time to purge the offenders.....Meanwhile, downgraded bonds sit rotting in the index fund, and performance suffers relative to the benchmark.....For the 12 months ended June 30, 2002, Vanguard Total Bond Market Index trailed the underlying Lehman Brothers index by an astonishing 144 basis points (7.19% vs. 8.63%).....Over the long-term (five or ten years), the Vanguard fund has essentially trailed the Lehman index by its expenses (currently 22 basis points), so these huge, short-term tracking errors are probably a shock for many Vanguard investors.
"Index Funds Don't Always Mirror What They Should," Richard A. Bravo, Dow Jones Newswires, July 16, 2002
The soon-to-arrive Columbia Thermostat Fund is perhaps the worst-named fund since the Gabelli Global Interactive Couch Potato Fund (which was renamed Gabelli Global Growth in early 2000).....Columbia Thermostat will be a contrarian fund of funds, managed by Ralph Wanger's crew, and it will draw upon five stock and three bond funds within the Columbia/Liberty families.....According to SEC filings, the fund will move among those stock and bond funds based on the level of the S&P 500 stock index: When the S&P 500 index is high (defined as 1600 or more), the fund will be 100% invested in fixed income, and when the index is low (defined as 650 or less), the fund will be 100% invested in stocks (at the end of July, the S&P 500 hovered around 900).....So what's the story behind the odd name?.....Again according to SEC filings, the name was chosen because "the temperature in your house is run by a single rule; your thermostat turns on the furnace if your house is too cold or turns on the air conditioner if your house is too warm. This fund works the same way".....We say, give those marketing guys an extra week off!
moneycentral.msn.com, July 22, 2002
Since September 2001, the once-red-hot Firsthand funds have fired a total of five stock analysts, including three analysts who were released last month*.....Inasmuch as the number of stocks owned by the various Firsthand funds isn't shrinking in proportion to the analyst staff, it's reasonable to assume that the remaining Firsthand analysts are:

(a) Covering more stocks
(b) Following stocks they know little about
(c) Hurriedly updating their resumes
(d) All of the above
We vote for (d), and it's another reason to be cautious if you expect the tech leaders of the late 1990s to lead the way out of our current tech doldrums.
* "Firsthand Funds Again Swings the Ax," Beverly Goodman, TheStreet.com, July 15, 2002

Mixed message? FundAlarm reader "Brian" recently received two communications from Vanguard.....Communication #1 was the semiannual report of Vanguard Explorer, which contained the following sensible message:

" As an investor, you cannot control how the financial markets perform. But there are vital variables that you can control...You can limit the risk in your portfolio by diversifying your holdings. And you can control the investment costs you incur."

Communication #2 arrived about the same time, and it concerned Brian's SIMPLE retirement plan:

"Effective July 1, 2002, the SIMPLE IRA custodial fee will increase to $25 for each mutual fund you hold in your plan...If you want to consolidate your plan assets to reduce your total fee, you may exchange assets any time...."

As Brian says, "I find it interesting that in my semiannual report Vanguard is encouraging me to limit my risk by diversifying, and to limit my expenses by using Vanguard. And then, in my retirement plan, Vanguard raises my fees, and invites me to become less diversified in order to avoid their new $25 per-fund charge."

iFund founders still dLuded: The IPS iFund is a shareholder-managed mutual fund that has been on a FundAlarm death watch almost since its inception in December 2000.....A recent article provided some additional tidbits about this supremely dumb fund idea.....Currently, the iFund has about 35 shareholders, who have invested an average of about $2,600 each ($90,000 total).....According to one IPS executive, the benefits of the fund's "emergent intelligence" won't really begin to emerge until the fund has between 200 and 500 shareholders.....IPS has spent about $500,000 to design and operate the iFund, and the head of IPS says that he intends to keep the fund going "forever"*.....Let's see: If the iFund gets another 200 shareholders, and each invests the minimum $500, fund assets will balloon to about $200,000.....With a 1.40% management fee, IPS will rake in about $2,800 a year on its half-million dollar investment, which works out to a return of about 0.56% (although some of that money must be used to cover fund expenses).....We always thought that fund managers were supposed to make intelligent decisions about investing capital, but we're probably just bFuddled.
* "iFund Experiment Generates Soft Returns, Hard Feelings," Karen Damato, The Wall Street Journal, July 8, 2002

From the IPS Funds Web site:

Uh, that's true guys, but here's a heads-up: The article trashes you.
Mario Gabelli, head of the Gabelli funds, earned $47 million in 2001, which was more than double the cash compensation of any other fund executive at a publicly-held company.....In the category of "Highest Pay for Unknown and/or Mediocre Funds," the easy winner was Lawrence Fink of Blackrock, with $9 million of compensation.
Source: fundaction.com, July 7, 2002

Value manager Nicholas Gerber has done a great job at the flagship Ameristock fund, but in May 2001 we expressed some reservations about his new offering, Ameristock Large Company Growth:

"Gerber has no experience as a growth manager, and the growth offering seems like a half-hearted attempt to be all things to all people -- exactly what Gerber hasn't been over the past five years, and one of the reasons he's been so successful"

It appears that others felt the same way, too: Ameristock Large Company Growth, with only about $500,000 in assets, was recently liquidated.

A sign of the times: A new company called ReFlow has nothing to do with plumbing, and everything to do with mutual funds that are experiencing "net redemptions" (i.e., shareholders bailing out like crazy).....A mutual fund facing net redemptions must raise cash, either by selling shares that it owns or drawing on a bank line of credit (if it has one).....ReFlow provides a third alternative: It will advance cash to a fund, for a fee, and provide a temporary parking place for the fund's shares.....As soon as the fund's cash flow turns positive, ReFlow will require the fund to buy back its shares.....ReFlow claims that this transaction doesn't trigger a taxable event, and it can cost less than any other cash-raising alternative.

And you thought phone solicitors were annoying: Japan's Asahi Bank has hired six former female flight attendants to sell mutual funds and government bonds to people who use the bank's automated teller machines.....According to one bank official, "We used to just let our clients run off after they used ATMs; now we can fence them in with ex-stewardesses who are good at talking to customers".....Wait, it gets worse: The bank also provides its "lobby ladies" with hand-held computers that reveal how old each customer is, and how much they have on deposit.
Bloomberg, July 5, 2002; thanks again to "Ben," a tireless source of good information and odd little items

A July 13 posting by "Mark" on the FundAlarm Discussion Board:

If you had bought $1000.00 worth of Nortel stock one year ago, it would now be worth $49.00.

With Enron, you would have $16.50 of the original $1,000.00.

With Worldcom, you would have less than $5.00 left.

If you had bought $1,000.00 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, then turned in the cans for the 10 cent deposit, you would have $214.00.

Based on the above, my current investment advice is to drink heavily and recycle.