Highlights and Commentary
By Roy Weitz
(Originally posted August 1, 2006)
[Archive Table of Contents]

Mirror, mirror, on the wall, who's the fairest fund manager of all? We'd have to say that it's Scott Schoelzel, manager of Janus Twenty, who appears below in a photo from the Janus Web site:



We recently submitted this photo to MyHeritage.com, a new Web site that scans facial features, and claims to match those features to a database of celebrity faces.....From the universe of male celebrities, Schoelzel registered his best match with former Vice President Dan Quayle.....But among all celebrities, male and female, MyHeritage.com says that Schoelzel's ultimate facial soulmate is actress Gwyneth Paltrow:


Congratulations to Schoelzel, we guess.....Moving on to other managers, Mario Gabelli's face (below) matches up best with Bob Hope, which makes for a nice symmetry, since both are essentially performers:


David Dreman's face (below) matches up most closely with Kevin Costner, which is not bad (for Dreman), but it looks to our unscientific eye that Count Chocula might be an even better match:


As for Roy: One of my photos matched up best with Hugh Jackman, and I should have stopped there:


But of course I didn't stop, and a second photo paired me with Johannes Rau, the former President of Germany:


Maybe Gwyneth Paltrow isn't such a bad match after all.


Principal Financial Group is acquiring WM Advisors Inc., the Washington Mutual subsidiary that runs the WM mutual funds.....Principal says that it will be (drumroll!) the 43rd-largest U.S. mutual fund family after the deal closes this fall and we'll take their word for it, since just about nobody cares.


There's always a lot of data available on mutual fund cash flows (i.e., money going in and out of individual fund companies, as well as the fund industry in general).....We've always considered this data irrelevant to individual investors, so we've never talked about it, but a recent article at the Web site of Investor's Business Daily was impossible to ignore.....The article starts out by noting that investors pulled $8.4 billion from stock mutual funds in June of this year, making June 2006 the worst month for stock-fund outflows since early 2003.....The article goes on to note:

"June's net outflow was the first since February 2003 when investors took a net $10.88 billion out of stock funds. It should be noted that a substantial rally began in March.

Even that number pales in comparison with the net outflow of a record $52.61 billion in July 2002, near the tail end of a three-year bear market.

The most money ever put into stock funds in a month was $53.68 billion in February 2000, just as the stock market was hitting a bull-market high and just before the S&P 500 began a 50% plunge and the Nasdaq was about to see 75% lopped off its value."

In other words, for the last three major turning points in the stock market, mutual fund investors (in the aggregate) have gotten it wrong all three times.....We have no idea where the stock market will go from here, but the odds would seem to favor an upturn.
"Mutual Fund Investors Flee Equities," Ken Hoover, investors.com, July 28, 2006


We're still astonished by the number of mutual fund managers who don't have even a penny invested in their own funds.....After all, how tough can it be for any well-paid manager to put together the fund's minimum investment, and at least pretend that he or she's in the game along with the fund's shareholders?.....Shouldn't that be the least we expect of any fund manager, just as we expect them to read English, add two numbers together, and avoid drooling on themselves at lunch?.....You might think so, but try telling that to the folks at TIAA-CREF, where the managers of 17 mutual funds (out of a total of 24 funds studied) don't have any money invested alongside their shareholders.....Or how about the managers of 36 Morgan Stanley funds, 21 of whom also don't have a penny invested in the portfolios they work on every day?.....The table below shows several other major fund firms that simply don't get it when it comes to fund manager investments, and several fund firms that do seem to get it, in a fairly big way.

Which fund managers invest alongside their shareholders?

Fund familyAvg manager
investment		Total #
funds studied		# funds with
no manager
investment 		# funds with
manager investment
over $1 million
The five worst fund families:
American Century $136,000 32110
Federated$104,000 19130
Bridgeway$69,000 116 0
Morgan Stanley$66,000 36210
TIAA-CREF $10,000 24170
The five best fund families:
Janus $933,000 9 0 5
Royce $877,000 130 6
Artisan $712,000 4 0 1
American Funds $597,000 9 0 0
T. Rowe Price $471,000 271 6

You can find your own manager's personal investment in your fund's Statement of Additional Information (SAI).....Search the SAI for the manager's last name, and you should end up at the relevant section after a click or two.
Table source: "Another Way to Assess A Mutual Fund," Eleanor Laise, The Wall Street Journal, July 26, 2006; the table is based on research by Morningstar


New-fund guru David Snowball notes that the State of Missouri recently created a terror-free fund, run by State Street Global Advisors, that will be responsible for investing the money of various Missouri cultural groups.....David wonders whether the folks who invested in Van Wagoner Emerging Growth now wish that terror-free investing had been available for them:




American Funds Growth Fund of America recently had about $145 billion in assets under management, which is about fifty-percent larger than any other U.S. stock mutual fund has ever been.....So, just how large is a $145 billion fund?
  • Growth Fund of America ("GFA") recently owned about $3.4 billion of Google stock, which was the fund's largest holding. This position in Google, by itself, was larger than the total assets of any single technology fund (T. Rowe Price Science and Technology, the largest stand-alone tech fund, recently had about $3.2 billion under management and owned 65 different stocks).

  • GFA recently owned about $2.9 billion of stock in Roche Holding, a pharmaceutical and medical research company. This position in Roche, by itself, would have made GFA the second-largest healthcare fund in the U.S., behind only Vanguard Healthcare.

  • GFA recently owned about $1.74 billion of stock in Fannie Mae. This position in Fannie Mae, by itself, would have made GFA the second-largest financial fund in the U.S., behind only JHancock Regional Bank.

  • GFA recently owned just over $2 billion of stock in Microsoft. This position in Microsoft, by itself, was almost four times the size of the entire Fidelity Select Software fund.
Ownership data for stocks, above, derived from percentages that appeared on the American funds Web site (July 23, 2006)


These days, if you want a mix of stock and fixed-income investments in a single mutual fund, much of the action revolves around lifecycle funds, and the owner of a traditional balanced fund might be starting to feel like an 8-track tape deck in a DVD world.....Which raises the question: Is there still a place for balanced funds?


In other words, a balanced fund still can make sense in your portfolio if you (1) like to keep things relatively simple, (2) like to know exactly who's managing your money, so you can hold them accountable, (3) own, or plan to own, additional funds, and (4) aren't interested in exposure to multiple asset classes.....If most of these conditions apply, you'll probably want to keep your balanced fund, or buy more of it.....If few or none of these conditions apply, you might want to jettison your balanced fund in favor of a lifecycle fund, keeping in mind that it's probably better to own two lifecycle funds, from two different companies, instead of putting all your marbles in one (in other words, diversification is a good idea, even with lifecycle funds)......At this point, we should say a word about lifestyle funds, which sometimes can look like balanced funds, but also can be structured like lifecycle funds (i.e., as funds-of-funds).....Lifestyle funds tend to be defined by their investment approach (i.e., conservative, moderate, aggressive), and they keep a more-or-less constant mix of underlying stocks or funds.....But if a balanced fund seems right for you, you probably have no need for a lifestyle fund.....Likewise, if a lifecycle seems like the way to go, you probably have no need for a lifestyle fund.....In other words, lifestyle funds are the odd fund out: Pretty much the only time a lifestyle fund might make sense is in a 401(k) plan, if a balanced or lifecycle fund isn't available.


Every time we talk about balanced funds (above), we make the following point, so we should make it again this time: If you're comfortable selecting mutual funds for yourself, you can create the equivalent of a balanced fund simply by mixing a stock fund and a bond fund in the desired proportions, and rebalancing the mix as necessary (or as your personal conditions change, which is more than any off-the-shelf balanced fund can do).....If you select the components carefully, your home-grown balanced fund might even save you some money, in the form of a lower overall expense ratio.


In this month's edition of the FundAlarm Annex, David Snowball talks about some of the challenges facing new mutual funds in general.....David also zeroes in on three specific offerings: Masters' Select Focused Opportunities, Delphi Value, and Mairs and Power Balanced.....Even if you're not currently in the market for a new fund, we think David's commentary is well worth your time: It's entertaining, it discusses important issues that affect all fund investors, and it shows you how the mind of a smart fund-guy works.....If you're already a smart fund-person yourself, David's writing will challenge you.....And if you'd like to become a smart fund-person, the best way is to pick the brain of someone who already is.....In either case, David's your man, and the Annex is the place to be.


We're changing the thresholds for three of our benchmarks: For the past several years, FundAlarm's benchmarks for domestic stock funds have been as follows:

A fund with a median market cap in this range......has been assigned to this benchmark
Up to $1.5 billionSmall-cap
(i.e., Vanguard Small Cap Index fund)
From $1.5 billion up to $5.0 billionMid-cap
(i.e., Dreyfus Mid Cap Index fund)
$5.0 billion and aboveLarge-cap
(i.e., Vanguard 500 Index fund)

Beginning this month, the market capitalization range for the small- and mid-cap benchmarks has been slightly increased, and our benchmarks are now structured as follows:

A fund with a median market cap in this range......is now assigned to this benchmark
Up to $2.0 billionSmall-cap
(i.e., Vanguard Small Cap Index fund)
From $2.0 billion up to $9.0 billionMid-cap
(i.e., Dreyfus Mid Cap Index fund)
$9.0 billion and aboveLarge-cap
(i.e., Vanguard 500 Index fund)

There are several reasons for these changes: Over the years, the median market cap of the small-cap benchmark has been creeping up, and this month, for the first time, the median market cap of Vanguard Small Cap Index itself exceeds the former threshold of $1.5 billion.....By moving the threshold higher for the small-cap benchmark, the mid-cap benchmark is inevitably affected.....Also, after a careful review of all funds that were previously classified as small- and mid-cap, we concluded that raising the small-cap threshold to $2.0 billion and the mid-cap threshold to $9.0 billion would properly move a number of former mid-cap funds into the small-cap category, and a number of large-cap funds into mid-cap territory.....Bottom line: 127 mid-cap funds from last month are now included in the small-cap category, and 310 large-cap funds from last month are now considered mid-cap.....In some cases, former NO-ALARM (Honor Roll) funds may appear to be much weaker performers this month, simply because of the benchmark change (this is especially true of former large-cap funds that are now classified in the better-performing mid-cap category).....For a list of all funds this month that have been affected by these benchmark changes, please see the accompanying page.


William Schaff, who used to run Bay Isle Financial, and also subadvised the now-defunct Berger Large Cap Value, has started a new firm called Phocas Financial Corporation (according to Morningstar, the firm will be rolling out a small cap fund and a real estate fund this September).....In case you're curious, FundAlarm's Linguistics Department informs us that "phocas" is a Native American word meaning "weird company name."



Roy's Excellent Market-Timing Adventure:
Month Ten: We see double digit returns. Unfortunately, there's a minus sign in front.

On June 29, Intelli-Timer advised me to move out of my cash position and into a "long" position in OTPIX (ProFunds OTC Inv), which is where I stayed for the entire month of July.....Unfortunately -- and this is beginning to sound like a broken record -- this was the wrong move to make, and my account lost another 5.66% during the month of July, as follows:

MonthDate of
signal
(1) 		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, 200510/16LongOTPIX$5,000.00$5,080.09 +1.60%+1.60%
November, 2005No new signalLong still in effectOTPIX$5,080.09$5,484.89+7.97%+9.70%
December, 200511/29ShortSOPIX$5,484.89$5,381.32-1.89%+7.63%
January, 2006No new signalShort still in effectSOPIX$5,381.32$5,378.51-0.05%+7.57%
February, 20061/29LongOTPIX$5,378.51$5,186.30-3.57%+3.73%
March, 2006No new signalLong still in effectOTPIX$5,186.30$5,193.62+0.14%+3.87%
April, 2006No new signalLong still in effectOTPIX$5,193.62$5,257.84+1.24%+5.16%
May, 2006May 16/
May 25		Cash/
Long		OTPIX$5,257.84$4,938.37-6.08%-1.23%
June, 2006June 12CashNA
(Cash)		$4,938.37$4,659.14-5.65%-6.82%
July, 2006June 29LongOTPIX$4,659.14$4,395.56-5.66%-12.01%
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.


Just for fun (?), I went back to May 16, and took a look at where my account would have been at the end of July if I had done exactly the opposite of what Intelli-Timer instructed me to do over the past two-and-a-half months (although, for purposes of this hypothetical, I did follow Intelli-Timer's "cash" signals).....Sure enough, had I gone short (i.e., bought SOPIX) both times Intelli-Timer said to go long (i.e., buy OTPIX), I would now have $5,570.59 in my Intelli-Timer account instead of $4,395.56 -- a 31% improvement on the actual system, achieved by ignoring it.

Here's the performance of my market-timing account compared to the usual FundAlarm benchmarks:

Current month
(6/27 thru 7/26)		Since inception
(10/17/05)
Schwab International Index Inv (SWINX) 3.40% 16.74%
Vanguard Small Cap Index (NAESX) -1.18% 9.39%
Dreyfus Mid Cap Index (PESPX) -1.06% 8.31%
Vanguard 500 Index (VFINX) 1.53% 8.02%
Vanguard Balanced Index (VBINX) 1.22% 5.53%
Roy's market-timing account -5.66% -12.01%
Sorted by return "Since inception"; benchmark returns assume that dividends are reinvested


I think it's now fair to officially designate the performance of the Intelli-Timer system as "disastrous".....And what does the Intelli-Timer Web site have to say about the performance of its system so far this year?.....Basically nothing, since the last signal shown on the company Web site was issued January 29.

To be continued...


Last month marked FundAlarm's 10th anniversary, and we reprinted some of our favorite items from the first five years of Highlights and Commentary.....Below, we've selected a few additional items from the Highlights and Commentary archive, from our second five years.


Robert Kiyosaki was saying idiotic things back in 2002 and, last time we checked, he's still saying them (from the February 2002 Highlights and Commentary):

Robert Kiyosaki is the author of Rich Dad, Poor Dad, and four other financial books that have sold over 11 million copies in 40 languages.....According to a recent interview with TheStreet.com, Mr. K. believes that 401(k) plans and mutual funds are "so risky, I don't think people will be able to retire on them.....Among Kiyosaki's other revelations: "Over the last several months, mutual funds have lost huge amounts of money,".....Mr. K says that he doesn't invest "without insurance, and mutual funds have got no insurance from a stock market crash"....Kiyosaki predicts that mutual funds will lose money again and, therefore, people "making less than $100,000 per year" should stay away from them.....Instead of 401(k)s and mutual funds, Kiyosaki likes real estate, both for himself and for the average Joe, because "in real estate, my banker requires me to have insurance from catastrophic losses".....For his personal portfolio, Mr. K. also likes options (currently, naked puts on gold stocks), and "controlling" interests but not "ownership" (whatever that means) in operating corporations, because he thinks he can't be sued.....Is this the biggest financial nonsense we've ever heard?.....We're reluctant to declare an all-time winner, but it certainly ranks near the top both in ignorance and destructive potential.....Kiyosaki claims to be worth "anywhere between $50 million and $100 million, depending on the day".....Even if we accept the low end of that range, Kiyosaki strikes another blow for the positive correlation between wealth and intelligence.


Speaking of idiotic things that haven't changed, we railed against 12(b)-1 fees back in 2002 and the current situation is pretty much the same (from the May 2002 Highlights and Commentary):

In 1980, the SEC first allowed mutual funds to charge 12(b)-1 fees, and it was potentially a win-win situation: Cash-strapped fund companies could temporarily pass their marketing expenses through to shareholders, fund assets would grow, and shareholders would be rewarded with lower expense ratios due to economies of scale.....Today, 12(b)-1 fees have become a grab-lose situation: Hugely profitable fund companies collect about $10 billion a year in 12(b)-1 fees,* investors receive virtually no tangible benefits for their money, and this money-sucking monster has become a permanent, growing fixture in the mutual fund industry.....At a recent meeting of the Investment Company Institute, the mutual fund trade association, SEC Chairman Harvey Pitt made some noises about investigating the uses and abuses of 12(b)-1 fees, but the chance for any meaningful reform in this area is virtually nil.....Simply put, most of the fund industry is propped up by 12(b)-1 fees.....Without these fees (for example) there wouldn't be any "B"-share load funds, and no-load fund companies wouldn't be able to cover the costs of selling their funds through mutual fund supermarkets like Schwab OneSource.....If 12(b)-1 fees are ever to be brought under control, pressure will probably have to come from the marketplace -- in other words, from individual fund investors.....And since few investors other than Vanguard shareholders seem to care about controlling fund expenses, we might as well learn to love throwing our money away on 12(b)-1 fees.....They're going to be here for a long, long time.


I seem to vaguely recall this scandal thing (from the October 2003 Highlights and Commentary):



If you read FundAlarm, there's a good chance that you also follow other financial news, and if you follow other financial news there's almost no chance that you missed the recent mutual fund scandal. For the few readers who might be returning from Camp X-Ray, or were otherwise out of circulation during September, here's what happened: New York Attorney General Eliot Spitzer uncovered evidence that four mutual fund companies essentially sold certain trading breaks to a large hedge-fund investor. In the process, Spitzer alleges that all of the fund companies either broke the law, broke their own internal rules, or both. Based on e-mails that Spitzer obtained, Bank of America's Nations funds allowed the hedge fund (Canary Capital Partners) to buy mutual funds for up to five hours after the stock market closed, and the hedge fund was still obtain the net asset value for the preceding day. This practice is out-and-out illegal. Nations and the other three fund families (Janus, Strong, and One Group/BancOne) also allowed Canary to make market-timing trades in several of their funds. In all cases, the fund companies had written policies that discouraged this kind of trading, and it's safe to say that no ordinary investor would have been able to negotiate the same type of trading privileges.


The following item was originally called "Something old, something new. Regulatory action is long overdue," and it appeared in the November 2005 Highlights and Commentary.....Check back for FundAlarm's 20th anniversary, and we predict that the shameful practice described below will still be going strong.

A recent press release announcing the introduction of Delaware Small Cap Core might have caused your brow to furrow: Why is the press release announcing that Small Cap Core "is now available to investors" [italics added], when the press release also indicates that the fund's "inception date" was way back in December, 1998?.....A close reading of the press release -- a really close reading -- reveals that Delaware Small Cap Core is an "incubator fund," one of the industry's most cynical, most deceptive, entirely legal, and still largely unregulated practices.....For the first six-and-a-half years of its existence, Small Cap Core was in "limited distribution" (typically, this means that only Delaware employees and their families would have been allowed to invest in the fund).....Because Small Cap Core performed reasonably well during its "limited distribution" (i.e., incubation), Delaware allowed the fund to survive, and the fund is now smiling for the public with a fresh new face and a well-worn track record.....If the fund hadn't performed well during its incubation period, it would have been liquidated, and virtually no one outside of Delaware would have been aware of its failure.....This kind of cherry-picking is bad enough, but Delaware Small Cap Core compounds the cynicism and deception: During most of the incubation period, the fund had a different name, different managers, a different style of investing, a more concentrated portfolio, a small and stable asset base, a lower expense ratio, and it didn't extract a 12b-1 fee.....In other words, the current fund is essentially new, yet it's being marketed with a track record that was carefully cultivated under totally artificial conditions.....When a fund comes to market with this kind of history, we offer just two words of advice: "Avoid it".....And when a fund company engages in tactics like this, remember, that company is giving you a clear demonstration of its values, and what it thinks of its customers.


[Top | Home]

FundAlarm © Roy Weitz, 2006