Dear friends,

The study of words is always fascinating. Take "doldrums," for example. Its technical meaning derives from navigation and describes a band from 5-10 degrees on either side of the equator. "The doldrums were notorious in the days of sail, because vessels could become becalmed there for many days and even weeks" (Kemp, Oxford Companion to Ships and the Sea, 1994). It is "a region of unbearable calm, broken occasionally by violent squalls" (E.F. Knight, Cruise Falcon, 1887). Investors, by analogy, refer to "the summer doldrums." That’s the period in summer when investment managers all go on vacation, market volume drops dramatically, and concurrently volatility rises.

But where does the word come from? We don’t exactly know. Etymologists believe that the "dol" or "dold" part is simply a variation of the modern word "dolt" and carries with it suggestions of dull, listless, sluggishness. The "drum" or "rum" part is trickier, but folks tend to view it as a sort of import from the word "tantrum." And so we end up in the middle of the summer with a slack-witted tantrum, unable to make progress and still beset by violent squalls.

Yeah, that sounds about right.

Good question. Not my question, but a good one nonetheless. The question was raised on the SeekingAlpha blog, July 20, 2009 and highlighted on the FundAlarm Discussion Board by tgeno. The blog’s author combined two observations (Mr. Winters says the market is rife with bargains and Mr. Winters is nonetheless raising cash) to draw the ineluctable conclusion: "that Winters expects greater market volatility ahead… possibly even another Crash. . . . I wouldn’t be surprised to see something of a repeat of last year’s September-November performance. Looking at David Winters portfolio, I’d say he’s thinking the same thing."

Sobering, if true. The problem with the analysis is that it assumes that the Wintergreen (WGRNX) portfolio is unusually cash-heavy and that the best explanation for that presumed over-weight is Mr. Winters’ expectation of a crash.

We can examine the first assumption by looking at the fraction of Wintergreen’s portfolio devoted to short-term investments. You can find those in Form N-Q filings with the SEC. Since inception, short-term investments have been:

Conclusion: maybe a little high but not quite "let’s stuff it in the mattress" high.

The only person capable of addressing the second assumption (Mr. Winters’ intent) is, well, Mr. Winters. Being the eternal naïf, I simply wrote him and asked if he could answer the question posed in the article title. I’ve spoken with Mr. Winters before and he comes across as both brilliant and ... well, nice. My hope was for something like a two-line response. What he offered was a conference call with himself and some of his associates. (I felt slightly gobsmacked and, I’m afraid, sounded like it during the call. Sigh.)

His short answer to the question: nope.

Elements of a longer answer:

Panicked: no. Cautious: yes. Which probably explains Wintergreen’s five-star rating and consistently superior returns.

The NASDAQ and Claremont Investment Partners, the adviser to the Industry Leaders (ILFIX) fund, have introduced a large cap index which tracks the fund’s proprietary underlying strategy. According to a NASDAQ press release, "The index, The NASDAQ OMX Industry Leaders Index (NILI), will enable investors to track the performance of these companies that are taking a leadership role in their industry and the market."

While Industry Leaders has done only "okay" in the recent junk-led rally, its long-term record (a very consistent top 25% over the past 3-, 5- and 10-years) is strong and it’s ideally positioned to serve investors over the years ahead, most particularly if GMO’s contention (July ‘09) that "the easy winner of the cheapest equity sub-category contest is still high quality U.S. blue chips" bears out.

Speaking of Industry Leaders, I made an error in my July profile update. In referring to Virginia Dawson’s role in the fund, I erroneously suggested that she bought the adviser. Wrong. As manager Gerry Sullivan pointed out in a subsequent e-mail:

Sorry about that. We’ve corrected the update.

Janus recently announced the resignation of CEO Gary Black. In a conference call, Janus Chairman Steve Scheid called the circumstances of Black's departure "very amicable," but repeatedly declined to elaborate. For his part, Mr. Black declined to discuss the decision. Though Bloomberg reporters Jef Feeley and Christopher Condon did a consistently splendid job of keeping up with the unfolding mess, much of the financial media reported the departure with little speculation about the cause.

Here’s one bit of speculation: the Emperor and Vader were caught on tape.

As I reported before, Janus lost a $5 million lawsuit filed by former manager Ed Keely. Keely claimed he was due compensation, Janus claimed that they had documents to show he wasn’t, and a Colorado judge claimed that it appeared the documents had been fabricated. In May, a jury sided with Keely. Another trial, on identical grounds, is already on the docket and it’s not hard to imagine some of the 15 other managers who left Janus after Black’s arrival are weighing their options.

If you think back to Janus’s advertising campaign (remember analysts exploring the fiber optic tunnels under the city streets?), you’d conclude that Janus managers came in two varieties: research-obsessed geniuses and visionary geniuses. At about the same time that those ads were running, Janus’s top executives apparently also concluded that Janus managers came in two varieties.

Hyenas. And jackals.

You’ll remember Janus’s stunning fall from the heights. It was the darling of growth investors in the 1990s, crashed at the turn of the century and was implicated by state and federal regulators in (put kindly) improper activities favoring certain large clients over their average shareholders (aka, the market-timing scandal). Chairman Steve Scheid and President Gary Black were brought in "to destroy the culture of entitlement among a handful of former portfolio managers and build a culture that is accountable to all of our constituents" (per Janus representative Shelley Peterson).

Apparently among the things the former managers felt entitled to was the compensation promised in their contracts. Mr. Black disagreed. At trial, former manager Minyoung Sohn reported on a meeting between Black and his managers, at which Black declared, "Yes, I’m violating your contracts, but the company violated my contract, too."

While it’s easy to paint Black as the star villain, emails from Chairman Scheid, released during trial, paint quite a picture:

Your key employees are terrorists? You need to cut portfolio manager compensation now now now? They face "The Wrath of Big Red"? Oh dear.

Ed Keely put something like $2 million of his own money on the line in bringing the two-year suit. Apparently Black was okay with being sued, since he thought the suit would damage the fired employee more than it did Janus. Another e-mail released at trial had Black discussing the prospect that Tom Malley, then-manager of the Janus Global Life Sciences Fund, "would likely sue once departed. That in itself isn't bad since folks will think he was let go."

At trial, Keely alleged that Janus owed him about $4.8 million in compensation but also sought $5 million in punitive damages because Janus engaged in fraud by allegedly granting a secret side deal to Scott Schoelzel after vowing to treat all fund managers equally. (If Schoelzel were to disclose the terms of the deal, his compensation "would go up in flames" according to Keely’s attorney.) The jury found that Janus had indeed violated Keely’s contract and engaged in fraud, but chose not to award the punitive damages. They concluded that the fraud was just based on "a series of mistakes . . . a big mess up."

Shelley Peterson, the Janus spokeswoman who continued to paint Keely as the wrong-doer even after the jury verdict, said the Keely case didn’t play a role in Mr. Black’s departure.

I’m not sure, but I think investors should be appalled if she’s right.

Good news and bad from Tweedy, Browne: Tweedy’s second quarter letter to investors reports that Tweedy, Browne Worldwide High Dividend Yield Value Fund (TBHDX, whose name is entirely too long) "finished the 12 months ending June 30, 2009, as the number one performing global large cap value fund in the Lipper universe." Then, on July 29, Tweedy announced the departure of its long-time leader, Chris Browne, who co-managed TBHDX. Here’s the text of their announcement:

Good news and bad from Matthews Asian funds: one of my favorite funds, Matthews Asian Growth & Income (MACSX) is stinking up the joint! Hooray! MACSX is one of the worst performing Asian funds so far in 2009 which is cause of continued celebration on the part of its shareholders. MACSX trails the pack badly whenever the Asian market gets frothy (uhh: Oberweis China OBCHX is up 86% in the first seven months of 2009 and that’s still not enough to make it the top-performing fund) then rushes to the head of the pack in the ensuing meltdowns.

The math is pretty stunning: in MACSX’s three worst relative-performance years (bottom 13% in 1999, bottom 8% in 2007 and bottom 4% in 2009), the fund returned an average of 30% a year. In its three best relative-performance years (top 1% in 2000, top 3% in 2002, top 1% in 2008), it lost 7% a year. Excluding 2008 as a horrendous anomaly, its absolute returns in its four worst relative years has been an entirely respectable 10%/year.

I asked the manager, Andrew Foster, whether the fund has been able to manage its inflows since reopening about a year ago. He notes that the fund has grown by $500 million (to $1.6 billion) in 2009. He’s monitoring inflows but not yet concerned:

In addition, Mr. Foster just stepped aside from the role of acting CIO, a position that he’s held since January 2008. In a parallel to the case of Chris Browne at Tweedy, Browne, Mark Headley’s health forced him to step away from his day-to-day responsibilities with the firm. Mr. Headley’s health is, I’m happy to report, much improved but his extended illness gave him cause to reconsider how best to spend his time. As a result, on July 1, Matthews announced the appointment of William J. "Bill" Hackett as CEO and Robert J. Horrocks, PhD as CIO. Those changes then free Mr. Foster to return to full-time portfolio management.

The deathwatch is getting a bit dull: for the first month in a long time, the number of reported fund liquidations was minimal (and far below the number of fund launches). Old Mutual Clay Finlay Emerging Markets Fund, Optique Large Cap Value Fund, the Optique Small Cap Value Fund and the Optique Intermediate Fixed Income Fund have all left their worldly cares (and shareholders) behind. I’m only slightly-embarrassed to report that I didn’t even know that the poor dears existed. On a happier note, the Free Enterprise Action fund (a long-standing silly idea) has merged into the Congressional Effect fund (a new one).

With respect,

David