Highlights and Commentary

By Roy Weitz

(Originally posted August 1, 1999) [Archive Table of Contents]

Don't get caught by surprise: This month's FundAlarm database contains 617 funds that have been in existence at least three years, but less than five years.....By definition, none of these funds can be 3-ALARM, but that doesn't mean poor performance should be ignored.....The accompanying page lists all 617 of these funds, and highlights the worst (and best) funds in each benchmark category.....Among the funds that aren't yet 3-ALARM, but should be causing the greatest concern:

Large-cap: - PBHG Core Growth (PBCRX) - Smith Barney Contrarian B (SBMBX) - Smith Barney Contrarian L (SBMCX) - PBHG Select Equity (PBHEX) - Smith Barney Contrarian A (SBMGX) Mid-cap: - Dreyfus Aggressive Growth (DGVAX) - Lighthouse Contrarian (LGFTX) - Merrill Lynch Growth C (MCQRX) - Merrill Lynch Growth D (MDQRX) - Seligman Frontier B (SLFBX) Small-cap: - Safeco Small Co Stock No Load (SFSCX) - Liberty-CrabbeHuson Small Cap A (CHSCX) - RS Partners (RSPFX) - Oberweis Micro-Cap (OBMCX) - Artisan Small Cap (ARTSX) Balanced: - Prudent Bear (BEARX) - CitiSelect Folio 200 A (CFBAX) - CitiSelect Folio 300 A (CFCAX) - CitiSelect Folio 400 A (CFDAX) - Smith Barney Conc Alloc Cons A (SBCPX) International: - Vontobel Eastern Euro Equity (VEEEX) - Guinness Flight Asia Small Cap (GFASX) - Lexington Small Cap Asia Gr (LXCAX) - Warburg Pincus Emerg Mkt Com (WPEMX) - Alliance All-Asia Investment B (AAABX) Specialty: - Gabelli Gold (GOLDX) - RS Global Natural Res (RSNRX) - Van Eck Global Hard Assets C (GHACX) - Van Eck Global Hard Assets A (GHAAX) - Franklin Natural Resources (FRNRX)

1-800-COOKIECUTTER: Richard Sapio is a former water-cooler salesman, bartender, and broker.....He is also the proprietor of 1-800-MUTUALS Inc.....Investors can make a toll-free call to Sapio's company, and one of his telephone consultants will help design a mutual fund portfolio.....For this service, Sapio charges a $375 set-up fee and a 1% annual maintenance fee, which also includes portfolio monitoring and "free annual rebalancing"*.....How good is Sapio's service?.....We took a look at his Web site (www.1800mutuals.com), and we weren't impressed.....The basic problem is lack of flexibility.....1-800-Mutuals offers only five pre-packaged portfolio allocations, and every investor is shoehorned into one of them, whether the investor belongs there or not.....For example, we created a profile for an extremely conservative retiree, and we used the "Investment Blueprint" feature on Sapio's Web site to request a recommended portfolio.....Even though our "retiree" said that she owned only certificates of deposit and money market funds, had no investment experience, and wanted a low-risk portfolio, she was directed to Sapio's "balanced" allocation, which looks like this: How can we say this nicely?.....This is an absurd allocation for a conservative retiree -- 63% in stocks for someone who, as far as Sapio knows, has never owned a stock in her life.....We also tested Sapio's "Investment Blueprint" on the most aggressive investor we could dream up, with the following result: All of Sapio's allocations are heavy on three types of sector funds (health care, technology, and financial services).....This second allocation isn't as wildly inappropriate as the preceding one.....But even for a young and aggressive investor, it leaves much to be desired, since it has no "core" holdings, and huge sectors of the economy are missing entirely.....Is it possible to streamline the process of selecting mutual funds?.....We believe it is, but 1-800-Mutuals isn't the answer.
* "Dial 1-800-Mutuals To Have Some Fund," Mara der Hovanesian, Dow Jones Newswires, July 8, 1999


StockJungle.com recently announced plans for a new series of mutual funds, including the StockJungle.com Community Intelligence Fund.....According to the registration statement, this fund will invest:

"in a diversified portfolio of [U.S.] common stocks...having market capitalizations of no less than $100 million and whose identity has been provided...by visitors to the StockJungle.com website...."

Your eyes are not deceiving you: The Community Intelligence Fund plans to build its portfolio around anonymous postings on a Bulletin Board.....Think about this for a moment.....If you had solid (and presumably legal) information about a company, why would you want to post that information on the Community Intelligence Bulletin Board?.....Because you love mankind, and you believe everyone should have a chance to get rich?.....Because your Mom always taught you to share?.....Or because you hope the Community Intelligence fund will buy the stock that you're writing about, which will drive the price up, which will make your holdings worth more money?.....Perhaps FundAlarm readers will be inspired by the first two noble motives, but we suspect that most people who post on the Community Intelligence Bulletin Board will be driven by the third one: financial gain.....So if you really want to make some money from this fund, forget about investing in it.....Just establish a reputation as a good tipster.....Buy the stock you're touting, preferably one that's thinly-traded (to stay out of trouble, don't forget to disclose your ownership interest).....Then sit back, let the fund push your stock's price higher, and sell out for a nice profit.....Think of it as Front-Running for the Common Man.


The Wonderful World of Work:

Position	Job Performance	Result
Sales clerk	Fails to meet objective standards	Possible discipline, cut in pay, or termination.
Corporate executive	Fails to meet objective standards	Possible discipline, cut in pay, or termination.
Mutual fund manager	93% fail to meet objective standard (S&P 500) over previous three years	Median base salary of $144,500, up 10% from 1998. Median bonus of $133,000, up 22% from 1998.

Source: Managers Get Big Pay Despite So-So Showings, Pui-Wing Tam, The Wall Street Journal, July 20, 1999

The Sassy Dilemma: My dog, Sassy, likes to carry things around in her mouth.....When she's champing on a nylon bone, it seems like nothing could ever dislodge it.....But if I offer her a ball, she considers her options for a millisecond, and drops the bone like it's on fire.....Many mutual funds, especially growth funds, will soon face The Sassy Dilemma.....Under the new Lipper ratings, which go into effect this fall, it has been estimated that over half of all growth funds will see their relative performance ranking drop by at least one quartile.....But if these growth funds choose to classify themselves as "supergroup" funds -- and the choice is entirely theirs -- only 14% would see a one quartile drop, and 13% would actually move up a quartile.....Some cynical observers of the mutual fund scene believe that mutual funds will choose the Lipper category that makes them look best.....Steven "Pollyanna" Lipper, architect of the new Lipper rating system, disagrees: "Fund companies are a bit more intelligent about the public positioning of their funds. If they've been positioning their funds as growth funds all along, they're not going to suddenly switch".....Right....And if Sassy had a ball in her mouth, she'd refuse to drop it for a Beefy Burger.


Ways to lose money you probably don't even know about: We suspect that few mutual fund investors worry about "transaction costs".....But two recent articles highlight, once again, how small costs can add up*.....Transaction costs come in two basic varieties: Processing costs and market-impact costs.....Processing costs include things like broker commissions, fees, taxes, etc, and these are relatively easy to control.....Market-impact costs are more elusive, and beyond the experience of most individual investors.....For example, say XYZ stock is currently trading at $20 per share, and your fund manager expects it to increase to $25 within a year....If she places a large order at $20, and the market responds by pushing the price up $1 per share, the potential gain of 25% ($5/$20) is reduced to 19% ($4/$21).....In a study of 150 mutual funds from 1996-1998, the research firm Barra determined that PBHG Emerging Growth had the highest market-impact cost among small-caps, at 5.73%.....Among mid-caps, the market-impact leader was Dresdner RCM Growth Equity, at 5.23%.....Large-cap Phoenix Engemann Aggressive Growth led all funds, with an astounding market-impact cost of 8.13%.....How can an individual investor identify funds with high transaction costs?.....It's almost impossible.....Transaction costs are often associated with turnover, but two funds with the same high turnover rate can incur very different transaction costs, depending on how their managers control market impact.....We predict that you'll be reading a lot more about market-impact cost, and market-impact data should become more readily available.....In the meantime, it helps to remember this: Funds with 0% turnover have $0 of transaction costs.....The closer you can come to this ideal, the better.
* "Portfolio Manager's Style of Trading Skews Returns," The Wall Street Journal, Pui-Wing Tam, June 25, 1999;
"It's Gnawing at Your Fund, And Now It Has a Gauge," The New York Times, Carole Gould, July 11, 1999


Let's talk about EDGAR: If you were expecting a discussion about men in tutus, you've come to wrong place.....In this case, EDGAR stands for Electronic Data Gathering, Analysis & Retrieval.....EDGAR is a powerful tool that can help you retrieve most mutual fund documents filed with the SEC (annual reports, Statements of Additional Information, proxies, prospectuses).....But using EDGAR often takes patience, persistence, and savvy.

• Which EDGAR will it be? The SEC created the EDGAR system, and the SEC still maintains the mother of all EDGAR sites (www.sec.gov).....For giving birth to EDGAR, we should all give thanks to the Securities and Exchange Commission.....But if you actually try to use the SEC version of EDGAR, it's likely that the word "mother" will come to mind often.....Your best bet is to use one of the private services, which deliver the same EDGAR information through almost-friendly interfaces:
  
  

  EDGAR Service	Web address	FundAlarm comments
  Partes FreeEdgar	www.freeedgar.com	Free site, with no registration required...."Watch lists" (for automatic notification) are easy to create.....Searches tend to be slow, unless you are using an industrial-strength Internet connection.
  Edgar Online	www.edgar-online.com	Free site, except for real-time filings....Registration required....Good glossary.
  PricewaterhouseCoopers EdgarScan	edgarscan.tc.pw.com (Note: no "www")	Free site, with no registration....Allows searching of documents before downloading (a big time-saver)....Cleanest interface....Search results come up quickly....Best choice for EDGAR novices.

  
  
  
• What thedoes it mean? Here's an example of a recent search on EdgarScan for the "Internet Fund" (the links are not active):
  
         497 1999/07/07        497 1999/06/17       497J 1999/05/06    485BPOS 1999/04/30        497 1999/04/21    PRES14A 1999/04/05    DEF 14A 1999/03/29        497 1999/03/26        497 1999/03/25    485APOS 1999/03/01        497 1999/02/26     NSAR B 1998/12/31    N 30D/A 1998/12/31      N 30D 1998/12/31    24F 2NT 1998/12/31     NSAR A 1998/06/30    485BPOS 1998/03/10    24F 2NT 1997/12/31    485BPOS 1997/04/01    24F 2NT 1996/12/31    485BPOS 1996/11/19     N 1A/A 1996/10/21     N 1A/A 1996/10/17     N 1A/A 1996/08/30     N 1A/A 1996/08/29       N 1A 1996/05/03       N 8A 16/04/16
  
  Some of these forms are of interest only to the SEC and securities lawyers.....Most, however, contain useful information for individual investors:
  
  

  Form Number (all relate to mutual funds)	Description
  485APOS 485BPOS	Fund prospectus (also usually contains Statement of Additional Information)
  497	Prospectus supplement
  N-30D	Annual or semiannual report
  N-30-B2	Quarterly report
  497K1 497K2 497K3B	Profile (short-form prospectus)
  N1-A	Registration statement for new open-end funds
  N-14	Proxy

  
  [If you plan on doing your own EDGAR research, you can print
  only this table and use it as a cheat-sheet. See the accompanying page]
  
  
• Some search tips.
  
  
  • Funds from small families are usually easiest to find -- for example, to find the Torray Fund simply enter "Torray".....But if you are looking for (say) Oakmark Value, typing "Oakmark" will get you nowhere.....That's because EDGAR indexes the Oakmark funds under Harris Associates, which is the legal name of the fund manager.....If you are searching for a fund, and you consistently come up with nothing, there's a good chance that it's hiding under another name.....In that case, try searching EDGAR for the name of the fund family, which you can usually get from Morningstar.
    
    
  • Larger fund families often group several funds in one EDGAR document (for example, all of the Janus funds are found in one N-30D, under the heading "Janus Investment Fund").....One way to zero-in on the fund you want is to start your search at EdgarScan.....When the list of documents comes up, use "text search" to look for the name of the fund that you're interested in.
    
    
• If you're not a mutual fund geek, why should you care about EDGAR?
  
  
  • Once you know how to use EDGAR, you can probably toss most of your hard-copy fund documents.....You can then use the extra filing space to accumulate other unneeded documents.
    
    
  • Are you dissatisfied with the portfolio information that appears on your fund company's Web site?.....Download the most recent Form N-30 from EDGAR, and you'll be able to review complete portfolio information.
    
    
  • Would you like to be the first to know if your fund is trying to raise its management fee, add a 12b-1 fee, or attempt any number of other fast-ones that fund companies have been known to attempt?.....Set up watch-lists for your funds, and keep an eye out for Form 14.

"It's mine!...No, it's mine!": When Ryan Jacob left the Internet Fund, he took with him one of the best short-term track records in mutual fund history.....Or did he?.....The SEC views performance records as belonging at least partly to the manager, while the NASD and many fund companies see them as belonging to the fund.....As things stand now, Jacob might be able to mention his track record in the prospectus for his new Internet fund, but NASD rules prohibit him from mentioning that same record in ads or on a Web site.....Most of the debate in this area centers around who owns a manager's record, and who can exploit it.....We'd like to propose a refreshingly simple solution: Declare that both parties own a departed manager's record, but also require that breaks in management tenure must be clearly indicated whenever performance results are presented.....If this were the rule, we suspect that fund companies would come up with more effective ways to keep managers from leaving, and managers would be less likely to succumb to happy feet.


Briefly noted:

• Bob Kronish is a long-time FundAlarm reader who has his own skeptical view of the mutual fund world.....From time to time, Bob has shared some of his written work with us.....We asked Bob to write a couple of pieces especially for FundAlarm, and we're pleased to present two columns by Bob Kronish on the accompanying page.
  
  
  
• SEC rules require that mutual fund ads not be misleading, and ads that use performance data must show results (through the most recent quarter) for the preceding one-year, five-year, and 10-year periods, or the life of the fund....Funds can choose to use results from other periods, and funds can also include cut-off dates more recent than the preceding quarter.....But what happens if ads in mid-September (for example) still show fund results through June 30, even though the fund has fallen significantly in value since then?.....Or, what happens if fund performance has skyrocketed since June 30, and the fund chooses to highlight year-to-date numbers, which are now considerably better than 12-month numbers?.....The SEC is concerned enough about both possibilities to launch an investigation.....The fund industry says that there isn't a problem.
  Source: Bloomberg, July 12, 1999
  
  
  
• A lot happens behind the scenes at a mutual fund, and one of the most important functions is "pricing".....At the end of every trading day, a fund must calculate its per-share price.....Basically, this is done by adding up the value of all the fund's underlying securities (including cash), subtracting any liabilities, and dividing by the number of shares outstanding.....In most cases, pricing is routine and accurate.....But what happens if a fund owns thinly-traded securities or private placements?.....Funds typically come up with a "fair" value for these, which is often based on trades that happened days or even months before.....Shareholders of IAI Value recently learned about "fair" value the hard way.....On July 2, a day when the S&P 500 was up about 1%, IAI Value dropped almost 18%.....What happened?.....It seems that this fund, which had shown a gain of about 19% through June 30, decided to "reprice" its substantial holdings of private placements, and almost all of the fund's appreciation for the year disappeared overnight.....Meanwhile, for the next couple of months, IAI Value will be allowed to claim a 19% return through June 30.
  Source: "Truth in Value," Charles Jaffe, July 21, 1999
  
  
  
• Readers who spotted the connection between the two items above should award themselves extra credit....In item #1, we learn that the SEC is concerned about performance calculations that meet the letter of the law, but violate its spirit....In item #2, we learn that IAI Value can now claim a 19% return through June 30, consistent with the letter of the law, even though almost all of that return was wiped out two days later.....Don't you love it when things come together like this?
  
  
  
• Jim Lowell (fidelityinvestor.com) has released his mid-year fund manager rankings.....Adam Hetnarski (Fidelity Export) claims the honor as Fidelity's worst diversified domestic stock manager.....Steve Buller takes the prize as Fidelity's worst Select fund manager (Real Estate), and Alexandra Edzard personifies futility as manager of Fidelity France.....Among the runners-up for worst Fidelity manager:
  
  
  • Domestic diversified stock: Nick Thakore (Trend) and Tim Krochuk (TechnoQuant Growth)
    
    
  • Select: John Porter (Medical Delivery) and Simon Wolf (Industrial Equipment)
    
    
  • International: Penelope Dobkin (Worldwide) and William Bower (International Growth & Income)
  
  
  
• Should you hold stock funds in a personal or tax-deferred account?.....This is a perennial debate in the mutual fund world, and FundAlarm generally comes down in favor of tax-deferred accounts.....But if you own a fund that invests in foreign stocks, there may be one complicating factor: foreign taxes.....In a tax-deferred account, such as a 401(k) or IRA, withheld foreign taxes are lost forever.....In a personal account, withheld taxes can be claimed as an itemized deduction, or taken as a foreign tax credit.....Foreign tax withholdings often don't amount to much, and for many investors this will be a non-issue.....But if you lose even $100 of foreign tax credits per year, your total loss over 30 years (compounded at 10%) would be about $18,000.
  
  
  
• Irene Hoover compiled a terrific track record at Jurika & Voyles Mini-Cap.....She is now sub-advisor (manager) of the Forward Small Capitalization Equity Fund.
  
  
  
• Allianz AG (a German insurance company) is reportedly interested in buying all or part of Pimco.....AIG has acquired a majority interest in John McStay Investment Counsel, which runs the JMIC Brazos funds (and still not a word about the acquisition on the Brazos funds Web site)*...... The Pilgrim mutual funds have been acquired by ReliaStar Financial Corp., a Minneapolis-based insurance company.
  * Thanks to FundAlarm reader Jared Jameson for bringing this item to our attention
  
  
  
• In the second team-grabbing incident in as many months, Loomis-Sayles has snared Eswar Menon and Alex Muromcew, co-leaders of international equity and emerging market products for Nicholas-Applegate.....(Nicholas Applegate serves as subadvisor for several Pilgrim funds, including Pilgrim International Core Growth, Pilgrim International Small Cap Growth, and Pilgrim Emerging Countries).....Loomis-Sayles has also snagged Nicholas-Applegate's European stock-picking expert, John Tribolet.
  
  
  
• Softbank Corp. (Japan) has purchased a 20% stake in Morningstar for $91 million.....A 20% stake in FundAlarm is available for considerably less.
  
  
  
• Merrill Lynch Global Allocation was the worst-selling mutual fund during the first half of 1999, with net cash outflows of $2.95 billion......Among the other top-five worst-selling funds, with their respective outflows:

  Vanguard Windsor:	$2.17 billion
  Oakmark:	$1.96 billion
  Fidelity Low Priced Stock:	$1.87 billion
  Merrill Lynch Capital:	$1.51 billion

  Source: "The Big Get Bigger," Mark McLaughlin,
  SmartMoney.com, July 28, 1999
  
  
  
• What do you do when your fund is named the best-performing mutual fund in the country for the past five years?.....If you are Ken Kam, co-manager of Firsthand Technology Value, you quit the fund, sell your interest in the firm, and leave to start your own firm.....Could it be that Kam wasn't getting along with partner and co-manager Kevin Landis?......As a lovely parting gift, Kam gets to keep Firsthand Medical Specialists Fund, which he will take to his new firm and rename (pending shareholder approval).
  
  
  
• As of April 30, 1999 Amerindo Technology had built-in gains of $15.05 per share, or about 55% of its recent net asset value.....These gains must be distributed by October 31, if they haven't been offset by losses in the interim.....So. if you've been considering this fund for a taxable account, you might want to think again.
  Source: "Capital gains pain awaits hot funds," Sandra Block, USA Today, July 20, 1999
  
  
  
• David Moran, a sharp-eyed FundAlarm reader, recently noted some confusion at Fidelity.....David owns three funds from a certain San Francisco-based mutual fund company, which are shown on his Fidelity statement as follows:
  
  

  ROBERTSON STEVENS--EMRG GR FUND

  ROBERTSON STEPHENS INFO AGE FD

  RS MID CAP OPPORTUNITIES

  
  
  
• Morningstar has announced that it's dropping seven mutual funds from its corporate 401(k) menu.....Two funds (T. Rowe Price Era and Liberty Newport Tiger) are being axed because Morningstar is eliminating the categories they represent.....The other five dropees are being canned for poor performance:
  
  

  Morningstar 401(k)
  Gone:	Replaced by:
  Fidelity Real Estate Investment Trust	MSDW Instl U.S. Real Estate
  Lindner Dividend (now Asset Allocation)	Vanguard LifeStrategy Growth
  PBHG Growth	MAS Midcap
  PIMCO StocksPlus	Vanguard 500 Index
  T. Rowe Price New Income	PIMCO Total Return

  
  Eight funds in the Morningstar 401(k) are holdovers from last year: Brandywine, Domini Social Equity, Fidelity Low-Priced Stock, Gabelli Asset, Selected American, Templeton Developing Markets, and Vanguard International Growth.
  
  
  
• Paul Hoffman will retire early next year as manager of Merrill Lynch Basic Value.....We'll have more to say about this change when it takes place.
  
  
  
• You are reading the 36^th issue of FundAlarm.....We have published every month since inception, so this is also our third anniversary.....Many thanks to our readers.....Thanks, also, to all of the real financial journalists out there, without whom (as they say) FundAlarm would not be possible.....We have recycled your ideas, borrowed your best quotes, and probably pissed off some of your sources, and you have taken it all in great style.....We appreciate your work.
  
  
  
• Here's some advice we recently received from a FundAlarm reader, who is also an MD:
  • Eat a sensible diet
  • Get lots of exercise
  • Avoid natural causes

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FundAlarm © Roy Weitz, 1999