FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

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

Do you own a "weak" NO-ALARM fund? There are 617 NO-ALARM funds in this month's database, and together these NO-ALARM funds make up the FundAlarm Honor Roll.....By definition, every NO-ALARM fund has outperformed its respective benchmark for the past 12 months, three years, and five years.....So, how is it possible for a NO-ALARM fund to be "weak"?.....To understand what we mean by a weak NO-ALARM, take a look at part of this month's data table for Guardian Park Avenue A:

As we see from the area in red, Park Avenue follows a growth style of investing, and the fund is being evaluated against FundAlarm's large-cap benchmark (the Vanguard 500 Index fund).....As we would expect from a NO-ALARM fund, Park Avenue has outperformed the large-cap benchmark over the past 12 months, three years, and five years (the upper black rectangle).....However, over the same measurement periods, Park Avenue has underperformed the average large-cap fund with a "growth" style -- in other words, Park Avenue has underperformed its peer group (lower black rectangle).....This poor peer-group rating (Lower | Lower | Lower) is why we consider Park Avenue a "weak" NO-ALARM.

[See the accompanying page for a list of the 55
"weak" NO-ALARM funds in this month's database]

Boycott Molson beer! Legislation currently being considered by the Canadian Parliament would require Canadian investors to pay income tax on each year's unrealized appreciation in U.S. mutual funds and exchange-traded funds.....That's right: Even if a Canadian investor doesn't sell a U.S. fund, the appreciation for the year would still be subject to Canadian income tax.....The legislation started as an attempt to discourage off-shore tax evasion schemes, but it now snares investments as innocuous as the Vanguard Total Market Index fund.....Conspiracy theorists darkly hint that the Canadian mutual fund industry is somehow behind this bizarre and punitive legislation -- which wouldn't surprise us one bit.

Thanks to FundAlarm reader Larry Eberlein for bringing this item to our attention.
If you'd like to learn more about this legislation, check out www.bylo.org

FundAlarm ruins a day at the country club: Last month, we reported that the Internet address TomMarsico.com had been grabbed by Marsico's former employer, Janus, more than two years after Marsico left the firm.....New York Times reporter Danny Hakim picked up on our story, and it turns out that the tale is even better than we thought.....Jim Goff, a Janus fund manager, apparently decided on his own to take the Marsico name, and Marsico wasn't aware that his name had been hijacked until the Times reporter told him.....Marsico was not amused by Goff's caper, especially since Marsico originally recruited Goff, and helped him get his Janus job.....Anyhow, at a "chance" country club meeting several days after the story broke, Goff apologized to Marsico, and offered to return TomMarsico.com for free......Marsico still sounded a bit peeved: "This is a guy who I brought to Janus. I got him into a country club he lives right on. He doesn't say, 'It's nice you sold your business, congratulations.' It was, 'By the way, since The New York Times called me, I bought your domain name.'"

We love happy endings: On August 14, just two weeks after FundAlarm got the ball rolling, Jim Goff did the right thing, and Tom Marsico was officially reunited with TomMarsico.com.....And now, we check our e-mail every day, certain that Tom will eventually get around to thanking us.

A surprising number of well-known mutual fund manager names are no longer available in dot-com form, and the owner of the name isn't whom you might expect.....For example, PeterLynch.com is owned by Jerome Weinberg, of Birmingham, Alabama, and MarioGabelli.com is owned by Tom Manzi, of Wilbraham, Massachusetts.....Fortunately, some good alternative names are still available:

This manager's name...	Is owned by...	But this name is still available...
PeterLynch.com	Jerome Weinberg Birmingham, AL	GrayHairedFidelityDude.com
RonBaron.com	Vail Trademarks, Inc. Vail, CO	GoSothebys.com
MarioGabelli.com	Tom Manzi Wilbraham, MA	MarioGabucks.com
MichaelPrice.com	Marc Reyes Jackson Heights, NY	LetsPlayPolo.com
DickStrong.com	Vail Trademarks, Inc. Vail, CO	MisterHumility.com
AlbertoVilar.com	John Thomson Glasgow, Scotland	TheFundGod.com

	Q: Through July 31, what was the top-performing diversified U.S. stock fund?
	A: American Eagle Capital Appreciation
	Q: And how do I invest in this fund?
	A: Darned if we know

Something strange is going on with American Eagle Capital Appreciation and its sibling, American Eagle Twenty.....Introduced in December 1999, Capital Appreciation has returned an eye-popping 86.7% year-to-date, while Twenty has returned 68.6%.....Both funds are the first no-load offerings from Jundt Associates, a father-son management team in Minneapolis that already runs a series of load funds under the Jundt name.....Jundt Associates has a Web site, but you won't find a single reference to the American Eagle funds.....Jundt Associates has reserved the name americaneaglefunds.com, but the site hasn't been activated.....American Eagle funds are distributed by Firstar Mutual Fund Services, and you also won't the funds mentioned on the Firstar Web site.....As far as we can tell, American Eagle funds aren't carried by any of the major fund supermarkets (Schwab, Waterhouse, E-trade, etc.), and the fund's estimated expense ratio of 6.96% [!] seems intentionally designed to discourage potential investors.

What's going on?.....It's possible that the Jundts are simply clueless marketers, but that seems highly unlikely.....Our guess is that the Jundts are trying to keep the fund as small as possible for as long as possible, so that they can goose performance -- in effect, a public incubation period.....(This hunch is confirmed by an August 25 proxy filing which shows that the Jundts still personally own about 50% of each fund).....Once they've established a good track record with these two funds, we wouldn't be surprised to see the Jundts introduce additional no-load funds, and start marketing like crazy.....There's one other interesting wrinkle, which tends to support the incubate-then-market theory: Marcus Jundt, the son, is about to take over majority control of Jundt Associates from his father.....We suspect that Marcus has some big plans for the firm, and those plans probably couldn't be hurt by a new, hot no-load fund family.

If you want more information about the American Eagle funds, your best bet is to try freeedgar.com (search for "American Eagle"), or contact the fund directly: American Eagle Funds, c/o Firstar Mutual Fund Services, 615 East Michigan Street, 3rd Floor, Milwaukee, Wisconsin 53201-5207, 800/370-0612. This is the only way into the funds that we could find -- although it's not a recommendation.

Lies, damned lies, and ~~statistics~~ certain mutual fund performance graphs: Performance graphs can serve a valuable function.....But, as Mark Twain said about statistics, they can also mislead.....If you visited the Thurlow Funds Web site on August 25, you would have seen the following performance graph for the Thurlow Fund:

As FundAlarm reader Peter Speyer points out, there are a couple of big problems with this graph.....For one thing, the information was definitely not "New!" on August 25, since the measurement period ended March 10, 2000.....And just in case you were wondering about that date, it's no accident: On March 10, the share price of the Thurlow Fund hit its high for the year.....From March 10, 2000, through August 24, the Thurlow Fund lost about 46% of its value, but that little nugget of information is nowhere to be found on the Thurlow site.....If Tom Thurlow doesn't have the time or resources to keep his Web site up-to-date, he should shut it down.....And if he's intentionally trying to deceive investors with this graph -- well, at least you know the kind of guy you're dealing with.

There's one other possibility, which is that Tom Thurlow has completely flipped out: Early in August, the Thurlow Fund unloaded all of its stocks, and moved to a 100% cash position.....Thurlow expects a late-year tech rally.....Until then, he says, "I'd rather keep my powder dry."
"Skittish Thurlow Liquidated Entire Portfolio Last Week," Ilana Polyak, TheStreet.com, August 11, 2000

Has anyone seen my gimmick? The Value Trend Links Fund, which bills itself as the "premier and only no-load mutual fund dedicated to golf," recently showed the following top-five holdings:

Cisco Systems [Internet networking]
EMC Corporation [Electronic information infrastructure]
Nokia [Cellular phones]
Ericsson [Cellular phones]
Network Appliance [Network data storage devices]

Surely FundAlarm has goofed, and somehow we've revealed the portfolio of the upcoming Fidelity Select Wireless fund.....Surely we haven't: This is, indeed, a golf fund.

Speaking of gimmicks, the AIM Dent Demographic Trends fund invests in companies tied to the Baby Boom generation.....If Demographic Trends truly had a unique approach to investing, you'd think that its portfolio would stand out from the crowd.....Consider, then, the following top-ten holdings of two different funds from the AIM family -- Demographic Trends and Charter, which is a plain-vanilla large-cap blend fund.....See if you can tell which fund is which:

Top-10 Holdings of:
Fund "A"		Fund "B"
Pfizer		Pfizer
Tyco		Nokia
Target		Morgan Stanley DW
Morgan Stanley DW		Cox
Cisco		Oracle
Citigroup		Intel
Microsoft		Citigroup
Nokia		Veritas
AIG		Nextel
American Express		Time Warner

Fund "B" is Demographic Trends, but there doesn't appear to be much that is uniquely Boomer-ish about its portfolio.....In fact, if you didn't know, we could probably convince you that Fund A (AIM Charter) was the real Boomer fund.....That's our point: Some of the gimmicks that are so beloved by fund marketers simply don't hold up when you look at what a fund owns....Demographic Trends has performed well since it was introduced in June 1999, but it would have performed just as well if it had been named the A-1 Acme Fund.

Mark McGwire Quits Major League Baseball,
Will Coach Senior's Softball Team ------------------------------------- Slugger says, "I'm looking forward to the new challenge"

If you saw this headline in the sports section, you might be dubious.....So when we heard that Jim Craig of Janus was retiring at age 44, to help manage money for his new family foundation, something didn't seem right.....It still doesn't.....Craig was the chief investment officer at Janus, and he was also the institutional thread that held together all of the Janus funds and managers.....Some observations about Craig's departure:

It's clear that Craig was planning this move since at least October 1999, when he announced his resignation as manager of the flagship Janus fund. Craig didn't tell the straight story to the press when he stepped down from the Janus fund, so there's no particular reason to believe anything he says this time, including his prediction that "There will be nary a ripple in Janus operations."
Craig says that the recent spinoff of Janus into Stilwell Financial "had no effect at all" on his decision to leave. Uh huh.
In our experience, tightly-knit work groups (like Janus) are fragile structures. When anyone leaves, especially the boss, there's always an unsettled period. We can't imagine that there won't be some significant operational and morale problems at Janus over the next few months.
The new Craig Family Foundation will initially be funded with $1 million. Craig is used to running a firm with about $300 billion under management, so it should take him about 10 minutes a week to oversee the Foundation's money.
FundAlarm knows the foundation world well -- Roy's day job is doing what Craig will be doing -- and there are plenty of opportunities for good, rewarding work. But considering where Craig has been, it's unlikely that any foundation will be able to keep him interested for more than a few months.

The foundation gives Craig a good, temporary cover.....We predict that Craig will be back in circulation soon, with his own money management firm, and that one or more of his Janus colleagues will join him.....Craig's departure is no reason, by itself, to sell your Janus funds.....But when the first Janus manager finally defects, we predict that others will follow.

Our completely unsolicited advice for Jim Craig: If you really want to do something different, how about starting a not-for-profit mutual fund?.....You can invest in anything you want, cap the fund at any size you like, and donate your operating profits to charity -- maybe even your own family foundation.....We guarantee this would be a bigger deal than Paul Newman's salad dressings.

Dreyfus CEO Christopher "Kip" Condron		They'll be watching you: According to The Wall Street Journal,* Dreyfus has one of the most sophisticated customer retention programs in the mutual fund industry.....By looking for patterns in customer data, Dreyfus tries to identify (and contact) unhappy investors before they bail out.....Among the creepy programs that Dreyfus admits to testing: Trying to determine a link between the car a customer drives and the funds he or she likes to buy and sell....Since we can't recall any mutual fund company ever asking what type of car we drive, we have to assume that Dreyfus obtains this data from external sources, and merges it with internal customer files.....Lest you become alarmed about a potential invasion of your privacy, you should know that Dreyfus has a "chief privacy official" who "continuously" monitors the data gathered by the customer retention folks.
* "For Most of the Big Fund Companies, The Name of Their Game is Retain," Aaron Lucchetti, August 7, 2000

We won't rest until we're #20,000:

She has sung: Exactly one year ago (September 1999), FundAlarm reported a manager change at Oppenheimer Quest Value:

Eileen Rominger hears the call of other interests, and decides to pursue them. A team of eight [!] "senior investment professionals" takes over. FundAlarm comments: If you are ever required to "pursue other interests" at your job, wouldn't it be nice to know that it takes eight people to replace you? Not included in the team of eight is the kitchen sink, but Oppenheimer seems to be throwing just about everything else at this fund. If we owned this fund, we'd be inclined to hold. And, if performance doesn't pick up over the next nine to 12 months, we'd also be inclined to conclude that Oppenheimer doesn't have an encore. (What would it be? A team of 16? A team of 32?) If this fund is still underperforming, we believe we could (and would) sell with a light heart and a clear conscience.

Well, performance hasn't picked up.....From September 1999 through July 2000, Oppenheimer Quest Value A returned -5.3%, versus 9.7% for its large-cap benchmark (the Vanguard 500 Index fund).....Even compared to various large-cap value benchmarks over the same period, Quest Value has underperformed by about 300 to 1,300 basis points (3% to 13%).....If we owned this fund, we'd be looking for alternatives right about now.

Last year at this time, we also noted a manager change at Kemper Small Cap Value:

Thomas Forester and Steven Stokes leave as "co-lead managers." Forester leaves the firm; the destination of Stokes is not known. This fund is now run by James Eysenbach and Calvin Young. FundAlarm comments: Stokes and Stokes/Forester ran this fund since July 1996. From the beginning, it appears these managers had some kind of falling-out with the small-cap benchmark, and the bad feelings appeared to intensify in the fall of 1998. Fund and benchmark have not been seen together since, with the benchmark way out ahead. Eysenbach has a relatively short and mixed history as lead manager at two other funds (Kemper Small Company Relative Value, Scudder Micro Cap). If we owned this fund, we'd be inclined to give Eysenbach a look, perhaps for nine to 12 months.

Time has also failed to smile on this fund.....From September 1999 through July 2000, Kemper Small Cap Value returned -6.6%, compared to 18.4% for its small-cap benchmark (the Vanguard Small Cap Index fund).....Even against various small-cap value benchmarks over the same period, Small Cap Value has underperformed by about 500 to 1,300 basis points (5% to 13%).....If we owned this fund, we'd be thinking "Feet, don't fail us now."

Folio fever: In case you've missed it, the financial world is all abuzz over "folios"......A folio is basically a prepackaged basket of stocks that you buy and hold in a special brokerage account -- for example, you might buy a "large cap growth" folio or a "blue chip value" folio, each containing about 30 to 50 names.....To get started with a folio, you must prepay an annual fee, typically about $200 - $300, which also buys you fairly generous stock trading privileges at no additional cost....What's so attractive about folios?.....Unless you've been known to trade stocks while you're asleep, a folio can never generate any tax surprises, which is a major improvement over the large and unexpected capital gain distributions that often flow from conventional mutual funds.....Unlike most mutual funds, folios also provide full portfolio disclosure, absolute style purity (if desired), and low expense ratios (at least for larger accounts).

Folios are a unique application of Internet technology, and we like gadgets as much as the next guy.....But we still can't come up with the profile of many users for whom folios clearly make sense.....If we handed you a folio of stocks, and you were qualified to decide which stocks you wanted to keep and which ones you wanted to sell, you probably wouldn't need us to design a folio in the first place.....In that case, you might as well open an account with a discount broker, and do everything yourself for less money and with fewer trading restrictions.....And if you aren't qualified to trade individual stocks, why tempt yourself with the capability to do so?.....Even if you start with a no-brainer folio, like the 30 stocks in the Dow Jones Industrial Average, one ill-considered trade a year could easily wipe out any theoretical tax and cost savings that the folio might have had over a comparable mutual fund.....Readers of FundAlarm know that we're not starry-eyed about mutual funds.....But for all their faults, we think mutual funds still make more sense for the vast majority of investors.

Foliofn.com appears to be only folio site that is actually functional.
NetFolio.com will be rolled out soon. It's from Jim O'Shaughnessy,
who recently screwed shareholders of the O'Shaughnessy funds
by selling out.

Briefly noted:

Most Web "awards" are silly, but the Forbes "Best of the Web" means something to us.....So indulge us, please, as we boast of FundAlarm's inclusion in the Fall 2000 "Best of the Web" ("Fund Selection" category).....As Forbes points out, and we're the first to admit, our "design and navigation are still lacking".....(Potential partners with bags of money, who wish to help remedy this situation, are encouraged to contact us).....But we strongly disagree when Forbes says that the FundAlarm Discussion Board contains "not particularly useful chatter".....Show us a better all-in-one fund discussion board, and we promise to run free ads for it.
Ted, a regular on the FundAlarm Discussion Board, has passed along a juicy rumor that also makes a lot of sense: The entire Berger fund family will be rolled into the Janus family within the next 12 to 18 months.....Stilwell Financial owns both firms, so it's unlikely that either Berger or Janus could veto the move......This kind of consolidation would also result in significant cost savings, which has to be attractive to Stilwell management.....Ted can't publicly reveal the source of his rumor.....But he did share the source with FundAlarm, and we believe his tip is worth taking seriously.
Hmmm: During a farewell conference call, Jim Craig of Janus hinted that one or more new Janus funds may be in the works......According to TheStreet.com,* "it's logical to expect a foreign stock fund, a domestic small-cap fund or a value fund".....Berger already has one of each, which could easily be converted into funds carrying the Janus name if Berger were merged into Janus.....If Janus does create these new funds on its own, the similar Berger funds could be merged without any trouble.
* August 11, 2000
Sector funds -- technology, communications, biotech, etc. -- never accounted for more than about 4% of total cash flows into U.S. stock funds prior to 1999.....In 1999, sector funds grabbed almost 20% of all cash.....Through May 2000, sector funds siphoned off about half (44%) of all mutual fund money.
"Going Overboard? Sector Funds Rake in Record Sums of Cash," Ian McDonald, TheStreet.com, August 3, 2000
John Muresianu runs the Fidelity Fifty fund, and we're pretty sure he's not a teenager.....Why, then, has he been behaving so erratically?.....Last October, Muresianu sold off some of his technology stocks, and he let the fund's cash position grow to 19%.....The higher-ups at Fidelity took Muresianu aside, and (big surprise) Muresianu almost immediately "decided" to reduce his cash position.....Muresianu's most recent, bizarre move involved selling all of Fidelity Fifty's technology stocks (yes, 100%), and loading up on energy and precious metals companies (now 23.1% and 15.5% of the portfolio, respectively).....Fidelity veterans may remember that a huge timing bet got Jeff Vinik fired as manager Fidelity Magellan, back in 1996, after which Vinik started a successful hedge fund.....Muresianu seems determined to retrace Vinik's career path.....First, Muresianu needs to get himself fired, and he's well on his way toward that goal.....Can a hedge fund be far behind?
Mutual fund "stock dividends" (splits) are marketing gimmicks, but ultimately they are harmless and meaningless.....The ridiculous hype above, which was recently spotted on the AIM Web site, should embarrass even marketers.
Granted, very few people these days care much about mutual fund expense ratios.....But wouldn't it be somewhat interesting to know how much you really pay to maintain your mutual fund investments?.....That's the simple idea behind a recent proposal from the General Accounting Office (GAO), which would require your fund company to disclose how much it took from your account to pay for your funds -- not a percentage, not some hypothetical expense table, but real, cash dollars.....Predictably, the mutual fund industry opposes the GAO proposal.....Although most people over the age of 12 have a pretty good understanding of the value they should receive for an expenditure of $100 vs. $1,000 vs. $10,000, the fund industry says that investors would be "confused" if they were told exactly how much they had spent on their mutual funds.....It is much better, says the fund industry, to stick with the current system, which shows the expenses of a hypothetical $10,000 investment growing at a hypothetical 5% per year.
If TheStreet.com paid better money, maybe Jim Cramer wouldn't need to kidnap computers:
Your thank-you card is in the mail: Investors in Fidelity Magellan generated $554 million in management fees for Fidelity during the year ended March 2000.....That's more than twice the 1999 revenue of all 77 funds in the T. Rowe Price family.
Kiplinger's, August 2000
"Our goal is to know our companies better than they know themselves."

This is a quote from a Janus spokesman, and it's one of the most misguided comments we've heard in quite a while.....If outsiders really can get to know a company better than the people who run it, that's one of the best reasons we can think of not to invest in that company.....And if Janus thinks that a handful of its twenty-something analysts, spending a few hundred hours a year, can get to know a successful business better than the people who run it full time -- well, maybe Janus deserves that reputation for arrogance after all.
You might not know that it's happening, but even a fund with 0% turnover could be undergoing dramatic portfolio changes.....That's because turnover is calculated as the lesser of fund purchases or sales, divided by average net assets.....A fund with zero sales, but $1 billion in purchases (from new money), would have a 0% turnover ratio, since zero is the smaller of the two numbers, and zero would be in the numerator.....Meanwhile, those purchases could be dramatically altering the composition and allocation of the fund's portfolio.
"Things You Didn't Know You Need to Know About Your Mutual Funds," Dagen McDowell, TheStreet.com, June 29, 2000
Lee Munder is starting a new fund company, and one of his offerings is an Internet fund, which he will manage.....Who would have guessed that the two most qualified co-managers in the entire world would be Munder's sons, Adam and Ryan?.
A textbook case: Warburg Pincus Japan Small Company Fund recently distributed capital gains equivalent to 55% of the fund's net asset value, which is reportedly one of the largest fund distributions in the past 25 years.....(To put the pain in perspective, someone with $10,000 invested in the fund will have a tax bill of about $1,700).....What happened?.....The fund had a spectacular year in 1999, and hot money flowed in.....This year, the fund has been a disaster (down 44.5% through August 25), and about three-quarters of the hot money has been yanked just as quickly as it arrived.....The stocks that went up last year had to be sold, in order to pay the departing shareholders, and that generated huge capital gains.....What's the lesson here?.....It's easy, if anyone is paying attention: Don't buy small, hot, and volatile funds in a taxable account.....If you do, you'd better be one of the first shareholders to reach the exits when your fellow shareholders shout "fire."
Just kidding about the name! The Standish Small Capitalization Tax-Sensitive Equity Fund recently distributed about 14% of its net asset value as capital gains -- reportedly the largest distribution ever made by a tax-managed fund.
"Standish Fund Payout Will Carry a Tax Bite," Aaron Lucchetti, The Wall Street Journal, August 22, 2000
According to a recent survey by Ernst & Young, 47% of college students believe they will be millionaires by the time they hit age 50.....Based on this response, we're guessing that 99% of college students also believe that the opposite sex finds them "extremely attractive."
Self-proclaimed maverick investor Doug Fabian recently described the origin of his "lemon list" of mutual funds:

"In 1998, when I looked at the year-in-review publications...I noticed everyone was publishing lists of mutual fund performance, but nobody was ever talking about lack of performance."*

We hope that Fabian's research skills have since improved, or his memory has become less selective.....FundAlarm began publishing its 3-ALARM list in July 1996, 18 months before Fabian had his copy-cat revelation.
*Investment News, August 21, 2000
It's sort of like eating a bad clam, except that your clients lose millions of dollars: Elaine Garzarelli now blames her disastrous 1996 bear market call on a "bad cash-flow statistic" that somehow got plugged into her computer model.....To find the errant number, Garzarelli says that it took her "three months of combing through the data by hand".....To put Garzarelli's prodigious effort in perspective, Boeing moved about fifteen 747 jetliners out the door in the same period of time.
"Quantify This," Dawn Smith, SmartMoney.com, August 18, 2000
There's a city guy driving by a farm and he sees a bunch of sheep. He pulls over and stands at the fence admiring the sheep. The farmer comes over and asks if he can help him.
The guy says, "Oh, I'm just admiring your sheep out there. You've got some very fine animals."
"Yep," the farmer agrees. "Got a good flock."
"How about if I guess how many sheep are in the field, I get my pick of one?" the guy asks.
"Sure," replies the farmer.
The guy takes a minute to look the flock and the field over. "637."
"That's exactly right," the farmer says.
So, the guy walks out into the field, picks up a female, and brings her over to his car.
As the guy is getting ready to drive away, the farmer says, "Okay. Let's try this the other way. If I can guess your profession, I win my animal back."
"Sure."
The farmer looks at the guy and says, "You're a mutual fund manager. Probably growth stocks."
"Yeah. Exactly right," the guy says. "How'd you know?"
"Cause there's one dog in whole flock, and you just picked her."
From: High Flying Adventures In The Stock Market, by Molly Baker