| Highlights and Commentary |
| By Roy Weitz |
 |  Call them the Ultra 3-ALARM Funds: Ordinarily, the performance of each fund in the FundAlarm database is compared with a single benchmark.....And in any given month, some benchmarks are tougher to beat than others.
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The 401(k) plan is a great invention, but 401(k) plans don't run for free.....Plan participants typically pay some of the expenses, and plan sponsors (i.e., employers) pay the rest.....401(k) plans are hotly pursued by financial services firms and, as you might expect, these firms are often willing to sweeten the pot in the hopes of obtaining 401(k) business.....The most common pot-sweetener is a fee rebate , which seems straightforward enough, but actually raises some important issues.....Consider, for example, the XYZ 401(k) plan, which is invested exclusively in Fidelity mutual funds.....At some point, the XYZ plan becomes large (and profitable) enough that Fidelity is willing to return some of the fees that it earns from the plan.....Here's the big question: Who should be credited with Fidelity's rebate?.....On the one hand, there wouldn't be a rebate without assets in the participant accounts, so it seems like the participants should benefit from Fidelity's refund.....On the other hand, it's the employer that negotiates the rebate, and it's ultimately the employer that Fidelity needs to keep happy.....Before the suspense kills you, here's the answer: In many cases, perhaps most, the employer keeps the rebate.....By law, the employer is required to use rebated funds for the benefit of the 401(k) plan, but that doesn't change the economic reality: The rebate allows the employer to reduce its out-of-pocket 401(k) expenses, while plan participants receive no financial assistance, and continue to bear their full share of their pension plan costs.....How do you know if your employer is receiving rebates from your 401(k) plan?.....You probably won't..... Under current law, employers aren't required to disclose these rebates, and many won't even talk about them.....Recently, for example, spokesmen for DuPont, General Motors and Hewlett-Packard flat-out refused to discuss rebates in their 401(k) plans.....When that happens, you know there's big, big money involved.....You also know that you're not getting it.
On August 1, the MetaMarkets.com Open Fund went out of business, about 24 months after it started.....The Open Fund was the first (and only) mutual fund to publish its holdings in real time.....With its Web cam, its non-stop New Paradigm hype, and its "Think Tank of Technology and Business Luminaries," the Open Fund was always a bit over the top.....But the founders of the fund, Dave Nadig and Don Luskin, also helped keep the issue of portfolio disclosure in the public eye.....FundAlarm took numerous shots at the Open Fund, but Dave Nadig was always a terrific sport about it, and also one of our biggest boosters, which we appreciate.....We wish the principals well, and we hope that Dave opens another fund soon.....We could use the new material.
From the FundAlarm catalog of mutual fund merchandise: | A Think Tank of Technology and Business Luminaries. This Think Tank, formerly used by the MetaMarkets Open Fund, is in mint condition. It met only a few times, and it's still loaded with insights about the New Economy. Impress your clients, dazzle your spouse, and get ready to grok. This item won't last! | |
| Item #229A Make us an offer! | ||
If your sector fund is performing way out of line with its peer group, there are at least two possible explanations: (a) Your fund manager isn't a very good stock picker, or, (b) Your manager is buying stocks outside of the fund's stated area of specialization, and those outliers are skewing returns.....Most sector/specialty funds are allowed to invest a portion of their assets outside of their sector -- sometimes a large portion -- so managers who stray aren't necessarily doing anything wrong.....But not all specialty managers take advantage of their theoretical investment freedom and, for those who do, the results aren't always stellar .....Recently, for example, Philip Morris was the third-largest holding of Davis Financial (at 5.7%), and companies such as Sealed Air (a maker of packaging) and Tellabs (a telecom company) were prominently represented in the Davis portfolio.....Over the past 12 months, Davis Financial has significantly underperformed the average Specialty-Financial fund in the FundAlarm database, and one has to assume that these forays into non-financial stocks are a major reason for this disappointing performance.....If your specialty fund is 3-ALARM it is also, by definition, underperforming the average fund in its peer group.....You might want to take a closer look at your fund's portfolio, and see if it's investing far afield.
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| "Mutual Series Prepares for a Changing of the Guard," Ken Brown, The Wall Street Journal, August 6, 2001 | |
Dr. Jekyl and Mr. Heebner: There are 492 mid-cap funds in this month's FundAlarm database, and two of them are managed by Ken Heebner.....One of Heebner's offerings, CGM Focus, is by far the best-performing mid-cap fund over the past 12 months (+94.6%), while the other Heebner mid-cap fund (CGM Capital Development) ranks #275 in its peer group for the same period (-13.05%).....As far as we know, Heebner doesn't have a split personality, so something else must account for the huge gap in performance.....Actually, it's quite simple.....Focus is the only fund that allows Heebner to sell stocks short, and he's has taken advantage of that mandate by shorting technology stocks in a big way (56% of the portfolio as of December 31, 2000, the latest information available).....On the other hand, CGM Capital Development doesn't allow short selling, so its performance reflects the results of Heebner's more conventional stock picking*.....As you read this, there's a good chance that a ton of new money is flowing into CGM Focus, and most (if not all) of it is being attracted by Heebner's short-term hot streak.....Can Heebner keep it going?.....We say, "Probably not," and we offer the following chart as Exhibit #1:
If Consumer Reports offered its own line of household appliances, you might be somewhat suspicious of the next refrigerator comparison test, especially if the Consumer Reports model was included in the group.....Morningstar, the fund-rating service, is about to face a similar kind of problem.....Starting this fall, Morningstar plans to offer several "managed portfolios" of mutual funds, which will be available exclusively through financial advisors.....Morningstar will select the funds for each portfolio, make changes as it deems appropriate, and charge a management fee of 15 to 35 basis points per year.....Morningstar says that its managed portfolios and its fund rating service will employ different staff, but, of course, that's what they have to say.....Within nanoseconds after the investment group decides to include a fund in a managed portfolio, the folks who write the fund ratings will know about it.....Assuming that all of the employees on the rating side of the company are human, it's also inevitable that the people who write the ratings will be influenced by decisions made on the investment side.....The problem isn't that bad funds will suddenly receive great write-ups.....The real problem is that the ratings people may go slightly easier on funds that are favored by the investment side.....And even if that doesn't happen, readers will always be suspicious that it did happen.....Morningstar is getting ready to go down the treacherous path that accountants already walk with their consulting divisions, and brokerage houses walk with their investment "analysts".....We hope Morningstar plans to make a lot of money from this new venture, because it's putting a tremendous amount at risk.
More news from the slippery slope: Morningstar has entered into a deal with fund company T. Rowe Price to provide educational materials to investors in Price mutual funds, as well as participants in Price-administered 401(k) plans......This is the first deal of its kind for Morningstar, and probably not the last.
A FundAlarm Canine Primer: watchdog |  lapdog |
It isn't often that a mutual fund story makes the front page of The New York Times, but it also isn't often that a manager takes such a spectacular dive as James McCall (Merrill Lynch Focus Twenty, Merrill Lynch Premier Growth).....McCall was the high-flying darling of PBHG Large Cap 20, who was wooed away by Merrill Lynch in late 1999, and for whom Merrill paid a hefty breach-of-employment-contract bounty.....Merrill Lynch brokers (or, more accurately, their clients) handed McCall about $1.5 billion to invest in March, 2000, and McCall has proceeded to lose about $1 billion of it.....Unbowed and unrepentant, McCall says that he'll "continue to try to identify the companies that have the best chance of increasing their profits at extraordinary rates, regardless of what value other investors are assigning to those prospects at any given time".....And what about the $2 share price of Focus Twenty, which started out at $10 per share?....."I don't think $2 a share is a lot to risk. We could go down from here certainly, but over the long term, there is more potential on the upside than on the downside".....Ah, yes, Jim, you're ever the optimist.....But shouldn't we also talk about break-even?.....At an average 15% appreciation, it will take your shareholders 11.5 years just to get back the $1 billion that they lost.....Let's see, you're 47 years old right now, so you'll probably be retired by then, right?
 |  | When emerging markets were flying high, Templeton's Mark Mobius was a highly-regarded manager with a huge opinion of himself.....Now that emerging markets are in the dumps, both his reputation and his ego appear to be on somewhat shakier ground.....These days, Mobius is blaming "corporate governance" for the poor performance of his international stock picks, and he's taking steps to become an international corporate activist (it's like an international man of mystery, but much more boring).....But even Mobius isn't sure that activism will work.....Says Mobius, in a sudden flash of realization, "There are so many factors, like money, that make it so tempting for people [in foreign countries] to ignore corporate governance".....Ever the optimist, Mobius has this encouraging thought for his beleaguered investors: "If corporate governance was better, I think you'd see emerging markets do a lot, lot better." |
If, if, if: Here's an excerpt from the May 1998 issue of FundAlarm, featuring more wishful thinking from Mark Mobius: | "If monkeys could fly": This month's Flying Monkey Award goes to Mark Mobius, manager of the Templeton Developing Markets and Templeton Emerging Markets funds......In mid-April, Mobius hired Philip Tose as a financial advisor to these funds.....If Tose's name doesn't sound familiar, he was the CEO of Peregrine Investments Holdings Ltd., which went spectacularly bankrupt during last fall's Asian economic crisis.....Templeton funds owned stock in Peregrine and, as a result of the Peregrine bankruptcy, various Templeton funds lost a total of about $150 million....Here's what Mobius had to say about Peregrine, Philip Tose, and the loss of about $150 million of investor money: "If the region had not gotten so bad, they probably would have pulled it off." |
William Donoghue runs a mutual fund timing service that utilizes various sector funds, especially Fidelity funds, to work its purported magic.....Donoghue makes some extravagant claims for his service but, as far as we can tell, those claims aren't backed up by an independent audit or any other type of verification (we contacted Donoghue's PR person twice by e-mail to ask about this, and she never replied).....Donoghue's Web site also contains the following little piece of puffery, which should be of particular interest to the Morningstar police:
Speaking of performance records, we would never believe one from any timing service unless the record had been verified by an independent accounting firm.....If someone has a timing system that really works, it's easy to demonstrate that fact to an accountant, and have an accountant sign off on the numbers.....Given the amount of money that a promoter can make from a successful timing system, it's also dirt-cheap to get the blessing of an accounting firm.....If you're ever considering a timing service, be sure to ask the promoter for an independent accountant's report on his track record.....If he doesn't have an accountant's report, trust us, his "record" can't be verified according to industry standards, and the record means very little.
Amen:
| "The mutual fund industry must take a hell of a lot of responsibility for what happened in the bubble, for bringing out 100 new technology-oriented growth funds and 31 Internet funds right at the top of the market. These people knew what was going on and could see what would happen, but this is a money-gathering business so that's what they did." | ||
| --Jack "Sweet Talkin'" Bogle, Vanguard founder, quoted by Charles Jaffe ("Words of wisdom from Vanguard's Saint Jack") | ||
Robert Turner runs the Turner funds, and he's apparently a little bit testy about all the money he's been losing for his investors lately.....In a recent interview,* Turner brushed off the poor recent performance of his funds with the following comment: | "It isn't pleasant when [funds are] going down, but to outperform on the upside and outperform on the downside is not the way it works. You can't have it both ways." |
There are 338 large-cap value funds in this month's FundAlarm database, and Janus Strategic Value lands 18th from the bottom based on performance over the past 12 months (-8.82%).....If you own Janus Strategic Value, should you be concerned?.....We think you should.....Even though Strategic Value is only about 18 months old, it's not too early to form an opinion.....For starters, this fund has no history of outstanding performance to fall back on (unlike some other large-cap value funds that are also struggling, such as Excelsior Value and Restructuring, or Legg Mason Value).....Strategic Value is also the first offering of its kind from growth-house Janus, so it came into this world under a big question mark: Could Janus really run a successful value fund?.....Add to this unpromising mix a manager (David Decker) who's never proven himself, and we think Janus Strategic Value has already become a strong candidate for sale.....It's possible, of course, that Janus Strategic Value will turn out to be the best value fund of the decade.....Right now, however, there's absolutely no hint of this.....Janus has had its shot with Strategic Value, and you know Janus was trying as hard as it could to launch this fund successfully.....If Janus can't deliver the goods with a value fund in today's environment, what makes you think it ever will?
Briefly noted:
| As of: | FundAlarm |
Vanguard Total Stock Mkt |
|---|---|---|
| Feb 22 | $95,900 | $94,900 |
| Mar 22 | 86,161 | 84,480 |
| April 22 | 93,445 | 92,440 |
| May 22 | 103,670 | 100,070 |
| June 22 | 95,083 | 93,460 |
| July 22 | 93,650 | 92,710 |
| August 24 | 92,613 | 90,650 |
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| *Dow Jones Newswires, Colleen DeBaise, August 27, 2001 | ||
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