FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

(Originally posted October 1, 2004) [Archive Table of Contents]

Is your core fund rotten? Most investors should own at least one core mutual fund, but the definition of a core fund varies widely.....Here at FundAlarm, we believe that the best core holding for most people is a large-cap blend fund -- large-cap stocks provide some protection from volatility, and the blend style, which combines elements of both growth and value, minimizes reduces the risk of picking an out-of-favor approach.....So, how have these core funds been performing?.....This month's FundAlarm database contains a total of 522 large-cap blend funds that have been in existence at least five years.....Of these, 201 are 3-ALARM, and two can be found on our list of the ugliest 3-ALARM funds, which is the bottom of the barrel in the FundAlarm universe

The two ugliest core funds
Nicholas-Applegate US Sys Large Cap Growth I (NLCIX)
Nicholas-Applegate US Sys Large Cap Growth R (NLCRX)

The accompanying page lists all of the 3-ALARM core (large-cap blend) funds in this month's FundAlarm database.

Beginning August 31, mutual funds were required to publicly disclose their proxy voting records for the previous year.....And within less than a week, the AFL-CIO Office of Investment had issued a report card, grading the 10 largest fund families on how they voted their proxies "when presented with 12 opportunities to curb CEO pay abuse" .....Granted that "CEO pay abuse" is sometimes in the eye of the beholder, granted that a few of our readers will reflexively retch at anything published by the AFL-CIO, and granted that this report is exactly the kind of interest-group pressure many in the fund industry feared as a result of proxy-vote disclosure.....The report is still a great read, and well worth your attention.....Basically, the AFL-CIO identified proxy votes at 12 different companies, and each vote concerned an issue that the AFL-CIO has associated with executive pay abuse.....Of the top-10 fund families, American Century voted to curb the pay abuses 100% of the time, and three other fund families (Vanguard, Janus, and Oppenheimer) opposed the pay abuses at least 70% of the time.....At the opposite extreme, AIM, Fidelity and Putnam each voted to allow the pay abuses to continue at least 70% of the time.....If you were initially in favor of proxy vote disclosure, as we were, the AFL-CIO report should bring you great joy, since it highlights some of the most outrageous corporate pay abusers and turns up the heat on their mutual fund enablers.....And even if you opposed proxy vote disclosure, you might want to take a closer look.....In the long run, proxy vote disclosure is going to improve corporate governance and help fund shareholders.....The AFL-CIO report is the first, sweet taste.

The AFL-CIO report is called "Behind the Curtain." It's a PDF file, so Adobe Acrobat is required

Mutual funds have been very, very good to me: This year's Forbes listing of the 400 richest people in America includes a "Moneybags" section, and that's where most of the mutual fund managers can be found.....The standings have changed a bit from last year, with two new entries and one dropout..... The wealthiest fund manager continues to be Abigail Johnson, daughter of Fidelity CEO Edward Johnson, who's reportedly worth $12 billion.....If Ms. Johnson's $12 billion wealth were combined with her father's $6 billion -- and where do you think she got her wealth in the first place? -- the Combined Johnsons would be tied for number four overall on the Forbes list.....In fact, the Combined Johnsons would be the only non-Walton, non-computer billionaires in the top ten, except for Warren Buffett.....Here's this year's complete list of mutual fund money bags, along with last year's numbers for comparison:

Name	Fund affiliation	Net worth (2004)	Net worth (2003)	FundAlarm comments
Abigail Johnson	Fidelity	$12.0 billion	$9.8 billion	Thanks, Dad.
Edward Johnson	Fidelity	$6.0 billion	$4.9 billion	Thanks, Dad.
Charles Johnson	Franklin	$2.5 billion	$2.0 billion	Thanks, Dad.
Rupert Johnson Jr.	Franklin	$2.0 billion	$1.6 billion	Thanks, Dad.
Tom Bailey	Janus	$1.0 billion	$975 million	Sold out just in time, and still can't wipe that smile off his face.
John Calamos (NEW)	Calamos	$1.0 billion	-	Who says small fund companies can't thrive in today's marketplace?
Michael Price	Mutual Series	$1.0 billion	$900 million	Polo?
Alberto Vilar	Amerindo	$950 million	$750 million	It's a whole new ballgame...again...and again.
Elizabeth Wiskemann (NEW)	Franklin Resources	$950 million	-	Inherited 6% of Franklin Resources from husband R. Martin Wiskemann, a Swiss billionaire who was a longtime gold and precious-metals fund manager for Franklin Resources.
Tom Marsico	Marsico	$825 million	$800 million	See Tom Bailey, above.
Alfred West Jr.	SEI	$800 million	$975 million	Who?
Richard Strong (GONE)	Strong	Didn't make it	$800 million	Disgraced, driven from the fund business, and still sitting on several hundred million dollars, though not enough to make this list.

Nothing says "sincerity" like sucking up to a huge, potential client: Ever since the fund scandals broke last fall, Putnam has been in the doghouse with a couple of huge California pension plans (CalPERS and CalSTRS).....Putnam wants to be able to run money again for these plans, so Putnam recently agreed to a fairly extensive set of reforms and disclosures.....Among other things, Putnam has agreed to:

Provide a Web site calculator, which will allow investors to determine annual fund fees based on their own account balances.
Disclose the dollar amount of compensation paid to each fund management team.
Disclose ownership of Putnam funds by senior management.
Disclose stock brokerage commissions paid to the top tier of broker/dealers.
Disclose manager turnover, apparently in connection with performance reporting, so that investors are better able to relate to relate performance to the manager who's responsible for those numbers.
Provide a "detailed analysis and rationale of its fee schedule" on its Web site.

There's nothing wrong with this list -- in fact, Putnam is now clearly ahead of any other fund firm we can think of when it come to progressive, shareholder-friendly practices.....But wouldn't it have been nice if Putnam came up with this list on its own, several months ago?.....The way Putnam has handled this, it looks like the firm is merely caving under pressure, and buying back some valuable pension fund business by making a few concessions to the California pension giants.....In any event, other fund firms now have a model to follow, and it wouldn't be difficult for Janus, MFS, Nations, PBHG, and other scandal-tainted companies, to adopt every single one of these measures.....Come on, guys: You all talk about how your firms have changed since the scandals, and how you've all turned the corner.....What's your excuse for not following Putnam, and adopting these same practices?

It's Bush (and the Republicans) in a landslide: According to public records, owners and executives of mutual fund companies overwhelmingly favor George W. Bush for President, and some have also contributed heavily to the Republican National Committee (RNC).....Obviously, we couldn't search for every fund executive, so we limited ourselves to those who are more or less household names (at least in our household)......Not only is Bush leading in the money (and popularity) race, we could only find one fund owner/executive who has supported John Kerry.....Among the fund-industry boosters of Bush and the RNC:

		---------- Financial support for ----------
Fund executive	Fund affiliation	George W. Bush (individual max=$2,000)	Republican National Committee
Richard Driehaus	Driehaus funds	$2,000	-
Foster Friess	Brandywine funds	$2,000	-
Mario Gabelli	Gabelli funds	$2,000	$4,000
Edward C. Johnson, III	Fidelity CEO	$2,000	-
Charles B. Johnson	Franklin Templeton	$2,000	$50,000
Rupert Johnson	Franklin Templeton	$2,000	-
James Jundt	Jundt funds	$2,000	-
Marcus Jundt	Jundt funds	$2,000	-
Louis Navellier	Navellier funds	$2,000	-
James Oelschlager	Oak Associates	$2,000	-
Tom Marsico	Marsico funds	$2,000	-
James Oberweis	Oberweis funds	$2,000	$25,000
Robert Olstein	Olstein funds	-	$1,000
Steven Scheid	Janus	$2,000	-
Dennis Tito	Wilshire funds	$2,000	-
Bonus: Paul Schott Stevens	Investment Company Institute (ICI)	$2,000	$1,250
Source: fundrace.org

Here's the best we could do for the Democrats: Robert Pozen (of MFS) gave $2,000 to John Kerry, Ron Baron (of the Baron funds) and Craig Litman (of the Masters' Select funds) gave $1,000 each to Joe Lieberman, Wally Weitz (of the Weitz funds) and Louis Navellier (of the Navellier funds) gave $2,000 each to Wesley Clark, and Martin Whitman (of the Third Avenue funds) gave $1,000 to Howard Dean (it might be the screaming that attracted Whitman).

The Federal Reserve is run by seven governors and, theoretically, there's no one in America who should be more tuned-in to the financial world than these folks.....So, what do the personal investment portfolios of Greenspan and his Financial Titans look like?.....According to public financial disclosure reports, the Federal Reserve governors invest just like millions of other Americans who are busy with their jobs, have family responsibilities, and aren't stock or mutual fund experts -- which is to say, the governors invest haphazardly, with little evidence of a formal asset allocation strategy or an overriding investment plan.....Chairman Alan Greenspan holds about 95 percent of his wealth in U.S. Treasury bills, although his wife (NBC reporter Andrea Mitchell) does own one stock mutual fund (Dreyfus Premier Value).....As for some of the other governors:

Vice Chairman Roger Ferguson, his wife, and children own 18 different stock and bond mutual funds, mostly from Smith Barney and Vanguard, which suggests that Ferguson believes in a balanced economic policy (i.e., one mediocre, load-fund family balanced by one decent, no-load family). Ferguson also got sucked into the morass that is American Century Giftrust (to the tune of $30,000 to $100,000), so it's nice to know that even smart financial people make dumb investment mistakes.
Susan Bies, the wealthiest governor, owns 11 mutual funds, including one fund worth over $1 million (Vanguard Mid Cap Index), and eight funds worth between $500,000 and $1 million each: Harbor International, Vanguard 500 Index, Pimco High Yield, Davis New York Venture, Rainier Core Equity, ING Small Company, Nations International Value, and DFA US Micro Cap.
Donald Kohn, who has worked at the Fed for his entire career, has the smallest portfolio, and a great affinity for T. Rowe Price funds (he and his wife own 14 of them).....His largest fund holding is T. Rowe Price Balanced.
Mark Olson is a big Fidelity fan, with Fidelity Growth and the flagship Fidelity fund each holding between $100,000 and $250,000 of his money. Among all the governors, Olson has the most interesting selection of good, off-the-beaten-path funds (Julius Baer International Equity, Longleaf Partners International, and Mosaic Mid Cap ), as well as two of the worst funds (AIM Premier Equity and AIM Constellation).

"Mutual funds attract Fed governors' eyes," Russ Wiles, suntimes.com, September 20, 2004

Class-action lawsuits typically start out with guns blazing, but the results often make you wonder why anyone (except the lawyers) bothered in the first place.....A case in point is the recent settlement of the Everen class-action......This case started back in 1997, when Everen securities shifted some client money-market accounts from Fund A to Fund B, and Everen failed to inform those clients that it had a financial interest in Fund B.....As part of a settlement, Everen ultimately accepted liability, and during the years that the case was winding its way through the courts, Everen was absorbed by Wachovia, the company that also runs the Evergreen mutual funds .....Now (drumroll) it's time to distribute the settlement in the Everen case..... According to FundAlarm reader Alan McClain, of Stabil Capital Management, Inc. (Houston, TX), the entire settlement benefit consists of several semi-fancy paper certificates.....One set of four certificates entitles the holder to a commission discount on transactions at Wachovia Securities (worth a total of $200), while the other certificate (shown above) entitles the holder

"to purchase up to Fifty Thousand Dollars ($50,000) in Class A Shares of Eligible Mutual Funds sponsored by Evergreen Investment Management Company LLC, at net asset value (i.e., without paying the Front-End Sales Charge or Front-End Sales Load that would otherwise apply)."

In other words, this certificate drops a customer (and a management fee) into Evergreen's lap, even though Evergreen is the successor of the company that violated the law.....With penalties like these, losing a class-action lawsuit just might become the newest fund-marketing strategy.

Here's a certificate that is truly valuable, courtesy of FundAlarm, and you don't have to participate in a class-action lawsuit to get it.....Simply print out this page, clip the certificate, and present it to any no-load fund company at the time you make an investment in one of their funds.....We guarantee you'll be able to buy your fund at net asset value, you won't have to pay a commission, and you'll have a lot more choices than just Evergreen funds:

Briefly noted:

Feared Fidelity pirate Edward "Blueblood" Johnson III has pulled his ship alongside the Vanguard, and opened fire: From now on, five Fidelity index funds will be offered with expense ratios capped at 10 basis points (0.10%), which is lower than almost any comparable Vanguard index fund*.....Meanwhile, Vanguard skipper John Brennan, who does most of his fighting with a sharp pencil, seems to have been caught off-guard by Fidelity's daring attack.....Vanguard should be able to defend itself by pointing out that Fidelity's new, low expense ratios come about as the result of fee waivers, not official fee reductions.....Fidelity says that its fee waiver isn't a short-term marketing ploy, but investors who take the bait, especially in a taxable account, could be sorry.....If Fidelity's expense ratios do start to creep up again, and investors then want to switch to Vanguard, the capital gain taxes could wipe out the cost savings many times over.
* The five Fidelity index funds are: Spartan 500, Spartan U.S. Equity, Spartan Total Market, Spartan Extended Market, and Spartan International.
Raymond Cunningham, former CEO of the Invesco funds, has been fined $500,000 and banned from the securities industry for two years.....In the universe of sleazy fund executives, Cunningham's star shines especially bright, and he appears to have been among the most active fund-company CEOs in soliciting, facilitating, and then hiding his firm's involvement with market timers.....According to Cunningham's lawyer, Cunningham regrets that the firm's "pre-existing involvement" with the market timers "continued" during his tenure, which makes the market-timers sound like a force of nature that Cunningham was powerless to stop.....Hey, Ray, here's a little management tip for your next CEO gig, assuming anyone is willing to hire you: When a problem "continues" on your watch, it's your problem.
"Invesco Funds' Former CEO Settles," Ian McDonald, The Wall Street Journal, September 9, 2004
Just a few days after Invesco's Cunningham (above) left behind a trail of weasel tracks, the CEO of the Bridgeway funds, John Montgomery, almost managed to seem heroic.....At the same time Montgomery and his firm were being fined by the SEC for improperly calculating fund management fees, Montgomery was taking full and public responsibility for the mistake: ''...this calculation was absolutely my responsibility, and I am the one at fault".....It's pretty clear that Montgomery's error was unintentional, but it's also clear that somebody, at some level in his organization, should have known they were using the wrong formula (in a five-year calculation of performance fees, Bridgeway had been applying the performance bonus to the current asset base, instead of spreading it over the average five-year asset base during which the bonus was earned).....In any event, it's unlikely that Bridgeway will suffer any permanent damage, and there was even talk (on the FundAlarm Discussion Board) of sending some additional investment dollars to Bridgeway as a show of support.....So, let's see: Montgomery steps up, faces the music, and keeps his reputation intact, while other fund executives (we're thinking Lasser of Putnam and Whiston of Janus) hide behind lawyers, deny all personal responsibility, and resign in disgrace.....And Montgomery gets to keep earning his $300,000 salary, while Lasser and Whiston are still counting their $78 million and $17 million golden parachutes.

Never mind.....That isn't quite the point we were hoping to make.
Ambitious state attorney general wants to be governor, so ambitious state attorney general makes a name for himself exposing and cleaning up mutual fund abuses.....If you're thinking "Eliot Spitzer of New York," you are correct, but you might also want to pay attention to "Bill Lockyer of California," who seems to be coming on strong just as Spitzer is fading.....Last month, as part of a settlement, Lockyer required Pimco to start disclosing how much Pimco pays brokerage firms to hawk its mutual funds, and also which firms get the money.....Lockyer's message to other fund firms is loud and clear: Provide the same disclosures when you sell your funds in my state, or face possible legal action under California's securities-fraud law*.....Post-Spitzer, several big-money fund issues are still on the table (for example, 12b-1 fees and soft dollars), and Lockyer's disclose-if-you-want-to-sell-in-California approach could be an effective way of making fund companies see the light in those areas, too.....Lockyer has had his first taste of mutual fund power.....With Schwarzenegger as his potential gubernatorial opponent, Lockyer is out to prove that he's no girlie man, and we predict that Lockyer will be baaaack.
* "California Tackles Disclosure Issues at Mutual Funds," Tom Lauricella, The Wall Street Journal, September 16, 2004
If you ran a decades-old investment newsletter, with an excellent record for identifying winning stocks, it would seem like an easy matter to turn your service into a successful mutual fund:
Print out your list of top stock picks.
Buy the stocks on the list, and place them in your fund.
Sit back, and collect management fees.
Alas, nothing comes easy for Value Line these days.....Although Value Line's "No. 1 timeliness" ranking has proven to be a solid stock picking tool over many years, the flagship Value Line mutual fund has dipped into stocks with timeliness rankings as low as three (on a scale of five)....The fund's managers have also tried to tweak the portfolio, by periodically second-guessing the timeliness system, and manager turnover at the fund has been horrendous (at least five lead managers have passed through the revolving door since 1998).....The results have been predictable: Value Line is a dismal large-cap growth fund, with a shrinking asset base and a trashed reputation.....It's pretty clear that Value Line doesn't care about the fund that carries the company name, and it's difficult to come up with even one reason why investors should care, either.
"A Winning Stock Picker's Losing Fund," Jeff D. Opdyke and Jane J. Kim, The Wall Street Journal, September 12, 2004
Nicholas Gerber, who runs the Ameristock funds, is just 42 years old, but he's already trying to figure out how to get the maximum possible value for his fund firm when he finally bails out.....Since a conventional sale isn't likely to get Gerber the dollar amount he's looking for, about two years ago Gerber came up with another strategy: Turn one of his open-end mutual funds (Ameristock Focused Value) into an operating company, and have that entity buy Gerber's fund management company (this is what happens when you run low turnover funds: You have a lot of time on your hands, and you can think of things like this).....The directors of Focused Value threw cold water on Gerber's scheme, but they also left the door open a crack: If Gerber could get Focused Value up to $50 million in assets, they would take a formal vote on his plan.....Focused Value currently has about $14 million in assets, so it's going to take a lot of market appreciation, or a lot more investors in this dismal fund, before Gerber gets his big payday.
"Looking for the Exit Sign," David Whelan, forbes.com, October 4, 2004
A recent report from the Coalition of Mutual Fund Investors takes a look at the redemption fee policies of the 50 largest fund companies*.....Maybe we haven't been paying close enough attention, but we were astonished by the section of the report labeled "Limitations/Exclusions/Waivers of Redemption Fees and/or Market Timing Policies".....Virtually every fund with a redemption fee states (in its prospectus) that it is still unable to properly assess the fee on shareholders who make trades in "omnibus" accounts (these are intermediary accounts, maintained for the fund by brokers and retirement plans).....In other words, more than a year after the trading scandals first broke, huge numbers of fund shareholders are still able to make market-timing trades, funds are still powerless to do anything about it, and the funds boldly proclaim their impotence in public ("Feel free to screw our shareholders, since we have no way to stop you.").....Even worse, now that the fund companies have fully disclosed their ineptitude, they have little or no incentive to improve their control over omnibus accounts.....Scandal notwithstanding, it looks like market-timing trades have become a permanent part of the industry.

* Redemption fees of up to two percent, for a stated period of time after purchase, are designed to discourage market-timing and rapid trading of fund shares.

The report is titled "Analysis of Mutual Fund Redemption Fee Policies" (it's a PDF file). Thanks to Linkster Ted, of the FundAlarm Discussion Board, for bringing this item to our attention.
According to several new TV commercials, Janus is a firm that does in-depth research, and finds stocks that its rivals have overlooked*.....These commercials are apparently part of Janus' new "Maybe the Idiots Have Forgotten" marketing strategy.....FundAlarm readers, of course, haven't forgotten: In the late 1990s, Janus employed exactly the same advertising theme, and the firm proceeded to lose billions of dollars on multiple dot com bombs.
* "Janus to launch campaign in bid to regain investors' trust," James Paton, rockymountainnews.com, September 10, 2004
Guess what's missing: The following is an excerpt from the Janus corporate "timeline," found on the Janus Web site: