| Highlights and Commentary |
| By Roy Weitz |
Attention all Pod People: If you prefer to get your mutual fund and financial information via audio
files, instead of the written word, a number of fund companies are now ready to accommodate you with podcasts......You can
listen to each podcast on the fund company's Web site, or download the file for later use, and free "subscriptions" to the podcasts are available (but not required)......To listen, you'll need either a portable MP3 player, or software that plays MP3 files installed on your computer.....So far, podcasts appear to be more popular with no-load fund firms, perhaps because load firms (American Funds, Putnam, MFS, etc.) already have a vehicle for getting their message out to investors (it's called the "broker" and the "financial planner").....Although podcast technology isn't exactly high-tech, we assumed that fund companies with a reputation for technology investing would at least be among the leaders in fund podcasting.....We assumed wrong: Although they may be out there, we weren't able to find podcasts from any fund company that's usually associated with tech investing (for example, firsthandfunds.com, oakfunds.com, kineticsfunds.com).....Here's our semi-complete sampling of podcasting in the fund world, late 2006:
If you have several billion dollars to spend, and you're looking to buy a mutual fund company, you might want to get in line: Putnam Investments and MFS Investment Management are both up for sale.....It's too early to know how these deals will play out, but one thing is for sure: At this early stage, no one is considering, or even giving lip service to, the interests of Putnam or MFS fund investors.....These deals, if they happen, will be all about asset gathering, distribution channels, covering style-box grids, and scale of operations (but don't get too excited, because if the scale of operations increases to the point that there are economies of scale, they almost certainly won't filter down to fund customers).....If either deal goes through, you can also count on manager turnover, fund mergers, name changes and general confusion, all with the vague possibility that fund investors might eventually derive some benefit.....It probably doesn't make sense to bail out of your Putnam or MFS fund now, simply because of what might happen in the near future, but it might make sense to hold off on additional investments with either fund family.....This is also a time when the broker or financial planner who sold your Putnam or MFS fund owes you some quality, no-cost handholding.....Remember, you've paid a sales commission and 12(b)-1 fees for "service," so make sure you get it.
The Citigroup funds now belong to Legg Mason, so let the mergers begin.....Along with the mergers, Legg Mason wants to eliminate eight of ten separate fund boards, and Legg also wants to send more than twenty independent directors into retirement.....The board reorganization proposal is immensely -- almost comically -- complex, but one aspect of that proposal is like nothing we have ever seen: Nine members of outgoing "Board 8" will be receiving retirement payments that range from about $220,000 to $500,000 each, and then these "retired" board members will turn around and join one of Legg's two new boards, where it looks like they'll each continue raking in about $120,000 per year.....The English language is tortured every time a fund company talks about directors "retiring" from their "job," since directors typically do almost no meaningful work to begin with.....The fact that nine Legg Mason directors are also going to pocket a total of $2.8 million in "retirement" benefits, and then receive generous pay from a new fund board, suggests that some funds have indeed become little more than money spigots for well-connected corporate game players.....Speaking of money, Legg Mason has refused to say exactly how the cost of these multi-million dollar retirement payouts will be split between itself and the funds.
T. Rowe Price is a publicly-held fund company, and it has a profit margin of about 29%.....Franklin Resources (of Franklin funds fame) is another publicly-held company, and its profit margin is just shy of 25%.....By contrast, the largest oil company, ExxonMobil, has a profit margin of only about 10% -- and that's in an industry where price gouging is simply assumed to occur.....If you think your U.S. Global World Precious Metals fund has performed well over the past 12 months, you are correct, since it was up 91%.....But if you had owned stock in U.S. Global Investors, Inc., the company that runs the U.S. Global funds, your investment would have more than quadrupled over the same period (+433%).....To some extent, this is an old story: Over reasonably long periods of time, the stocks of many U.S. fund companies have performed considerably better than the average mutual fund in that company's lineup.....The message here isn't to ditch all your funds and buy fund company stocks, since that would leave you seriously undiversified.....Rather, we think the message is this: As a fund investor, the management fees that you pay are helping to make many, many people quite wealthy.....You have the right to expect -- make that demand -- certain things from your fund company, starting with outstanding investment performance.....If you settle for anything less than top-notch investment performance, well, maybe your fund company executive will give you an extra wave of his hand as he passes you in his Ferrari.
Pfizer stock lost almost half its value during the five-year tenure of former CEO Hank McKinnell, but that didn't keep Pfizer's directors from awarding McKinnell a pension benefit worth $83 million, as well as $65 million in pay during that disastrous period.....When it came time for Pfizer directors to face reelection, you might think that some of the company's largest shareholders -- especially mutual funds -- would have wanted to send a message to the directors who enabled McKinnell, in the form a sharp kick in the butt.....But you would be mistaken.....Funds run by Dodge and Cox, Fidelity, and Northern Trust all supported the Pfizer board, and it should come as no surprise that each of these fund companies also has some type of business relationship with Pfizer.....In the "no surprise" category, we also should note that each fund company denies being influenced by its Pfizer relationship, even though the two largest proxy advisory services (Glass Lewis and Institutional Shareholder Services) advised withholding support from three Pfizer directors.
Alert Bill Nygren! Somebody is actually defending him, and that somebody is our very own new-fund guru, David Snowball.....In this month's edition of the FundAlarm Annex, covering new and undiscovered funds, David takes a look at the new Oakmark Global Select, co-managed by Mr. Nygren, and David basically likes what he sees (and, yes, David does know about Oakmark and Oakmark Select).....David also examines FMI Large Cap, and calls it "pretty much the poster child for a star-in-the-shadow" fund.
If you were director of a mutual fund, and you knew that your fund calculated its management fee in an unusual way, don't you think you'd pay extra-close attention to that calculation?.....Of course you would, which might make you more qualified than any director of the Putnam, Kensington, Dreyfus, Gartmore, or Numeric funds.....For various periods ranging from April 1997 through December 2004, each of these fund companies ran at least one fund that charged a performance-based fee*.....Over those same periods, each fund board failed to notice that its respective fund company was incorrectly calculating its performance fee, thereby overcharging fund investors.....At the strong suggestion of the SEC, each fund company has now repaid its unearned performance fees, with interest (but no penalties), and these fund companies will never, ever make such a mistake again.....Also, to express contrition for its sloppiness, each fund board has voluntarily docked its own pay -- come on now, you didn't really believe that, did you?
According to moneycentral.msn.com, there's one exchange-traded fund -- streetTRACKS Dow Jones STOXX 50 -- that recently showed the best three-year return among all U.S. stock ETFs:
You've heard about crappy funds. Now it's time for funds that give away crap. The Web site of the new Arrow Funds is offering prizes to visitors who complete an online "product development survey":
Forbes magazine recently awarded its annual mutual fund booby prize to the Managers 20 fund.....Here at FundAlarm, we spotted Managers 20 as a flat-liner back in May 2005, and this is part of what we had to say at the time:
Like all of the Managers funds, this one is subadvised (i.e., run by an outside manager).....In this case, the subadvisor is Jim Oelschlager's firm, Oak Associates, which also runs its own Oak family of funds (Pin Oak, White Oak, etc.).....Oelschlager has loaded Managers 20 with a heaping helping of tech stocks, which is exactly what he's done with his own funds, and to equally disastrous effect.....But remember, Oelschlager is a hired gun on Managers 20, and the folks who run the Managers fund family have an obligation to monitor Oelschlager's performance and fire him if necessary.....Indeed, that's the promise made by Managers on its Web site:
If Oelschlager's five-year performance has indeed been "scrutinized" by Managers' investment professionals, and if Oelschlager's results are as "expected," then perhaps Managers should revise its logo with a couple of well-placed question marks:  |
For many years now, the Pax World funds have been prohibited from investing companies that "derive revenue from the manufacture of liquor, tobacco and/or gambling products"......As we reported last year, the Pax World funds had a significant stake in Starbucks during early Spring 2005, about the same time that Starbucks licensed its name to Jim Beam for use with a coffee-flavored, alcoholic beverage.....Oops.....Since Starbucks was suddenly going to "derive revenue" from the manufacture of Jim Beam's "liquor product," Starbucks was no longer a suitable holding for Pax World, and the firm was required to divest its Starbucks stock (at the time, Starbucks was selling for about $23 per share, and recently it's been up in the $33 range).....Pax World is now asking shareholders to approve new, more flexible rules that will allow the firm to selectively invest in alcohol and gambling-related stocks, based on a company's "entire social responsibility profile."
First they take your money (through outrageous fee hikes), then they take your money: TIAA-CREF has made a mistake allocating income and capital gains among shareholders of TIAA-CREF Institutional International Equity Fund and, to make things right, certain shareholders of the fund's retirement class (TRERX) will split a $2 million refund.....If you were a shareholder of record on or before May 25, 2006, and you lost more than $10 because of the misallocation, you can expect a check directly from TIAA-CREF.
 | Month Twelve: Another $105.38 and I break even (sort of) |
| Month | Date of signal | Type of signal | Fund bought/held (2) | Acct value (beginning) | Acct value (ending) (3), (4) | Change in acct value for month | Change in acct value since inception |
|---|---|---|---|---|---|---|---|
| October, 2005 | 10/16 | Long | OTPIX | $5,000.00 | $5,080.09 | +1.60% | +1.60% |
| November, 2005 | No new signal | Long still in effect | OTPIX | $5,080.09 | $5,484.89 | +7.97% | +9.70% |
| December, 2005 | 11/29 | Short | SOPIX | $5,484.89 | $5,381.32 | -1.89% | +7.63% |
| January, 2006 | No new signal | Short still in effect | SOPIX | $5,381.32 | $5,378.51 | -0.05% | +7.57% |
| February, 2006 | 1/29 | Long | OTPIX | $5,378.51 | $5,186.30 | -3.57% | +3.73% |
| March, 2006 | No new signal | Long still in effect | OTPIX | $5,186.30 | $5,193.62 | +0.14% | +3.87% |
| April, 2006 | No new signal | Long still in effect | OTPIX | $5,193.62 | $5,257.84 | +1.24% | +5.16% |
| May, 2006 | May 16/ May 25 | Cash/ Long | OTPIX | $5,257.84 | $4,938.37 | -6.08% | -1.23% |
| June, 2006 | June 12 | Cash | NA (Cash) | $4,938.37 | $4,659.14 | -5.65% | -6.82% |
| July, 2006 | June 29 | Long | OTPIX | $4,659.14 | $4,395.56 | -5.66% | -12.09% |
| August, 2006 | No new signal | Long still in effect | OTPIX | $4,395.56 | $4,602.20 | +4.70% | -7.96% |
| September, 2006 | No new signal | Long still in effect | OTPIX | $4,602.20 | $4,894.62 | +6.35% | -2.11% |
| Notes: (1) Signal was executed (i.e., fund bought) on the next business day. (2) OTPIX=ProFunds OTC Inv.; SOPIX=ProFunds Short OTC Inv. (3) Cut-off for valuation and account activity is 26th day of the respective month. (4) Account value includes value of fund shares only. Cash in the account, as well as interest earned on the cash, is ignored. Brokerage commissions are paid out of this free cash, and commissions are not included in return calculations. Dividends are reinvested. | |||||||
| Current month (8/27 thru 9/26) | Since inception (10/17/05) | |
|---|---|---|
| Schwab International Index Inv (SWINX) | 0.05% | 21.12% |
| Vanguard 500 Index (VFINX) | 2.89% | 14.18% |
| Vanguard Small Cap Index (NAESX) | 3.88% | 14.17% |
| Dreyfus Mid Cap Index (PESPX) | 2.86% | 11.29% |
| Vanguard Balanced Index (VBINX) | 1.83% | 10.21% |
| Roy's market-timing account | 6.35% | -2.11% |