Highlights and Commentary

By Roy Weitz

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

"They could be better, they could be worse": Every four years, this statement seems to sum up public sentiment about our Presidential candidates.....But how do the current Presidential candidates rate as investors, specifically as mutual fund investors?.....SmartMoney.com has done an impressive job of assembling and analyzing the investment portfolios of the leading Presidential candidates, based on public documents.....Our conclusion?.....As investors, the current crop of Presidential candidates could be better, and they could be worse.....Neither Democratic candidate (Al Gore or Bill Bradley) owns any stock or balanced mutual funds.....Of the seven Republican candidates (Gary Bauer, Pat Buchanan, George W. Bush, Elizabeth Dole, Steve Forbes, Orrin Hatch, John McCain) and one ex-candidate (Dan Quayle), Buchanan and Dole also own no stock or balanced funds.....Forbes has the largest portfolio of stock funds in terms of estimated value ($650,000), and Forbes also holds the greatest number of funds (14 different names).....Funds from the American family are well-represented in both the Bush and Quayle portfolios, and Bush and Quayle hold the only fund in common (Fundamental Investors) .....Meanwhile, someone from the Frank Russell Company seems to have gotten the ear of Orrin Hatch (he owns six Russell funds), and John McCain seems to have a friend at the One Group (he owns seven of their funds)......Interesting note: Forbes has a small amount ($7,300) invested with one of his regular columnists (David Dreman, of Kemper-Dreman High Return Equity).....At least two other columnists (Kenneth Fisher and Martin Sosnoff) also run mutual funds, but they've received none of the Forbes family fortune.

The accompanying page shows the entire mutual fund portfolio for each Presidential candidate

Quite a ride: Exactly one year ago, the FundAlarm small-cap benchmark was barely limping along, with a 12-month return of -19.45%.....This month, the small-cap benchmark shows a 12-month return of +30.38%.....Our other benchmarks are also up dramatically from their year-ago levels:

Benchmark	12 Mo. Return @ 8/31/99	12 Mo. Return @ 8/31/98
Large-cap (Vanguard 500 Index)	39.87%	7.99%
Mid-cap (Dreyfus Mid Cap Index)	40.55%	-9.85%
Small-cap (Vanguard Small Cap Index)	30.38%	-19.45%
Balanced (Vanguard Balanced Index)	22.10%	6.42%
International (Schwab International Index Inv)	26.20%	-0.17%
Specialty (FundAlarm Specialty index)	42.03%	-5.68%

Whoopee! Now we get to talk about numbers! FundAlarm readers often occasionally ask how we compute our 12-month, 3-year, and 5-year returns, so here's a quick tutorial.....(Hang in there: It's not as bad as it looks).....For example, let's see how we arrive at the 12-month return for Vanguard Small Cap Index fund (30.38%), shown in the table above.....First, we need to assemble total returns for each of the preceding 12 months, starting with September 1998 and ending with August 1999:


Vanguard Small Cap Index - monthly returns:

Aug-99	Jul-99	Jun-99	May-99	Apr-99	Mar-99	Feb-99	Jan-99	Dec-98	Nov-98	Oct-98	Sep-98
(3.79)	(2.15)	5.74	1.67	8.87	1.48	(8.11)	1.23	6.23	5.31	4.21	7.53

You might think that merely adding these 12 monthly returns would give you the annual return, but that would be far too easy.....Instead, these returns must be arithmetically "linked," as follows:

Total Return=((1+MR₁/100) x (1+MR₂/100) x (...) x (1+MR₁₂/100)-1) x 100
If we take "Aug-99" as MR1 (i.e., Monthly Return1), the expression above tells us that we need to divide -3.79 by 100, and add 1 to the result.....We need to do the same thing to MR2 ("Jul-99"), MR3 ("Jun-99"), and so on, until we have accounted for all 12 monthly returns.....Then, we need to subtract 1 from the product of the 12 monthly returns, and multiply the result by 100.....If you're trying this at home, your intermediate calculation should look like this (after rounding):

((0.96

*

0.98

*

1.06

*

1.02

*

1.09

*

1.01

*

0.92

*

1.01

*

1.06

*

1.05

*

1.04

*

1.08)

-1)

*100

If you carry all this out to four decimal places, the Total Return (TR) for Vanguard Small Cap Index works out to 30.38%, exactly as promised.....Total Return for periods longer than 12 months can be computed using the same procedure, although obviously a greater number of monthly returns will need to be linked.....Total returns longer than 12 months can be annualized (as they are in FundAlarm), according to the following procedure:

Annualized Return= ((1+TR/100)^1/n-1) x 100

In this expression, "n" is equal to the number of years that makes up TR (Total Return).


It takes "more than the brains of an Einstein or even a Warren Buffett" to be a successful emerging-markets investor.
--Mark Mobius, Templeton's poster boy for emerging-market funds

--You might think that we're still talking about Mark Mobius.
In fact, this is a male a cappella sextet. They are students at Indiana University,
and they perform covers of Top 40 hits and contemporary a cappella numbers.

Scudder skids: The recent marriage of investment firms Scudder Stevens & Clark and Zurich Kemper was expected to produce a robust, asset-gathering offspring.....Instead, it seems to have produced a somewhat confused progeny, prone to drooling on itself.....Over the past six months, Scudder Kemper funds have suffered about $2 billion in net redemptions..... Analysts and portfolio managers have been quietly reorganized into small teams, each covering a specific investment style, as high-level talent continues to flee a "rudderless ship".....Some Scudder executives deny that the current problems have anything to do with the Scudder/Kemper marriage, but others are more frank about the resulting confusion and inefficiencies......Says one Scudder exec: "We had these meetings with hundreds of people sitting in the room, hundreds of highly paid, smart people who were just sitting there"......One former executive says that "these are good people, but they are in way over their heads. What [Scudder Kemper] needs is a real jerk, someone who is going to go in and clean house."
"Merged funds off $2 billion," Frederick P. Gabriel, Jr., Investment News, September 1999

Porky is back and, as always, he's joined at the trough by some of his fund buddies.....The Principal fund family is asking shareholders to reward consistent 3-ALARM performance by approving an average 32% fee increase for its five largest funds.... At the other end of the performance spectrum, Pioneer Growth fund has actually delivered some decent long-term returns.....In an effort to reduce the chance that this will ever happen again, Pioneer is seeking to hike this fund's management to 0.66%, from its current effective rate of 0.46%.....Pioneer is also proposing to institute a performance-based fee, which could net the firm another 10 basis points on the upside.....Even if Pioneer fails to beat its benchmark, the reduced fee will still be 10 basis points higher than the current fee.....To complete his slop-fest, Porky also welcomes Van Kampen Emerging Growth.....Directors of this fund have really, really studied the issue, and they have concluded that the management fee for Emerging Growth is currently lower than the average fee for its peer group.....The Directors heard presentations, hired consultants, and were involved in meetings on February 4, April 7-8, May 26, June 22, and June 23 before they also reached the conclusion that the management fee for this fund should be raised......In a separate analysis, which probably took about 30 seconds, Morningstar arrived at the opposite conclusion: According to Morningstar, this fund's management fee is already slightly higher than its peer group (defined as other mid-cap growth funds with front-end loads and more than $2 billion of assets under management).....Morningstar says that shareholders of this fund "should think twice" about voting for the proposed fee increase.


It's down! ("I want out!") It's up! ("I want in!").....American Century Giftrust recently generated quite a bit of heat on the FundAlarm Bulletin Board.....The fund's structure is unusual, and that's part of the reason for the controversy.....With the vast majority of mutual funds, you make your investment today and you can take your money out tomorrow if you are so inclined.....With Giftrust, you make your investment today, and you can't remove your money for a minimum of ten years.....Why would anybody sign on for a deal like this?.....In exchange for your ten-year commitment, you're allowed to name a "recipient" and treat your investment as a current gift.....Not surprsingly, many Giftrust accounts have been established by grandparents for their grandchildren.

Over the past 10 years, Giftrust has had a split personality.....From 1989 through 1995, Giftrust chugged along very nicely:

	1989	1990	1991	1992	1993	1994	1995
Giftrust	50.21%	-16.96%	84.91%	18.03%	31.41%	13.49%	38.32%
Benchmark (Vanguard Small Cap Index)	10.55%	-18.13%	45.26%	18.20%	18.70%	-0.51%	28.74%

But in 1996, Giftrust hit the skids:

	1996	1997	1998	1999(YTD)
Giftrust	5.78%	-1.20%	-13.09%	10.57%
Benchmark (Vanguard Small Cap Index=V) (Dreyfus Mid Cap Index=D)	18.12% (V)	24.59% (V)	18.42% (D)	0.59% (D)

Giftrust has perked up a bit in 1999, and its 12-month return is excellent (41.71%).....Still, many shareholders remain unhappy, and they want out.....The question is: Can they do it?.....In a recent posting on the FundAlarm Bulletin Board, Attorney Russ Willis said "yes", and he told how.....In response, a surprising number of FundAlarm readers said "don't".....The accompanying pages present pro and con arguments for ditching Giftrust, written (as you will note) in very different styles.....Timmy the zero-based below-average Bear (in an item originally posted on the FundAlarm Bulletin Board) represents the contract-is-a-contract, tough-it-out school....Attorney Russ Willis doesn't agree with him.


We searched the Van Kampen Web site, but we couldn't find any mention of "deceptive practices." So here's the story: During 1996, Van Kampen Growth was an "incubator fund".....Shares of the fund were not available to the general public, and it never held more than about $380,000 in assets.....Early in 1997, Van Kampen opened Growth fund to the public, and Van Kampen widely advertised the fund's spectacular 1996 performance: A return of 61.99%, and the #1 ranking in its peer group.....What Van Kampen didn't mention was that initial public offerings, mostly hot Internet companies, accounted for about 30% to 50% of the fund's 1996 return.....Van Kampen's Chief Investment Officer knew how the Growth Fund had achieved its 1996 returns, he knew that its performance numbers would be widely advertised, and he knew those numbers would be almost impossible to duplicate, yet he never informed the fund's Trustees.....Of course, the Trustees also failed to ask, apparently assuming that 62% years are routine....Needless to say, no one at Van Kampen informed investors about any of these issues.....The SEC recently fined Van Kampen $100,000 for its Growth fund shenanigans, and told them that they can never, ever do this kind of thing again.....The Chief Investment Officer was also fined $25,000.....Let's see: Over the life of the Growth fund, Van Kampen has earned about $1.5 million in investment management fees.....Let's be generous, and say that Van Kampen would have earned half of these fees even without engaging in deceptive practices.....In other words:

What Van Kampen has earned as a result of its deceptive practices:	What Van Kampen must pay as a result of its deceptive practices:
$750,000	$100,000

What a powerful warning to other fund companies: You, too, can suffer the indignity of earning $750,000, if you are willing to take the chance that you might pay a $100,000 fine three years down the road.....And what a painful experience for Van Kampen: "Ouch, Mr. SEC, your big fines are hurting me. Oh, stop, please stop."


A rose by any other name would at least be a flower: The Lindner Growth Fund was recently renamed Lindner Large-Cap.....See if you notice anything unusual about Large-Cap's top-10 holdings as of June 30, 1999:

Lindner Large-Cap: Top-10 Holdings	Market Cap ($ Mil)	Category
CPI Corp	$330 mil	Small-cap
Alliant Techsystems	$717 mil	Small-cap
International Bancshares	$769 mil	Small-cap
Corus Bancshares	$377 mil	Small-cap
National Presto Industries	$280 mil	Small-cap
Tecumseh Products - B	NA
Rightchoice Managed Care - A	$197 mil	Small-cap
Mark IV Industries	$973 mil	Small-cap
American Power Conversion	$3,770 mil	Mid-cap
MIF Limited 144A	NA

Source for fund holdings: Lindner Web site
Source for market cap data: Yahoo! Finance

The FundAlarm Literary Supplement:

Are you looking for a good mutual fund book, either for yourself or as a Holiday gift?.....For readers with limited fund experience, we recommend Mutual Funds for Dummies, by Eric Tyson.....Either of John Bogle's books would make a good choice for readers with a medium level of fund experience......Since we can't tell the difference between Bogle's books, and his first one (Bogle on Mutual Funds) is available in paperback, that's the one we'd go with.....Another good choice is How Mutual Funds Work (by Fredman and Wiles): It's not as basic as "Dummies," and it's easier reading than Bogle.....If you decide to purchase any of these books, or any other Holiday items through Amazon.com (electronics, videos, etc)., we hope you'll consider using the FundAlarm link: FundAlarm's link to Amazon.com (This link is always available on our Home page).....As we've said before, Amazon pays us 5% of your total purchase if you use this link to access their site.....Your name and specific transactions with Amazon are never disclosed to us.....Thanks in advance.

Briefly noted:

• We've checked back several times, and they still haven't changed their mind: According to the Forbes Interactive Web Guide, available on your newsstand now, FundAlarm is the top Web site in the "Mutual Fund Selection" category, .....Runners-up to FundAlarm are Morningstar.net, fundsinteractive.com, indexfunds.com, and America Online.....Most negative comment from Forbes: Our typeface is too small.
  
  Read the Forbes review of FundAlarm
  (The rest of the Forbes Web Guide is good, too)
  
  
• Billed as the world's "first interactive mutual fund," the OpenFund will be managed live on the Internet (www.metamarkets.com)....Trades will be posted in real time, and fund holdings will be continuously updated.....The fund's Web site will contain an area where fund managers and visitors can chat and post messages, and visitors to the site can control a live Web cam that is pointed at the fund's trading desk.....For the time being, at least, the managers of OpenFund do not plan to give out their home phone numbers, and investors have not been invited to drop by "if they're in the neighborhood".....The press releases for OpenFund glow with terms like "inclusion," "empowerment" and the "New Economy," so we were surprised to note that OpenFund is seeking patent protection for its underlying "business method".....In other words, "open" is OK for them, but anyone else who tries is going to be hauled into court.....This sounds a lot like old-fashioned exclusion and hypocrisy to us, but we'll check with our guru just to make sure.
  
  
  
• In addition to empowering and including investors like never before, the co-founder of the OpenFund has apparently broken the mutual fund "grok" barrier.....For those who aren't familiar with the term "grok" (and we weren't, before we looked it up), it's a Martian word, from Robert Heinlein's Stranger in a Strange Land.....It literally means "to drink," but grok also metaphorically means "to understand fully" or "take it all in".....Anyhow, the OpenFund recently announced that it had formed a think tank of "industry luminaries".....According to a press release, which quotes OpenFund co-founder H. Davis Nadig, the think tank will produce ideas to help portfolio managers "better grok the New Economy and formulate investment strategies to capitalize on it".....When OpenFund starts 24-hour trading, investors will presumably enjoy the benefits of grok around the clock.....In the meantime, OpenFund portfolio managers will be happy if they can avoid getting caught between grok and a hard place.
  
  
  
• When we zoomed the OpenFund Web cam, one Post-It note in particular caught our eye:
  
  
  
  
• The name Goldman Sachs conjures up images of:
  
  

  	a) Nothing.
  	b) A stuck-up Wall Street firm that wouldn't condescend to serve middle-income investors until they realized they could make a pot of money selling mutual funds.
  	c) "Integrity and trust and all those things investors want."

  
  The head of Goldman's U.S. mutual fund effort thinks that you will answer "c," but he's taking no chances.....Goldman is making a big push to market its funds to brokers, in the hopes that brokers will make a big push to market the funds to you*.....Whenever brokers come under pressure like this, there's always a chance -- just a chance -- that brokers will promote funds that aren't in your best interest, because of the financial incentives dangling over their heads.....In any event, Goldman still faces a serious challenge when it comes to fund performance.....This month's FundAlarm database contains 25 Goldman Sachs funds.....These funds have a total of 42 measurement periods, and they trail their respective benchmarks in 34 of those periods (81%).....Even if we toss out the multiple classes of each Goldman fund, we still have 12 discrete funds with 24 measurement periods, and 19 periods of sub-par performance (79%).
  *"Mutual Funds Are Hard Sell for Goldman," Charles Gasparino, September 22, 1999
  
  
  
• If you've been alive for the past couple of years, you're probably aware that the average commission paid by an individual investor to buy a share stock has dropped dramatically -- in some cases, to the equivalent of a penny a share, or less.....You might think that stock commissions paid by mutual funds would have dropped even more, but they haven't, and regulators want to know why.....The SEC recently launched a probe of trading practices at 25 investment advisory and brokerage firms, trying to figure out why the institutional commission rate seems to be stuck at about five or six cents per share.....Among the possibilities: Mutual funds pay excessive commissions in order to compensate stock brokers for various services, not all of which benefit fund shareholders.
  
  
  
• As you've probably also heard, 24-hour stock trading has finally arrived.....For now, after-hours markets are thinly-traded, and most mutual funds are avoiding them.....Soon, however, around-the-clock trading will be the norm, even for funds.....When that happens, look for funds to start pricing themselves more than once a day, and look for expense ratios to creep up as funds incur additional administrative costs.....Funds that price more than once a day could also start attracting hot money, so look for more funds to impose short-term redemption fees.
  Source: "A Late Bulletin: Extended Trading Hours Could Have a Negative Impact for Fund Investors," Charles A. Jaffe, September 8, 1999
  
  
  
• Young or old?.....Male or female?.....Ivy League or Podunk U.?.....Cat or dog?.....There have been endless debates over who makes the best mutual fund manager, and these questions are not likely to be resolved soon.....For a long time, we've felt that the best money managers are those who have had some experience running a business......Therefore, we were interested in a recent profile of Marc Klee and Barry Gordon, who co-manage John Hancock Global Technology*....Seems that Klee and Gordon personally own a minority stake in two minor league baseball teams, and their hands-on baseball experience has taught them a few important lessons about business in general......Says Klee: "Half of my career was spent without any inherent management experience. In retrospect, I wish I had known then what I know now"......An honest comment, and a sobering thought for fund investors.
  * "Batter Up!", Mark McLaughlin, SmartMoney.com, September 22, 1999
  
  
  
• In the November 1998 issue of FundAlarm, we channeled the spirit of Kreskin and turned our attention to "market-neutral" mutual funds.....Here's part of what we had to say:
  
  

  "Like so many foolproof systems that have come before, we predict that market-neutral funds will eventually fail.....It may be a long, slow fizzle, or maybe the system will suddenly crash, and one bad year will wipe out all the good ones.....But we're pretty sure it will happen."

  
  Well, market-neutral funds are still here, but patience with them seems to be wearing thin.....For example, writing recently in Business Week, columnist Robert Barker had a refreshingly simple suggestion for the dismal Barr Rosenberg Market Neutral Fund: Close it up, and return all the money to investors.....According to the fund manager, this option is not being considered.
  
  
  
• Effective December 31, 1999, Founders will scrap its no-load structure, and it will institute a system of multiple share classes with sales loads.....Existing no-load shareholders will still be able to invest without commissions, via a new "F" class.....Founders is owned by Mellon Bank, and so is Dreyfus, so the new funds will be known as Dreyfus Founders.
  
  
  
• Overheard at the Mellon Bank planning meeting:
  
  

  	Executive #1: So, which fund name should we put first?
  	Executive #2: The good one.
  	Executive #1: But we don't have a good one.
  	Executive #2 (thinking): Heads for "Dreyfus Founders," tails for "Founders Dreyfus." Call it in the air!

  
  
  
• More unhappy 401(k) owners: Eighteen former employees are suing First Union Bank, claiming that they were forced into "mediocre" funds as a means of building the bank's fund business.....The funds in question are the Evergreen funds, which happen to be owned by First Union.....Plan participants describe themselves as a $3 billion "captive audience," and say they were given no choices other than the Evergreen family.
  
  
  
• That sound you hear is mutual fund executives banging their heads against the wall.....Over the past few years, star fund managers have been difficult to retain, so many fund families started emphasizing team management.....American Century sang the praises of team management in some recent magazine ads, and they lost almost the entire Select fund team back in June.....The latest team to be "lifted out" (a new term!) is the one that ran Alleghany/Chicago Trust Growth and Income: Nancy Scinto and Jerold Stodden are gone, joined by their chief investment officer.....All three (plus David Cox, of Alleghany/Chicago Trust Balanced) are headed for Voyageur Asset Management, where they will handle institutional accounts, and where they will have the opportunity to become bigger, wealthier fish in a smaller pond.
  Barron's, Sandra Ward, September 27, 1999
  
  
  
• The GAM mutual funds, have been acquired by UBS (Switzerland).....According to a UBS press release, GAM will retain "its identity and approach," while becoming a new business area within the UBS Private Banking Division.....The UBS executive in charge of ensuring that GAM remains independent is described in the press release as head of "integration" for UBS Private Banking.....In other words, the head of "integration" for UBS has been assigned to keep GAM independent.....We're confused, but maybe it's a language thing.
  
  
  
• Hot tip!
  

  "If Transamerica Small Cap is not in your portfolio, we suggest that you do yourself a favor and stake a claim with [manager Philip] Treick and his fund." --MarketMavens.com, September 15, 1999

  
  
• Big problem!
  

  On August 9, 1999, 38 days before this item appeared, Treick announced that he was leaving Transamerica Small Cap.

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FundAlarm © Roy Weitz, 1999