| Highlights and Commentary |
| By Roy Weitz |
Don't get caught by surprise: This month's FundAlarm database contains 370 funds that have been in existence at least three years, but less than five years.....By definition, none of these funds can be 3-ALARM, but that doesn't mean poor performance should be ignored.....Forty-four of these funds, listed on the accompanying page, have underperformed their respective benchmarks by at least 5% (500 basis points) over the past 12 months and three years, and each fund on this list is a good candidate for 3-ALARM status when it's eligible.....Among the larger funds that aren't yet 3-ALARM, but are hurtling in that direction:
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When you pay a commission to buy a mutual fund, a portion of that commission goes to the individual who sells you the fund, and a portion goes to that individual's employer (a brokerage firm).....That's the easy part.....Behind the scenes, as a result of your purchase, the brokerage firm may receive additional payments directly from the fund company, plus payments as it holds the fund in your account.....Unlike commissions, these additional payments -- usually lumped under the heading of "revenue sharing" --- don't come out of your pocket, so you might think they don't matter to you.....But they do matter, and here's why: Let's say that Fund Company A gladly agrees to make up to $10 million in revenue sharing payments to your broker for the sale of its funds.....Fund Company B reluctantly agrees to make revenue-sharing payments of only $1 million.....Which fund company do you think your broker, and therefore your individual financial adviser, will be more likely to favor and promote?
| Annual revenue-sharing payments received by broker, per $10,000: | |||
|---|---|---|---|
| Broker | For selling a fund | For holding a fund in an account | Does the broker name the fund companies with which it has revenue-sharing arrangements? |
| Merrill Lynch | Up to $25 | Up to $10 (stock/balanced) | No. |
| Smith Barney | None | $12 (stock/balanced) | Smith Barney lists fund families "with" and "without" branch access, in descending order of revenue-sharing payments -- by far the most complete and useful disclosure of any of these four brokers. |
| UBS | $5 | $10 | UBS has "Tier I" and "Tier II" fund companies, and it lists only the Tier 1 companies (alphabetically). Tier I fund companies have branch access. According to UBS, "while the payment of revenue sharing is a factor in determining whether a fund company is placed in Tier I or Tier II, such payment is never the sole determinant in these decisions." |
| Wachovia | $20 | $10 | Wachovia lists 63 fund companies, but gives no indication of which fund companies are most favored or pay the most. |
The following links will take you to the complete revenue-sharing disclosure document for each fund discussed above:
If you can't say something nice, don't say anything at all: OK, then, we will say something nice.....As journalist Steven Goldberg recently pointed out, there are several new mutual funds, from experienced and successful fund families, that might be worth your attention:
Speaking of Primecap: There have been some interesting doings over the past few months, most of them in relation to Vanguard.....Outside observers don't know whether Vanguard or Primecap wanted to close the Vanguard Primecap funds last March, but we'd be willing to bet it was Vanguard's idea.....When Primecap announced its own line of mutual funds, shortly after the closing, you'd think that Vanguard might have been a bit peeved, since it looked like Primecap was biting the hand that had kept it very well fed.....But if Vanguard was annoyed, it's demonstrating that emotion in an unusual way: Penny-pinching Vanguard has actually agreed to increase the effective annual management fee of the closed Primecap funds, by four basis points (0.04%), and Vanguard has also put Primecap in charge of a new fund, Vanguard Primecap Core (which should be added to the list of attractive new funds, above).....And what is Vanguard's justification for raising Primecap's management fee?.....Here it is (in part):
| "The new fee arrangement will help Primecap Management Company continue to attract and retain top management talent, and thereby enhance the organizational depth and stability of the firm" |
If you like waiting in line for a flu shot that you don't really need, simply because the vaccine is scarce, how about signing up for a mutual fund that you don't need, simply because it's also scarce?.....The fund in question is Wasatch International Opportunities, an international micro-cap fund that will open next January and close when it hits $20 million in assets.....A previous Wasatch fund, also limited to $20 million, closed the same day it opened in August 2003, and even then the fund was oversubscribed by $40 million.....In other words, the upcoming Wasatch fund is going to be a hot ticket, and it's also going to create a considerable buzz (watch the FundAlarm Discussion Board: We guarantee it).....Of course, it's possible that this highly specialized fund could be a good fit for your portfolio, in which case you might want to get in line (Wasatch says it will take "applications" for the fund, starting January 12, according to procedures that are still to be announced).....But for most people, scarce or not, hot or not, this fund probably doesn't make sense.....And a lot of good our warning will do.
For a multi-billion dollar fund firm like Wasatch, a new $20 million mutual fund (above) seems to fall into the category of "Why bother?".....So we'll go ahead and ask: Why is Wasatch bothering with its new International Opportunities fund?.....Our best guess: It helps the firm develop expertise in a new investment area, it gives analysts a chance to run a fund of their own and, yes, it creates a buzz that keeps the Wasatch name in front of the investing public.....In other words, the new fund may be designed more to serve Wasatch's corporate strategy than your own investment strategy.....That's not necessarily a bad thing, just something else to keep in mind if you decide that you must have Wasatch International Opportunities even more than you had to have Beanie Babies.
Social investment programs are often criticized because their screening criteria are too strict, and they eliminate many potentially profitable stocks.....But how about criticizing socially responsible investing ("SRI") because it's not strict enough?.....That's not your typical argument, but it's an argument that's made in a recent report by Paul Hawken and his Natural Capital Institute.....Hawken notes that over ninety percent of the Fortune 500 companies are included across all SRI portfolios.....Since virtually the entire Fortune 500 can't be socially responsible, Hawken uses this statistic to argue that the screening methodologies of SRI funds are inadequate.....Current SRI screening methodologies are often geared to identifying the best player in a "bad" industry, or the best player in some aspect of its business (for example, McDonald's is typically recognized for some good environmental practices).....But Hawken says that's not enough.....In his opinion, "the single most important criterion for a company is whether its products and services should exist at all".....Since the aforementioned McDonald's spends $2 billion a year on advertising (more than any other company in the world), and much of that advertising is aimed at getting young children addicted to unhealthy fast foods, Hawken suggests that McDonald's fails the "should it exist" test, and the company should never be included in a true SRI portfolio.....If that part of Hawken's report is too radical for you, he makes some other, less inflammatory arguments about socially responsible investing, especially a lack of transparency (we've been frustrated by this, too).....Hawken calls on SRI managers to be public and specific about how stocks are chosen for their portfolios, and to "maintain constant online disclosure of portfolios with full commentary on why a company has been selected or deleted"....."Either the [SRI] industry has to reform in toto (or rename itself), or that portion of the industry that wants to maintain credibility must break off from the pretenders and create an association with real standards, enforceability, and transparency. "
Jim Snyder, who's running for Lieutenant Governor of North Carolina, has made a "revolutionary" retirement security plan part of his campaign platform.....If Snyder has his way, the State would put $700 into a retirement account for every child born in North Carolina.....The account would be invested in a "market index fund," and the balance would be available at retirement, tax-free, 65 years later.....The Snyder Retirement Security Plan is an intriguing idea, but it's hardly "revolutionary," at least for readers of FundAlarm......Consider the following excerpt from a profile of David Snowball, which appeared in the June 2002 issue of FundAlarm (David was, and still is, a regular contributor to the FundAlarm Discussion Board):
| "We asked David if he had any fund insights, words of wisdom, or anything else that he wanted to get off his chest.....In typical David Snowball fashion, he hit us with an idea that is so good, so simple, and so logical that you have to wonder why every financial services firm and politician isn't already lined up behind it: A retirement savings account for infants.....Under current law, let's say that age 15 is the earliest that a child can realistically set aside $2,000 of earned income to fund an IRA.....Assuming a 12% annual return, and no further contributions, that IRA will grow to about $580,000 by age 65.....But if the relatives of that child had been able to fund an "infant retirement account" of $2,000, that account could grow to the astonishing sum of almost $3.2 million by age 65.....As David says, in typical cut-to-the-core fashion, "with compound interest, the infant account allows for two more 'doublings' by age 65, plus a bit more, and that makes all the difference in the world"......David's idea seems perfectly attuned to our times: It's family-friendly, and it would foster economic self-reliance, take pressure off the Social Security system, and have minimal impact on the budget deficit.....If any politicians are out there reading this, and if you're looking for an issue that will make you famous and beloved, how could you do better than this one?.....Just get in touch with us, and we'll put you in touch with David.....And David is such a modest guy, he won't even object if you name the account after yourself. |
You can take this market commentary to the bank (where, unfortunately, it will be worthless): Here at FundAlarm, we receive dozens of stock market commentaries, some on a monthly basis, some quarterly, and all basically worthless.....This year, we've developed a particular fondness for the monthly "market outlook" that is penned by Robert Zuccaro, manager of the Grand Prix funds.....Zuccaro's commentary has at least two things going for it: It's only one page long, so it doesn't waste too much time, and it often closes with a short-term prediction of where the stock market is headed, which most other prognosticators avoid because it's so easy to look so foolish so quickly.....Anyhow, Zuccaro's fools-rush-in commentary makes for some resolutely wrong-headed reading:
| Date of Zuccaro's commentary | Zuccaro's market prediction | Dow Jones Industrial Average (end-of-month value) | FundAlarm comments |
|---|---|---|---|
| January, 2004 | "We will go out on a limb...and predict a second straight year of 20% gains in the stock market." | 10,488 | Keep your eye on this limb. |
| March, 2004 | "...we continue to stand by our forecast that the major market averages will advance by at least 20%." | 10,358 | Still early in the year, still plenty of time, even if the Dow is already down... |
| June, 2004 | "Better managed corporations along with [increase internet usage]...should translate into another double-digit gain in profits for 2005." | 10,435 | Oops. Halfway through the year, and the focus is already on 2005. |
| July, 2004 | "If past is prologue, expect a strong showing by the stock market in the next six months." | 10,140 | The promise of a "20% gain" is history, but at least we're back in 2004. |
| August, 2004 | "At some point, these two factors [corporate profits growth and stock market movements] will come into balance again which implies a major upward move by the S&P 500." | 10,174 | Yes, and at "some point" we'll all be dead. |
| September, 2004 | "Although the stock market has been mired in a trading range since February, it seems highly probable that a major upward move is imminent before year-end." | 10,080 | And the first 3.9% of that "major move" will get us right back to where we started the year. |
FundAlarm turns 100: You are reading the 100th consecutive, monthly issue of FundAlarm, which means that we've gone eight years and four months still without getting a life.....In that time, we estimate we've sent out 2.5 million monthly e-mail reminders, analyzed 300,000 funds, reported on 1,175 manager changes, written 700 pages of Highlights and Commentary, and noted one instance of a fund manager admitting a mistake.....For about half the time that we've been publishing FundAlarm, we've been asking our readers to help support us financially.....Over 1,000 readers have come through with direct financial support, and several thousand more have used the FundAlarm link when making purchases through Amazon.com (thanks to all of you, again, since FundAlarm couldn't and wouldn't exist without your help)......We're making one more request for support this year.....If you've never supported FundAlarm before, but you've been reading us for a while, please consider helping out now (for example, if you've read/enjoyed/survived 50 issues of FundAlarm, and you make our suggested support payment of $18, you're paying just 36 cents an issue, in arrears).....The accompanying page explains several support options and, as always, we thank you in advance.
Briefly noted:
| "Buddy, can you spare a dime?"
"Well, as a matter of fact, I can't." |
| "Mary-Kay Bourbulas is the manager of Strong High-Yield Municipal Bond.....In July 2001, Bourbulas told The Wall Street Journal that 'the worst is over' for her struggling fund.....Several months later, in October 2001, the default rate on the fund's holdings had crept up to 10.9%, the performance of the fund was still dismal, and Bourbulas told the Journal that her outlook for the high-yield muni market was 'positive'.....In September 2002, Bourbulas apparently grew tired of feeding BS to The Wall Street Journal, so she turned to Kiplinger's magazine, telling a reporter that she was 'slowly purging the fund of its worst bonds'.....Last month, Kiplinger's again turned its attention to the Bourbulas basket case, and the news is not good.....In 2003, for the fourth straight year, Strong High-Yield Muni finished dead last among all tax-exempt bond funds.....The fund's 11% loss for 2003 also marked the fifth straight year of negative returns.....The fund still has about $84 million in assets, which means that a number of its shareholders (1) are dead, (2) have forgotten about their money, or (3) prefer to emphasize hope over bitter experience.....Even Strong's muni-bond chief says that 'it would be nice to merge this fund away, but the portfolio is not positioned to do that right now.'" |