Highlights and Commentary
(Originally Posted November 1, 1997 - Some editing) [Archive Table of Contents]
Funds that focus: The average stock mutual fund has 140 different holdings, and its top ten holdings account for about 32% of total assets......Focused funds have relatively few holdings, and tend to take large positions in their top ten.....In the table below, we list all of the focused funds in the FundAlarm database (for our purposes, a focused fund has 40 or fewer holdings, and its top 10 holdings represent 50% or more of fund assets):

Fund Name	% Assets in Top 10 Holdings	No. of Holdings	3 Yr. Return vs. Benchmark (%)	Benchmark	Alarm Status
Robertson Stephens Contrarian A (RSCOX)	125	17	-1.38	Schwab Intl Idx
Sequoia (SEQUX)	92	15	0.45	Vang Idx500
United Services Gold Shares (USERX)	84	29	-53.01	Specialty	3-ALARM
Norwest Advant Growth Equity I (NVGEX)	83	36	NA	Vang Idx500
Robertson Stephens Val+Grth A (RSVPX)	82	20	6.41	Dreyf MidCap
Clipper (CFIMX)	75	19	-0.99	Vang Idx500	3-ALARM
Flag Inv Telephone Income A (TISHX)	64	34	1.04	Specialty
CGM Mutual (LOMMX)	63	21	0.89	Vang Bal Idx
Interactive Inv Tech Value (TVFQX)	63	39	33.79	Specialty
Fidelity Sel Defense & Aerospace (FSDAX)	61	40	15.35	Specialty
Lexington Corporate Leaders (LEXCX)	61	26	-3.08	Vang Idx500	3-ALARM
Longleaf Partners (LLPFX)	60	25	-0.7	Dreyf MidCap
Janus Olympus (JAOLX)	59	33	NA	Vang Idx500
Longleaf Partners Realty (LLREX)	58	31	NA	Specialty
Janus Twenty (JAVLX)	57	24	0.93	Vang Idx500
New England Growth A (NEFGX)	55	22	-2.05	Vang Idx500
CGM Capital Development (LOMCX)	53	28	4.48	Dreyf MidCap
Crabbe Huson Special Prim (CHSPX)	53	40	-11.62	Vang IdxSmCap	3-ALARM

In general, we like the idea of a focused fund: After all, you're paying a fund manager to come up with top-performing stocks.....There are only so many good ideas at any given time, and you don't want your manager's "A" list diluted with stocks from the "B" (or "C" or "D") list.....Unfortunately, as the table above demonstrates, focus doesn't necessarily translate into performance......If a focused fund goes 3-ALARM (like Clipper or Lexington Corporate Leaders), and it has performed reasonably well in the past, we would be inclined to hold it a little longer than we might hold a diversified 3-ALARM fund.....But as you make the mutual fund sell decision (or the buy decision, for that matter) remember that focus isn't a sure thing.

The Marsico funds get ready for business: In early August, Tom Marsico resigned as manager of Janus Growth and Income and Janus Twenty....In early October, Marsico's new company, Marsico Investment Management, filed documents with the SEC to start two new funds: Marsico Growth & Income Fund and Marsico Focus Fund.....The funds will apparently begin accepting money in January.....A number of details still haven't been announced, but here are the basics:

• Sales charge: None.....12b-1 fee: .25% (maximum)....Minimum initial/subsequent investment (regular account): $1,000 / $100.
  
  
• Marsico Focus Fund "is a non-diversified fund that seeks long-term growth of capital by normally concentrating its investments in a core position of 20-30 common stocks."
  
  
• Marsico Growth & Income Fund " is a diversified fund that seeks long-term growth of capital with a limited emphasis on income. Although the Growth & Income Fund normally invests at least 25% of its assets in securities that have income potential, it emphasizes equity securities selected for their growth potential."
  
  

Delusion of the Month
"I think one reason we've been successful is that we focus solely on this fund. We don't want a whole family of funds that will divert our focus from this small growth area."
--Lawrence Auriana, co-manager of the Kaufmann Fund
Fact: Kaufmann is a small-cap fund with $6.3 billion in assets
Fact: As recently as 1995, Kaufmann had "only" $3.2 billion in assets.
Fact: The average small-cap fund has about $289 million in assets.
Fact: Only one small cap fund is larger (the 3-ALARM Small Cap World Fund).
Fact: Kaufmann's 12-month performance has been dismal (almost 21% below the benchmark)
Fact: Kaufmann has trailed the small-cap benchmark since July 1995.
Opinion: Kaufmann shows the classic signs of deteriorating performance due to rapid growth in assets. Our suggestion: Watch it closely.

Balanced funds go 3-ALARM: Starting this month, our balanced fund benchmark (the Vanguard Balanced Fund) has a five-year track record....That means 89 balanced funds in our database can now be compared to their benchmark for five years (as well as three years and 12 months).....And sure enough, right out of the box, 22 balanced funds earn the 3-ALARM designation.....Here's the inaugural list of 3-ALARM balanced funds, sorted by three-year performance (worst at the top):

Fund Name* *(all balanced, all 3-ALARM)	Fund vs. Benchmark for past:
	12 Mo	3 Yrs	5 Yrs
Lindner Dividend Inv (LDDVX)	-10.73	-6.74	-2.78
USAA Growth & Tax Strategy (USBLX)	-7.95	-5.57	-2.81
Prudential Balanced B (PRFCX)	-6.69	-5.47	-2.53
Fidelity Asset Manager (FASMX)	-0.92	-5.42	-1.01
United Continental Income A (UNCIX)	-6.5	-4.73	-1.34
Phoenix Balanced A (PHBLX)	-3.65	-4.61	-4.01
United Retirement Shares A (UNFDX)	-5.98	-4.28	-1.52
Calvert Social Inv Managed A (CSIFX)	-3.97	-3.69	-3.38
American Cent Balanced Inv (TWBIX)	-4.56	-3.41	-2.57
IDS Mutual A (INMUX)	-1.08	-2.7	-0.83
Columbia Balanced (CBALX)	-4.04	-2.59	-0.6
Evergreen Balanced Y (EVBYX)	-1.34	-2.21	-1.43
Putnam Balanced Retirement A (PMITX)	-2.28	-1.77	-0.08
Dean Witter Strategist B (SRTBX)	-3.84	-1.73	-1.36
State Farm Balanced (STFBX)	-3.42	-1.73	-1.22
T. Rowe Price Balanced (RPBAX)	-2.06	-1.73	-0.36
Pax World (PAXWX)	-2.97	-1.28	-2.77
Keystone Balanced (KKONX)	-2.34	-1.25	-1.52
Kemper Total Return A (KTRAX)	-0.93	-0.92	-0.89
American Balanced (ABALX)	-0.47	-0.73	-0.15
George Putnam of Boston B (PGEBX)	-0.68	-0.3	-0.3
Composite Bond & Stock A (CMPBX)	-2	-0.08	-0.46

PBHG wants to hang with the big boys: With great fanfare, PBHG recently lured away Fidelity's marketing manager, Paul Hondros.....Seems that Hondros and PBHG have ambitious plans to expand, and PBHG now sounds like an unfocused teenager making career plans: It may open (or acquire) several new funds, it may start a line of broker-sold funds, it may establish a discount broker, it may pursue the 401(k) market....Apparently not on the list of PBHG possibilities: Dating Madonna, starting a rock band, or simply doing a better job with what it already has..... And what are the potential benefits of expansion for PBHG shareholders?..... Absolutely, positively, nothing.....This is an ego trip, pure and simple.....OK, we take that back....It's not just an ego trip: It's also an attempt by PBHG management to grab the bucks while the grabbing is good .....If you own a PBHG fund, take note: Your interests are not being served.

Bring in the gimmicks, bring in the risk: The Taxpayer Relief Act of 1997 contains at least one obscure (but important) provision affecting mutual fund investors: elimination of the "short-short" rule.....This provision was originally designed to limit the amount of short-term gains a mutual fund could recognize....Now that the rule is gone, mutual fund companies are developing new funds intended for short-term trading and short selling.....Many of these new mutual funds will have characteristics very similar to aggressive hedge funds, with a large amount of short-term trading, high turnover, and concentrated positions..... Also on the horizon: Many existing funds (especially natural resource funds) will begin investing in commodity futures and options, or increase exposure to them.....If a broker or financial advisor tries to interest you in a new fund, it's more important than ever to know exactly what you are getting.....Here's the best way to keep from being surprised: Read the section of the prospectus that deals with investment objectives.....If you don't understand the fund's objectives, or if you don't like what you see, don't invest.

Michael Price and the Five Ciphers: Not a new musical group, rather the current management team of the Mutual Series mutual funds......And as the date approaches (June 1998) when star manager Michael Price can step down as CEO of the $28 billion Mutual Series funds, Franklin Resources (owner of these funds) is starting to get nervous....Sales literature and advertisements now show Price surrounded by his five-man team, and Price is reported to have uttered the following words in public: "The press gives me far too much credit".....The performance of the Mutual Series domestic "Z" funds (Beacon, Qualified, Shares) has been lagging the mid-cap benchmark since at least June 1994 -- and Price says he is still putting in "15-hour days"......Looking ahead to Mutual Series without Price, we see a great big SELL sign starting to form.....Stay tuned.

Help us with this one. First, we'll set the record straight: It doesn't matter to us one bit whether Helen Young Hayes, star manager of Janus Worldwide and Janus Overseas, stays with Janus for the rest of her career or leaves tomorrow.....But ever since Tom Marsico left Janus, there have been persistent rumors that Hayes would follow him out the door, and start her own money management firm...A couple of financial journalists have opined that such a move wouldn't make financial sense for Hayes, and this is where we need help.....We look at the situation very differently, and we'd like to know what we are missing.

Here's our basic assumption: Hayes could have at least $1 billion under management within 24 months of starting her own firm..... (Remember Garrett Van Wagoner? He's been on his own about 21 months, isn't as well known as Hayes, and has about $750 million under management just in mutual funds.).....We are also assuming (a) that Hayes could raise cash to capitalize an investment firm without putting in a dime of her own, (b) that Hayes could retain at least a 75% equity interest in her new firm, and (c) that Hayes could have all the support staff and research she wanted or needed.....Based on recent transactions, a mutual fund company with $1 billion under management would be worth between $30 million and $50 million, and Hayes' share of that company would be worth $22 to $38 million.....If that isn't an attractive two-year return for Hayes, then her current deal with Janus must be truly extraordinary....or she doesn't have the slightest trace of entrepreneurial spirit....One final observation: We find it astonishing that someone like Hayes, who is paid to find the best investment opportunities in the world, apparently can't see (or isn't interested in) the opportunity sitting at her desk.

If you like paying too much, you're going to love these funds: In a recent article (10/21), Business Week put the spotlight on "closet index funds".....These are actively-managed large-cap funds which have returns and volatility similar to the S&P 500, but carry expense ratios significantly higher than the Vanguard Index 500 fund (many closet index funds also charge a sales load)....Some of the following funds (for example, G.E. U.S. Equity) deny they are closet indexers, and say it's just a coincidence that they track the S&P 500....Other funds acknowledge that they track the sector weightings of the S&P, but they hope (and often fail) to produce better-than-index returns through stock selection....Of course, you're better off owning a large-cap fund that comes close to the S&P, if the alternative is investing in a fund that misses the S&P by a mile.....But if you are paying your manager top-dollar to beat the S&P, and all you get is the index, you might want to reconsider.

Closet Index Fund*	3 Yr. Return (%)	Expense Ratio (%)	Sales Load (%)
Compass Select Equity Inv.	24.7	1.21	4.50
Dreyfus Disciplined Stock Inv.	26.0	1.15	None
First Investors Blue Chip	22.1	1.49	6.25
G.E. US Equity	24.4	1.00	4.50
Goldman Sachs Core US Equities	24.9	1.29	5.50
MFS Mass Investors	26.2	0.74	5.75
Pacific Horizon Blue Chip	26.3	1.28	4.50
Performance Equity Con. Serv.	24.7	1.06	None
State St. Research Investment	23.6	0.75	4.50
Tower Capital Appreciation	25.6	1.24	4.50
Benchmark:
Vanguard Index 500	26.5	0.20	None

* All "A"-class funds, except Dreyfus and Performance.
Money says "flimflam," we say "flawed." But still worth your attention: For its November 1997 issue, Money commissioned a study of year-end mutual fund performance -- specifically, last-day performance ("Watch Out for the Year-End Fund Flimflam").....The study found that a disproportionately large number of mutual funds that were close to (but trailing) the "market" on the second-to-last trading day of the year managed to surge ahead of the "market" on the final trading day of the year.....How did the funds do this? A number of methods, most but not all of which are (a) illegal and (b) extremely difficult to prove.....Why do funds care about year-end performance?.....An earlier academic study found that the assets of the best-performing funds in a given year grow more than five times faster in the following year than those of the average fund.

What's the problem with Money's study?.....It defines "market" as the S&P 500, and the study assumes that all types of funds, including small and mid-cap funds, are obsessed with beating the large-cap index.....We don't think so.....Small-cap funds (for example) earn significant bragging rights by beating the small-cap index (often the Russell 2000), and it would be pointless for the average small-cap fund to stretch to beat the S&P on the last day of the year.....Still, mutual fund investors should take note of this article: Fund managers know that investors are swayed by good calendar-year performance, and there's no doubt that some managers may be artificially/unethically/illegally boosting their year-end numbers....You can regain the upper-hand by not giving undue weight to fund performance for any given calendar year.

You haul 16 portfolios, and what do you get? Another day older, and an employment contract from hell: According to The Wall Street Journal (10/22), the parent of Putnam Investments (Marsh & McLennan) has adopted a carrot-and-stick employment policy for managers in the Putnam mutual fund unit.....The carrot is a form of newly-created Putnam equity.....The stick is an employment contract which prohibits managers from soliciting Putnam clients or employees for two years after they leave the firm.....The contract also includes a provision that seeks to ban managers from working at certain other jobs in the investment industry for two years after leaving Putnam, even if they are fired.....Former employees who violate the contract must repay 50% of all bonuses received since the agreement was signed, and forfeit any accrued bonuses.....The contract also prohibits employees from "disparaging" Putnam after leaving, under threat of a $500,000 penalty.... Is the contract enforceable? That remains to be seen.....What does the contract tell us about the Putnam corporate culture? All we need to know..... Meanwhile, if you are the first-born male child of a Putnam fund manager, you might well be nervous about future contract provisions.

Briefly noted:

• Last month, we reported that Irene Hoover had left as manager of Jurika & Voyles Mini-Cap Fund.....Turns out that Hoover's departure came a few months after a restructuring by New England Investment Cos., the fund's new owner, and Hoover wasn't promoted.....Hoover is a quirky manager who apparently doesn't fit the bland new corporate style.....Jurika & Voyles Mini-Cap is now a strong "sell".....Meanwhile, Hoover is expected to start her own fund, which should be worth checking out.....We'll keep you posted.
  
  
• "Can Fidelity Contrafund Come Back?": At Smartmoney.com, there is seldom heard a discouraging word about mutual funds and their managers. But even Smart Money can't ignore evidence that Fidelity Contrafund is getting "unwieldy." According to Smart Money, Contrafund manager Will Danoff "made his name as a frequent trader who moved in and out of sectors, seeking out-of-favor companies with strong earnings growth. But that was back in the days when Contrafund was less than $1 billion in size."[FundAlarm note: Contrafund now has about $32 billion under management, which is half the size of monster Magellan. The Contrafund portfolio currently contains about 800 [!] different holdings -- all, no doubt, carefully selected by Danoff.]
  
  
• Dare he say it? Don Phillips, president of Morningstar Inc., is quoted in a recent interview* as being "concerned" that Janus Overseas (managed by Helen Young Hayes) has gotten "very big, very fast." Phillips notes: "[This kind of growth is] typically is a sign of some sort of future trouble. I've seen a lot of other funds where everything looks terrific and the assets go off the charts. That's when they go into a funk".....And even though Phillips didn't say it, perhaps the rapid growth of this fund is another reason Hayes should consider striking out on her own.
  *"The Best Funds," Barron's, October 6, 1997
  
• Department of Swift Justice: Richard Hazlewood has been fired as manager of the Fidelity Emerging Markets Fund. You may recall that Hazlewood made disastrous bets on several Southeast Asian stock markets earlier this year, especially Malaysia. Ever since, fund performance has been horrendous, and investors have been fleeing.
  
  
• In the article reporting Hazlewood's dismissal (above), The Wall Street Journal noted rumors that Hazlewood had become friendly with Francis Yeoh Sock Ping, a leading Malaysian industrialist. Hazlewood's fund took large stakes in companies controlled by Mr. Yeoh, who also owns a private island in the Strait of Malacca. At one point, Mr. Yeoh reportedly promised to let Hazlewood sleep in the same room where opera singer Luciano Pavarotti once stayed (Hazlewood denies this).....The mind boggles..... If Placido Domingo had been the overnight guest instead of Pavarotti, would Hazlewood have been less interested in Malaysian stocks? Would investors in this fund still have their money?
  
  
• Timothy Ghriskey, manager of the Dreyfus Fund since June, has been responsible for adding about 40 new stocks to the fund's 65-stock portfolio.....Ghriskey says that Dreyfus is now a "pure value fund," instead of the previous mix of growth and value.
  
  
• Freedom Capital Management Co. is reportedly shopping buyers for the mediocre FundManager family of mutual funds, managed by Michael Hirsch.
  
  

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FundAlarm © Roy Weitz, 1997