FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

(Originally posted December 1, 2001) [Archive Table of Contents]

How well do the experts pick 'em? If you're lucky, you might be able to find a few hours each month to manage your mutual funds.....But here's a thought: What if you could spend your entire working day buying, selling, and rebalancing portfolios of mutual funds?.....Surely, with all that time and experience, you'd be a champion mutual fund investor, and you would easily outperform the relevant benchmarks.....Or would you?

As it turns out, there are people who buy and sell mutual funds all day -- they are the folks who run "funds of funds" .....A fund of funds is simply a mutual fund that invests in other mutual funds.....While there's no such thing as a typical fund of funds, there are some patterns.....For example, several of the major fund firms (Fidelity, Schwab, T. Rowe Price and Vanguard) sell funds of funds that draw exclusively on their own, in-house offerings.....Typically, these "in-house" funds are available in several different flavors, running the gamut from "conservative" to "aggressive"......Theoretically, the managers who run these in-house funds of funds should have unique insights into their own company's products, and those insights should translate into superior performance.....In reality, in-house funds of funds have generated only mediocre long-term results when compared to their respective benchmarks:

In-house fund of funds	Performance vs. benchmark (annualized %)			Alarm status	Benchmark used
In-house fund of funds	12 Mo.	3 Yrs.	5 Yrs.	Alarm status	Benchmark used
Fidelity Freedom 2000 (FFFBX)	7.69	2.99	0.22	NO-ALARM	Vang Bal Idx
Fidelity Freedom 2010 (FFFCX)	0.27	2.8	1.23	NO-ALARM	Vang Bal Idx
Fidelity Freedom 2020 (FFFDX)	6.21	5.07	-0.19		Vang 500 Idx
Fidelity Freedom 2030 (FFFEX)	2.03	4.01	-0.88		Vang 500 Idx
Fidelity Freedom 2040 (FFFFX)	-0.91	NA	NA		Vang 500 Idx
Fidelity Freedom Income (FFFAX)	12.06	2.37	-1.43		Vang Bal Idx

Schwab MarketTrack All Eqty (SWEGX)	1.72	0.45	NA		Vang 500 Idx
Schwab MarketTrack Balanced (SWBGX)	0.96	-0.33	-1.67		Vang Bal Idx
Schwab MarketTrack Conserv (SWCGX)	8.29	0.74	-1.69		Vang Bal Idx
Schwab MarketTrack Growth (SWHGX)	8.28	2.03	-2.8		Vang 500 Idx

T. Rowe Price Spectrum Grth (PRSGX)	7.81	4.22	-2.42		Vang 500 Idx
T. Rowe Price Spectrum Intl (PSILX)	1.27	2.78	NA		Schwab Intl Idx

Vanguard LifeStrat Cons Grth (VSCGX)	7.43	0.84	-0.53		Vang Bal Idx
Vanguard LifeStrat Growth (VASGX)	6.78	1.37	-2.05		Vang 500 Idx
Vanguard LifeStrat Income (VASIX)	15.53	2.18	-0.42		Vang Bal Idx
Vanguard LifeStrat Mod Grth (VSMGX)	-0.03	-0.66	-0.64	3 ALARM	Vang Bal Idx
Vanguard STAR (VGSTX)	7.62	2.77	0.94	NO-ALARM	Vang Bal Idx

At the opposite end of the spectrum, several funds of funds are authorized to buy virtually any mutual fund in the U.S.....These "go-anywhere" funds are typically offered by smaller shops, and this type of fund might seem like the ideal vehicle for generating benchmark-beating performance.....Unfortunately, even with the entire fund world at their disposal, go-anywhere funds of funds have proven to be even less effective than their in-house peers:

Go-anywhere fund of funds	Performance vs. benchmark (annualized %)			Alarm status	Benchmark used
Go-anywhere fund of funds	12 Mo.	3 Yrs.	5 Yrs.	Alarm status	Benchmark used
Integrity Fund of Funds (IFOFX)	-9.83	-5.19	-9.24	3 ALARM	Vang 500 Idx
Markman Aggressive Allocation (MMAGX)	-28.8	-8.49	-10.27	3 ALARM	Vang 500 Idx
Markman Conservative Allocation (MMCGX)	-15.95	-5.47	-6.61	3 ALARM	Vang Bal Idx
Markman Moderate Allocation (MMMGX)	-28.83	-10.8	-8.58	3 ALARM	Vang Bal Idx
STAAR Alternative Categories (-)	5.37	5.34	-6.99		Vang 500 Idx
STAAR International (-)	5.55	2.47	-1.19		Schwab Intl Idx
STAAR Larger Co Stock (-)	-2.59	0.79	-3.64		Vang 500 Idx
STAAR Smaller Co Stock (-)	-2.25	3.83	0.51		Vang SmCap Idx

The accompanying page presents performance information for an additional 28 funds of funds, as well as the 25 funds listed above.....You can view the entire funds of funds list sorted by selection strategy, as above, or by benchmark.

James Oberweis, who runs several middling funds that bear his name, has declared himself a Republican candidate for the U.S. Senate seat in Illinois.....While Oberweis is out hustling votes, his 27-year old son (also named James) will effectively run all three family funds by himself (Oberweis Emerging Growth, Oberweis Micro-Cap, Oberweis Mid-Cap).....Unfortunately, the timing of Dad's political ambitions appears to be somewhat inconvenient for young James, who is still a student at the University of Chicago business school.....Indeed, the young James Oberweis is about to enter some uncharted territory of his own.....For example, when push comes to shove, will he choose to manage the funds or do his homework?
Thanks to Leslie Kautz, of Angeles Investment Advisors, for first bringing this item to our attention

The senior Oberweis claims that his real-world business skills will come in handy in Washington.....But in at least one area of his own business, it looks like Oberweis has dropped the ball.....As recently as April 2000, the official Web site of the Oberweis funds was oberweisfunds.com.....Today, Web surfers looking for information about the Oberweis funds are directed to a different site -- oberweis.net -- and oberweisfunds.com has disappeared from view.....Well, not exactly disappeared.....Sometime after April 2000, Jim Oberweis either forgot to renew his Web address or, for some reason, he let it lapse......Oberweisfunds.com is now owned by one Christian Francoeur, who operates soft-core porn Web sites out of Quebec, Canada.....When we visited oberweisfunds.com in mid-November, we were greeted by an ad for "Tina's Free Live Webcam," which is one of Mr. Francoeur's creations:

[Screen capture, oberweisfunds.com, November 11, 2001]

As of December 1, oberweisfunds.com is still owned by Mr. Francoeur, but Tina no longer appears on the site.....All you'll see now is an "on hold" message.....Which makes us wonder: On hold for what?

Some growth and income funds pay no income dividends.....This isn't a new story.....But these days, with the SEC name police on the prowl, you'd think that income funds without income would either change what they call themselves, or find some way to generate a few dollars of dividends.....Among the largest growth and income funds that haven't paid any income dividends for at least 12 months:

Evergreen Growth & Income
Fidelity Advisor Growth & Income
Liberty Growth & Income
Marsico Growth & Income
Strong Growth & Income

Why do dividends matter?.....Traditionally, stocks (and funds) that pay dividends have provided better downside protection than their non-income producing peers.....Last year, for example, the 50 stocks in the S&P 500 with the highest dividend yields rose an average of 13.2%, compared with a drop of 9.2% in the overall index.
"Income Funds That Pay None," Ian McDonald, TheStreet.com, November 5, 2001

Department of Duh:

	"You have to be a realist. We're dealing with an uncertain environment."
-- Ryan Jacob, manager of Jacob Internet, quoted at businessweek.com

Back in August, we reported some major organizational changes at the Pioneer funds, and we predicted that professional staff would soon start bailing out.....How right we were.....Theresa Hamacher, chief investment officer, has announced that she's leaving the firm.....Hamacher will not be replaced.....In fact, after Hamacher's departure, Pioneer won't have any top investment executives located in the U.S......Starting immediately, Pioneer's U.S. investment operations will be managed out of Dublin, Ireland [!], and the head of the Dublin operation will report to Pioneer's parent company, UniCredito Italiano, which is based in Milan, Italy.

Besides centralizing its investment operations, Pioneer is also homogenizing the management of its mutual funds.....Under the new regime, individual fund managers will be replaced by teams that set industry allocations and risk levels.....Also, research analysts will be organized by industry sectors, and they will share their ideas with all Pioneer funds, instead of being assigned to a particular fund*.....To standardize operations even more, Pioneer will reportedly implement a new office layout, and FundAlarm has obtained an exclusive photo:

Under the new Pioneer arrangement, each analyst will be provided with an identical hutch, and analysts in related fields will be stacked vertically.....Analysts will be encouraged to communicate and share ideas, either by e-mail, telephone, or passing notes through the mesh.
* "Investment Chief Resigns from Boston-based Financial Services Company," Beth Healy, The Boston Globe, November 1, 2001

Munder Capital Management recently fired about 10% of its workforce, including mutual fund managers Alan Harris and Steven Appledorn, who helped run three offerings (Munder NetNet, Munder International NetNet, and Munder Future Technology).....Even in the midst of an impressive tech-wreck, Munder's collapse has been a standout, with tech-fund assets declining from a high of about $12 billion to a recent $1.1 billion.....Munder also announced that International NetNet will be merged into NetNet, and Digital Economy will be absorbed by Large-Cap Growth, both pending shareholder approval.
Fifteen months ago, in September 2000, Pilgrim promised to cap its new Internet fund at $500 million in assets, in order to keep the portfolio nimble.....As it turns out, the fund managed to stay nimble on its own, and it recently held only about $19 million in assets.....Pilgrim has decided to merge its Internet fund with another offering that has turned out to be nimble, Pilgrim Global Information Technology, which only has about $40 million in assets.
"Ailing Pilgrim Internet fund set to disappear," James Paton (Reuters), November 19, 2001
Pioneer announced an 8%, across-the-board reduction in its workforce, including one fund manager that Pioneer refuses to name.....This kind of stonewalling, previously practiced by Putnam, is really stupid: It takes journalists just a few days to figure out who was fired and, meanwhile, the firing takes on added significance because it seems like the fund company has something to hide.....We'll let you know next month who the victim was.

Earlier this year, we introduced you to Janet and Logan, the new "Cyber Guides" at Pioneer's Web site.....They seemed like nice, young people, and we were concerned that they might have been swept up in the Pioneer job cuts (above).....We recently asked how they were doing, and were somewhat taken aback by their snippy responses:

"Janet," the Pioneer Cyber Guide

"Logan," the Pioneer Cyber Guide

Briefly noted:

Scott Chapman and Thomas Arrington ran several funds for the Dreyfus Founders family, including Dreyfus Founders Growth and Income and Dreyfus Founders Growth.....Both funds are solid 3-ALARM performers, and Chapman and Arrington were recently fired.....According to an item in Investment News, Chapman acknowledged that fund managers "live and die" by their investment performance, yet Chapman expressed "surprise" at his firing.....Gosh, given their performance, it seems to us that the system worked just fine.
Investment News, November 19, 2001
Good news/bad news: The good news for Malcolm Fobes is that Berkshire Focus, which he manages, isn't the only fund that has lost more than 75% year-to-date.....The bad news for Fobes is that Berkshire Technology, which he also manages, is the other 75% loser.
At the rate it's been accumulating assets, Vanguard is perhaps 12 months away from passing Fidelity as the largest mutual fund company in the U.S*.....Vanguard is a 100% no-load company, and it's obviously having no problem making its business model work.....Yet almost every month, some other fund company either abandons its no-load roots (most recently Warburg Pincus, now Credit Suisse), or reorganizes itself to emphasize the sale of load funds (most recently, American Century).....At the risk of seeming really stupid, we'd like to ask a question: Why is Vanguard able to thrive as a no-load company, while so many others seem to have so much trouble?.....At the risk of seeming really simplistic, we'd like to answer our own question: Vanguard keeps its costs low; Vanguard talks straight to its customers; Vanguard keeps its eye on performance, and will actually fire managers who don't measure up; Vanguard has a reasonably authentic corporate identity, not merely some slogans manufactured by an advertising agency.....Vanguard isn't perfect, but its playbook is out in the open for every other no-load fund company to read.....If the other companies can't figure out how to sell no-load funds, they probably won't be successful selling load funds, either.
* "In leader Fidelity's rearview mirror, Vanguard looms," boston.com, November 18, 2001
Are you ready for the Harry Potter Fund?.....It probably won't happen, which is a shame, because we've come up with a dynamite marketing hook ("The fund that owns the Wizards of Wall Street!").....Nevertheless, you can bet that a couple of other gimmick funds will soon be torn from the headlines*.....A "War on Terrorism Fund" is probably a bit crass, even for the fund industry, but a "New Realties Fund" (investing in defense contractors, security firms, selected biotech and pharmaceutical companies) is almost a sure thing....Likewise, a "More-Income-Without-Risk" fund is almost certainly on someone's drawing board.....Considering that several "more-income-without-risk" funds have been attempted before, and all have essentially failed, the prospects for a new incarnation do not appear good.....Which is not to say that the new version still won't attract many investors, and millions of dollars.
* Morningstar.com, Gregg Wolper, November 20, 2001
While we're on the subject of gimmicks, here's one from the book world: It's called "Financial Security in Troubled Times: What You Need to Do Now".....Financial planner Ric Edelman allegedly wrote the book in one weekend after the September 11 attacks,* and that might tell you something about the quality and originality of this project.....In any event, we can save you some time and money (Edelman, by the way, has promised to donate his royalties to charity).....What you should do now, financially, is exactly the same as what you should have done before September 11: Have an emergency fund, keep your estate plan in order, develop an asset allocation, use tax-advantaged vehicles (such as retirement plans) whenever possible, and ignore the day-to-day news that moves the markets.....Wow, we wrote that in 60 seconds!
* Investment News, November 19, 2001
Sign us up! As manager of the Strong Internet fund, James Houlton turned $1 of investor money into just 33 cents over a period of about 16 months.....Now, you have the opportunity to see what Houlton can do with your money in a new fund, ABN AMRO/Veredus Growth Leaders.....This is Houlton's first shot at running a diversified fund, and we're guessing that his record at Strong will not be prominently featured.

It has finally come to this: As of mid-November (and still, most likely, as you read this) several money market funds were taking more in expenses than they were paying out in yield.....Here are the five lowest-yielding, highest-expense money market funds (yield is shown first in parentheses, expense ratio second)*:

Invesco Cash Reserves Class C (0.13%, 1.67%)

Pro Funds Money Market Fund Svc (0.59%, 1.83%)

Pioneer Cash Reserves Class C (0.79%, 1.83%)

Pioneer Cash Reserves Class B (0.86%, 1.57%)

Cash Management Trust of America (0.91%, 1.50%)

* "Yield" is net 7-day simple yield as of November 6, 2001; expense ratio is for the month of October
Source: "When expense ratios really matter," John Waggoner, USA Today, November 16, 2001

Even old guys get the hedge fund tingle: Richard Mayo, 59-year old co-founder of the firm that runs the GMO mutual funds, has announced that he's leaving the firm to start a hedge fund.....Mayo is also resigning as manager of GMO Value III and the Pelican fund, both with excellent long-term records.....Joining Mayo at his new hedge fund will be his son, R. Scott Mayo, and Timothy Quinlisk, who are also resigning from the mutual funds that they manage (Hancock Focused Relative Value, Hancock Small Cap Equity, and Hancock Small Cap Value).....It's a sweet deal for the junior Mayo, and especially sweet for Quinlisk, who is simultaneously awarded the FundAlarm Ants-in-the-Pants Award.....As you may recall, Quinlisk quit Hancock in early 2000 to join the Westcore funds, only to be lured back to Hancock two months later when his successor joined a hedge fund.....Now, history repeats itself with Quinlisk, and the execs at Hancock must feel pretty foolish.
From the Web site of Friess Associates, which runs the Brandywine funds, here's the first and last time you'll see Jackson, Wyoming and Carefree, Arizona described as "strategically located":

It might also help that Foster Friess, owner of the firm, likes to live in these strategically located towns.
No, I haven't sold out:

RoyToy is a line of wood building sets, like Lincoln Logs used to be.
If you sponsor a 401(k) plan for your employees, you have a fiduciary obligation to make sure that the plan is paying reasonable fees.....But there's at least one plan fee -- the "finder's fee" -- that may be completely hidden from view.....Typically, a finder's fee will become an issue if a third-party consultant has helped you select the mutual funds for your 401(k) plan.....It's not uncommon for a grateful mutual fund company to pay your consultant up to 1% of the first $1 million of assets delivered, with a sliding scale after that.....However, since the finder's fee officially comes out of the pocket of the mutual fund company, the company isn't required to disclose the fee to anyone (according to one of our sources, even the super-clean American fund family pays finder's fees).....Of course, the fee is still a significant cost of doing business.....Plan sponsors and participants ultimately pay for this fee in the form of higher management fees and fund expenses.....How can you find out if your consultant receives a finder's fee?.....The best approach is to ask.....If a finder's fee is (or was) paid, you're entitled to request all or a portion of it.....If you are successful recovering a finder's fee, you must allocate the fee to employee accounts, or use it to offset plan expenses.
PlanSponsor magazine, July 2001, from PlanSponsor.com
It's a buyer's market in the world of portfolio managers and analysts, and some of the people who run money say that they would gladly take a 50% pay cut just to land a job....."We all got overpaid last year. I don't even know where the money went," said one analyst who's now out pounding the pavement.....And when will these lower salaries translate into lower mutual fund expenses?.....If we had to guess, we'd say never.
"Wall Street finds treasure trove of job hunters," Chelsea Emery (Reuters), November 15, 2001; thanks again to "BL"
We're stunned: According to a recent study, financial planners who earn their living from commissions overwhelmingly favor funds that pay them commissions.....This is in contrast to financial planners who don't earn commissions, who overwhelmingly favor funds that don't pay commissions (i.e., no-loads).....But the study did contain at least one interesting finding: Sixty-six percent of commission-based planners place more than 50% of client assets in a single mutual fund company.....There can be good reasons for this (for example, to take advantage of commission breakpoints), but this kind of concentration leaves clients dangerously exposed if an entire mutual fund family suffers a meltdown (think "Putnam").....Fee-based advisors typically build client portfolios with seven to nine funds, from about five different fund families.....This sounds like fee-based planners are building more diversified portfolios than their commission-based peers, but perhaps not.....The study also suggests that fee-based planners have strongly favored funds from the Janus family, which would have left their clients exposed to a similar kind of meltdown.
"Pay dictating fund choices," Brooke Southall, Investment News, November 11, 2001
Nuveen Investments has hired Alan Brown as its chief marketing officer.....We weren't aware that Nuveen even had a "brand," but Mr. Brown has promised to build on it all the same.....Before joining Nuveen, Brown was chief marketing officer for Amazon.com, which is not exactly a household name in the financial services industry.....But, then again, who cares?

Remember, you saw it here first.
For market timers who rely on moving-average systems, now might be a good time to move on.....Typically, such systems plot a moving average of the overall "market" over a predetermined period of time (for example, 39 weeks).....When the current "market" level moves above the market's recent moving average, that's generally a buy signal, and vice versa..... Moving-average systems were really cool back when the Carpenters were still making records, which was also a time when computing power was scarce.....These days, inexpensive computer programs can calculate moving averages all day long, and that may be one of the problems.....According to recent academic research, as well as some real-world evidence, moving-average systems are losing their luster, perhaps because everyone knows how they work and thousands of small investors can now make low-cost trades that distort the trend lines.....Or, perhaps, moving-average systems were always statistical flukes and, like most flukes, time has finally caught up with them.....In any event, as of mid-November, many moving-average systems were getting ready to generate another "buy" signal, and many investors were, no doubt, getting ready to follow.
"Nearing a buy signal?," Forbes.com, November 16, 2001
Over the past five years, the average health fund in the FundAlarm database has outperformed the average technology fund, 14.76% (annualized) versus 7.30%.....Over the past three years, the average real estate fund has returned 7.72%, compared with 3.07% for the average tech fund.....Diversification, anyone?
A year ago, Al Gore's financial disclosure forms revealed that he didn't own a single stock, bond, or mutual fund.....Last month, Gore was appointed vice chairman of Metropolitan West Financial Inc., where he will be responsible for expanding the firm's business to include private-equity investments in biotechnology and information technology.....According to the CEO of Met West, Gore will play a role as an "active manager" at the firm.....Shareholders of Met West's excellent fixed-income funds, including Total Return Bond (MWTRX) and Low Duration Bond (MWLIX), will apparently have to struggle along without the benefit of Mr. Gore's financial savvy.