| Highlights and Commentary |
| By Roy Weitz |
Mutual fund directors are as close as we get to "insiders" in the mutual fund world, and it can be fun (and occasionally instructive) to see how insiders invest their own money.....According to recent proxy materials from Vanguard, a group of seven directors (technically, trustees) runs all 109 Vanguard funds, and each director personally owns, in total, at least $100,000 worth of Vanguard funds.....But as you might expect, the type of funds, and the amount invested, varies widely from director to director.....For example:
Are money market funds about to "break the buck?" While the possibility might not keep you awake at night, the question does raise some important issues.
Last month, we reported that Thurlow Growth had been censured and fined by the SEC for having out-of-date performance information on its Web site.....Clearly, fund manager Tom Thurlow deserves a full share of the blame.....But a FundAlarm reader alerted us that several Thurlow family members are also involved.....Indeed they are: According to SEC filings for the year 2000, when Thurlow Growth was getting itself in trouble, the fund had five directors (it apparently picked up a sixth and seventh director late in 2000).....One of the directors was asleep-at-the wheel Tom himself, one (and then two) director spots were filled by Thurlow's sisters, and Thurlow's wife rounded out the happy little family gathering.....All of the directors served for zero compensation which, in this case, is exactly what they were worth.
Absent the asteroid, it would have been an ordinary day for the dinosaurs, too: The last few days of October brought good news and bad news for fund manager Tom Marsico.....The good news: Marsico Growth got a nice write-up in the Sunday New York Times (October 27), and several of Mr. Marsico's best and brightest stock ideas, including Tenet Healthcare, were prominently featured in the Times article....."Consolidation has strengthened the market position of Tenet Healthcare," Marsico told the Times, and he also noted that Tenet has growing numbers of patients in three care-intensive medical specialties (cardiovascular, neurological, and orthopedic). "When people are in hospitals for problems that require a lot of treatment, you can spread the fixed costs of the hospital visits over a higher revenue base".....Thanks, Tom, that sounds great!.....But now for the bad news: On October 28, a day after Marsico's endorsement of Tenet appeared in the paper, a major research firm downgraded the company's stock, citing concerns about exactly the kind of specialty-care reimbursements (called "outlier reimbursements") that Marsico had been so hot about in his interview.....Just a day after the downgrade, Marsico issued a press release, claiming that "new information" about Tenet's outlier reimbursements had become available (in other words, Marsico read the analyst's report).....Marsico said that his firm had "reassessed" its views about Tenet, and was planning to reduce or eliminate its investment in Tenet.....How quickly was Marsico able to get off his reassessment and sell?.....We don't know, but we do know that Tenet was the top holding of both Marsico Growth and Marsico Focus as of September 30.....If Marsico was able to unload his entire Tenet position on the day of the press release, he would have gotten out with a gain of about $9 per share ($30.49 average cost basis, versus $39.25 closing share price)......But just a week later, after a flood of additional bad news, Tenet shares were trading in the mid-20s, and heading down.....Chances are, Marsico got lucky, and his shareholders didn't get flattened -- which is more than you can say for Marsico's reputation.
Speaking of embarrassed fund managers, Blaine Rollins of the Janus Fund was also caught holding a large position in Tenet Healthcare when the bad news hit.....Let's take a look at his comments:| " [Tenet] was a conservative growth stock with great management. I spent a lot of time with the CEO (Jeffrey Barbakow), who I really respect, only to find that the CEO didn't really know how hard the COO and the president were pushing the hospitals for revenue growth." |
A FundAlarm reader gave us permission to reproduce this e-mail exchange about Meridian Value, exactly as it occurred.....The reader wrote to us first, we responded, and the reader followed up:
Politicians everywhere must be green with envy: A few mutual funds are majority-owned by fund insiders.....As a shareholder in such a fund, you might be pleased that the folks in charge are willing to invest their money alongside yours.....But there's also a downside to majority ownership: When insiders control 50% or more of a fund's shares, they also predetermine the result of all issues that are subject to shareholder approval.....Case in point: Davis International Total Return recently fired its subadvisor, Fiduciary Trust Company, and replaced that firm with Marcstone Capital Management.....Fund investors were told that they would be "invited to vote" on the manager change at the December 22 shareholder meeting, but they were also told that voting would be a waste of time.....According to an SEC filing, Davis "family, directors and officers" control more than 50% of the fund's shares, so Davis wasn't planning to solicit proxies, the outside shareholder votes wouldn't matter, and the manager change was a done deal the moment it was proposed.....How can you tell if your fund is majority owned?.....In the Statement of Additional Information, funds are required to list all owners of 5% or more of their shares.....If your fund is insider-owned, it should be right there -- assuming you can get hold of that elusive document.
How many shareholders are aware that funds must disclose all 5% owners?.....Very few, we suspect, but that's OK, since few of us are affected by this rule.....But if you're a fat-cat fund investor, and especially a fat-cat investor in a relatively small fund, this disclosure requirement could result in a major breach of your privacy.....For example, consider the following excerpt from one fund's recent Statement of Additional Information (SAI):
From the FundAlarm catalog of mutual fund merchandise: | The "Investor Education" Megaphone. It's pretty clear that we're at the top of bond market, but some folks still refuse to believe it. If you know someone who simply insists on buying a bond fund, this is the product for you! With a power output of 15 watts, we guarantee that this unique investor education tool will get the attention of even the most stubborn, would-be bond fund investor. This attractive, lightweight unit even comes with a book of suggested investment advice, including:
Item #2LD | $79.99 | |||
Briefly noted:
 | Nicholas Lopardo, a top executive at the SSgA fund company, retired in August 2001, and it was apparently during his tenure at SSgA that Mr. Lopardo got used to hanging around brawny men.....Lopardo recently surfaced as a partner in the company that markets the Construction Jack action figures, which includes Construction Jack the Carpenter (left), as well as Construction Jack the Electrician, Plumber, and Painter. "Ex-SSgA CEO Lands in Toys," MutualFundWire.com, November 20, 2002 |
| Highlights and Commentary for December, 2002 |
| By Roy Weitz and Roy Weitz |