Highlights and Commentary
By Roy Weitz
(Originally posted December 1, 2005)
[Archive Table of Contents]

This story broke just after we posted last month's FundAlarm, but the news is important enough to risk being a little stale: Robert Stansky has stepped down as manager of Fidelity Magellan, and Harry Lange has taken over.....Lange is coming off a stint as manager of Fidelity Capital Appreciation, where he's done an excellent job.....But the average asset base of Capital Appreciation during Lange's tenure was about $3 billion, and Magellan's average asset base during the same period was about 24 times larger ($72 billion).....In late 1999, when both funds had swelled to then-record size, Magellan had two individual stock holdings (General Electric and Microsoft) that were each larger, by about $500 million, than Lange's entire Capital Appreciation fund.....We mention these stats because they're fun, and also because they highlight the one issue that Lange simply can't avoid: Magellan is huge.....Lange has been talking about including more small and mid-cap stocks in Magellan's portfolio, but there's a practical limit to how much of that stuff he can buy, as well as its potential impact on overall fund performance.....Lange may be able to squeeze out a little extra return by moving a larger portion of Magellan's portfolio overseas (the fund currently has less than 2% foreign exposure, while Capital Appreciation has about 20% of its assets in foreign holdings).....Ultimately, however, Lange will succeed or fail with Magellan based on his sector bets: If he overweights (say) the technology sector, and technology stocks come through, he'll do well (these "overweights" are relative to the S&P 500 index, the fund's benchmark).....If Lange's sector bets don't pan out, he'll probably do worse than Stansky, who tended not to make many sector bets.....(Note, too, that Lange's sector bets will have to be made within Fidelity's overall risk guidelines, which further limit his flexibility).....In the long run, winning and losing sector bets almost always seem to cancel each other out.....Which brings us back to where we started: Lange is another decent manager who's likely to fail at Magellan, and there's still no reason to own this fund.


An old joke, updated to fit Fidelity Magellan under Bob Stansky:

Question: How do you get to manage a $50 billion mutual fund?

Answer: Start with a $100 billion mutual fund.


From the Web site of DancePants.com, purveyor of dancing attire, see if you can spot the mutual fund manager in this list of satisfied customers:



Yes, that Harry Lange is also an accomplished ballroom dancer.


On October 28, Merrill Lynch Global Value (MAVLX*) received a cash legal settlement that increased the fund's net asset value (NAV) by 10.8%.....Mutual funds often receive cash settlements from lawsuits (including class action lawsuits), but we can't recall another settlement that increased a fund's NAV by such a significant percentage....Merrill Lynch refuses to provide any details of the settlement, and it won't discuss the underlying lawsuit, so we assume there's a confidentiality agreement in place.....In any event, there are clear winners and losers here: Shareholders who recently bought into this fund receive a substantial windfall, while shareholders who owned this fund at the time of the injury, and who have since bailed out, receive nothing.....Which raises another interesting point: If you knew ahead of time that this settlement was coming, you could have made a handsome, risk-free profit on this fund within a couple of trading days (just buy immediately before the settlement hit, and sell immediately after).....We have no reason to believe that anyone exploited Global Value this way, but we assume that the fund's directors (and perhaps the SEC) will be investigating this possibility.....It should be easy to check: Unusually large share purchases in the days leading up to October 28 would be very suspicious.....Corresponding sales shortly after October 28 would seem to clinch the case.
* Also: MBVLX,MCVLX,MDVLX,MRVLX



Mutual fund companies
put out the welcome mat
for former employees
For the past several years, top-level staff have been fleeing the mutual fund slums, and taking up residence in the hedge-fund penthouses.....Now, the trend may be ever-so-slightly reversing.....Brian Posner, a former star at Fidelity (and attempted star at Warburg Pincus, now Credit Suisse), was recently lured from his hedge fund for a job at Legg Mason.....Earlier this fall, Fergus Shiel left his hedge fund to rejoin Fidelity, and Reuters reports that "hundreds of less visible players have also switched sides," from hedge back to mutual*.....One drawback of hedge funds, its seems, is that investors actually demand performance, while mutual fund investors (and directors) often allow mediocre managers to coast for years.....One unnamed hedge fund manager, now looking for a new job, also complained that he had to "market the [hedge] fund, fix the photocopier, and answer investors' questions," in addition to calling the shots on the portfolio......Collectively, these activities are referred to as "working for your money," and that affliction also appears to be less common on the mutual fund side of the industry.
* "Some hedge fund execs eye return to mutual funds," Svea Herbst-Bayliss, reuters.com, November 11, 2005


Remember that obnoxious kid in grade school who could never accept losing, and who was always asking for a "do-over," and remember how nobody had any respect for him and how, eventually, nobody wanted to have anything to do with him?.....Hold that thought for a moment.


Back in October, we reported that shareholders rejected an attempt by TIAA-CREFF to push through a huge management fee hike on nine of its mutual funds.....Now, TIAA-CREF is going to try again: It has scheduled a re-vote on the fee increase, believing that "certain large, institutional shareholders might be willing to re-examine the proposal."


From the TIAA-CREF Web site (October 12, 2005) :



How deliciously ironic: TIAA-CREF initially lures investors into its funds with low-ball management fees, then tries to quadruple its fees, then won't accept its shareholders' "no" vote, then tries again to ram through the fee hike.....Now TIAA-CREF unveils a survey that finds only 9% of Americans believe financial services companies are "very trustworthy".


Speaking of whiners who can't accept being on the losing end of a vote: SEC Commissioner Paul Atkins recently delivered a startling public tirade against those within the SEC who disagree with him (Atkins is opposed to the rule that requires an independent chair for every mutual fund board and, in June, Atkins lost a crucial vote on that issue).....If you're used to only indirect and phony-polite words of disagreement from folks in Washington, Atkins' speech shows what happens when you combine strongly-held beliefs and possible failure to self-medicate .


Do as we say, not as we do: Here's an excerpt from an article about "Becoming an Informed Investor," which appeared in the November 2005 issue of Fidelity's monthly client magazine:

"The [mutual fund] prospectus should tell you about the background of the portfolio manager, or managers. It's their investment decisions that make or break the fund's performance."

We couldn't agree more -- the background of a fund manager is vital -- so let's see what Fidelity tells us about the background of some of its top fund managers:

From the Fidelity Contrafund prospectus:

"Will Danoff is vice president and manager of Contrafund, which he has managed since September 1990. He also manages other Fidelity funds. Since joining Fidelity Investments in 1986, Mr. Danoff has worked as a research analyst and manager. "

This strikes us as a little skimpy -- for example, it might be nice to know the names of Danoff's other Fidelity funds, as well as the names and dates of his previous fund responsibilities..... It also might be helpful to know Danoff's areas of expertise as a "research analyst" and, while we're at it, we're guessing that he went to college.....How about a college name, and some attendance dates, too?....But maybe we just picked the wrong prospectus.....Let's take a look at another one:

From the Fidelity Low-Priced Stock prospectus:

"Joel Tillinghast is vice president and manager of Low-Priced Stock Fund, which he has managed since December 1989. Since joining Fidelity Investments in 1986, Mr. Tillinghast has worked as a research analyst and manager."

Hmmmm.....Except for the name and dates, this useless little bio for Tillinghast is exactly the same as the useless little bio for Danoff.....Maybe we should look at a third example:

From the Growth & Income prospectus:

"Steve Kaye is vice president and manager of Growth & Income Portfolio, which he has managed since January 1993. Since joining Fidelity in 1985, Mr. Kaye has worked as a research analyst, manager and assistant director of equity research. "

We get the idea!.....Now, we're going to take a shot at writing the bio for new Magellan manager Harry Lange:

FundAlarm's proposed bio of Harry Lange, for the Fidelity Magellan prospectus:

"Harry Lange is vice president and manager of Magellan Fund, which he has managed since [insert date]. Since joining Fidelity Investments in [insert date], Mr. Lange has worked as [insert titles]. "

Are we good, or what?.....Here's Lange's actual bio, from the Magellan prospectus:

"Harry Lange is vice president and manager of Magellan Fund, which he has managed since October 2005. Since joining Fidelity Investments in 1987, Mr. Lange has worked as a research analyst, portfolio manager and director of research."

There you have it: In Fidelity's view, that's everything you need to know about the person who makes or breaks the Magellan fund.....And, best of all, you're now an "informed investor."



Roy's Excellent Market-Timing Adventure:
Month Two (since re-start): Nothing Much Happens

Intelli-Timer didn't issue any new timing signals through November 26, so I didn't have a chance to screw anything up.....I started the month long the market (i.e., my entire timing account was invested in ProFunds OTC Investor (OTPIX)), and I ended the month the same way:

MonthDate of
signal
(1) 		Type of
signal		Fund
bought/held
(2)		Acct value
(beginning)		Acct value
(ending)
(3), (4) 		Change in
acct value
for month		Change in
acct value
since inception
October, 2005Oct.16LongOTPIX$5,000.00$5,080.09 +1.60%+1.60%
November, 2005No new signalLong still in effectOTPIX$5,080.09$5,484.89+7.97%+9.70%
Notes:
(1) Signal was executed (i.e., fund bought) on the next business day.
(2) OTPIX=ProFunds OTC Inv.
(3) Cut-off for valuation is 26th day of the month.
(4) Account value includes value of fund shares only. Cash in the account, as well as interest earned on the cash, is ignored.


It was a good month for many segments of the stock market, and my account was no exception.....As you can see above, I was up 7.97% for the month, and I'm up 9.70% since this timing experiment started (or, more accurately, restarted) on October 17.

Other than timing signals, Intelli-Timer sends one e-mail a week to its subscribers, on Friday evening.....Here's the entire e-mail I received on Friday, November 25, which is typical of all the e-mails I've received so far:


Intelli-Timer's November 11 e-mail contained a brief, additional "commentary," as follows:


In fact, the long signal stayed in place, OTPIX was up almost 1.7% for the following week, and Intelli-Timer never followed-up on its "commentary".....What happened to the possible "overbought" condition, and the "short-term consolidation"?.....What, exactly, is the point of telling subscribers that a new timing signal may come "as soon as Wednesday or much later"?.....Communications like this are probably intended to put a human face on the Intelli-Timer system, but it seems to me they just backfire.....Now I'm wondering if anyone at Intelli-timer -- human or computer -- has any idea which way the market is headed.

Unsatisfactory e-mails aside, my Intelli-Timer account has also performed well against the usual FundAlarm benchmarks:

Current month
(10/27 thru 11/26)		Since inception
(10/17/05)
Roy's market-timing account 7.97%9.70%
Dreyfus Mid Cap Index (PESPX) 7.66% 8.61%
Vanguard Small Cap Index (NAESX) 7.18%7.81%
Vanguard 500 Index (VFINX) 6.66%6.79%
Vanguard Balanced Index (VBINX) 4.42%4.42%
Schwab International Index Inv (SWINX) 3.74%2.88%

The real test for Intelli-Timer will come when the first short signal is issued.....We'll see if I'm able to keep these nice gains, as the benchmarks presumably give theirs back.


The FundAlarm Review of Books

Title:The Bogleheads' Guide to Investing
Authors:Taylor Larimore/Mel Lindauer/Michael LeBoeuf
Publisher:John Wiley & Sons, Inc.
Price:$16.97(at Amazon.com; should be available December 16)
If you'd like to buy this book, you can get it from Amazon.com
by clicking on the following link: The Bogleheads' Guide to Investing
FundAlarm will receive 15% of the purchase price if you use this link, instead of our usual 6% or so.


Generically, the Bogleheads are folks who admire John Bogle, founder of the Vanguard mutual fund company. The particular Bogleheads responsible for this book, Taylor Larimore and Mel Lindauer, provide much of the energy and intellect behind the Vanguard discussion group at morningstar.com (they also helped found the group). The book's third author, Michael LeBoeuf, is a professional writer who's active in the Vanguard discussion group.

Larimore and Lindauer are both retired, both appear to be reasonably well-off financially, and neither is in the business of providing financial advice. They didn't write this book to generate money from a product or service, to promote a financial practice, to advance their careers, or to promote an annoyingly perky financial planning empire (no namez, please). If Larimore and Lindauer were being realistic (and we suspect they were), they also didn't write Bogleheads to get rich and/or transform their lives. If Bogleheads sells well, 20,000 copies or so might move off the shelves. Split three ways, the royalties for each author might be just enough to buy a three-year old mid-priced car which, coincidentally, is what they recommend for all of us. I hope they sell a lot more copies, so they can each buy a Porsche.

So, why did they write this book? Probably for a little ego boost. Also, perhaps, to share a lifetime of accumulated knowledge, to help other people achieve their financial goals, and to leave the world a slightly better place. Are these guys nuts, or what? Anyway, they did a good job. This is definitely a book for beginning investors, but the facts are solid, the advice almost impossible to argue with. (Quibble is a different story: If I only bought three-year old mid-priced cars, I'd lose the will to go on. The book's retirement income analysis is both too simplistic and too complex, but ultimately it gets to the right conclusions. And the chapter on estate planning would have been better left out entirely -- just say, "see a lawyer.")

If you're looking for a financial book you can trust, we can't think of a better candidate than this, except possibly for one of the books by the Master (i.e., John Bogle) himself. If you want to get started investing, if you need a new investment plan, or if you'd like to validate an existing plan, we suggest that you sit down, read this book, and trust what you read. How rare is that?

FundAlarm's rating of
The Bogleheads' Guide to Investing(five stars is best)

For readers who expect a quick, easy strategy to accumulate vast wealth:

For experienced no-load fund investors, looking for that last subtle nuance to enhance their investment portfolio:

For readers seeking a terrific gift for a young person just starting out, a person who can't seem to get started investing, a person who doesn't feel qualified to invest on his or her own, or someone who's fallen into the clutches of an incompetent or unscrupulous broker or financial planner: (Or, perhaps, that person in need is you)


Briefly noted:
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FundAlarm © Roy Weitz, 2005