| Highlights and Commentary |
| By Roy Weitz |
Like the cockroach, these funds are small, don't seem to serve much purpose, and won't go away: We screened this month's FundAlarm database for all 3-ALARM funds with less than $50 million in assets under management, and we ended up with a list of 73 small-fund losers (along the way, we also eliminated all classes of larger funds that otherwise would have survived our screen)......Is there something special about bad small funds compared to, say, bad large funds?.....We think so.....Some diminutive 3-ALARM funds are run by relatively small management companies, and what you see is all you're ever likely to get: Whatever talent and resources the management company possesses are already reflected in the fund, and there's little reason to believe that things are going to get significantly better in the future.....Other small laggards are offered by much larger fund companies, but the issue again comes down to talent and resources: If a fund is perpetually small, and perpetually underperforming, does a large fund company really have any incentive to rescue that offering?.....A few of the small 3-ALARM funds on the accompanying page are 3-ALARM by just a small margin, or they are basically decent funds that have hit the inevitable bump in the road.....But other funds on this list -- perhaps most of them -- are small for a very good reason: Nobody wants to own them, because they have failed to deliver competitive performance for at least five years.....If you're stuck in a truly bad, small fund, it might be time to get out the fund equivalent of bug spray, and rid yourself of the nuisance.
Last month, we wrote about the new BISYS kickback scandal (BISYS, a company that provides services to mutual funds, would agree to inflated contracts, and then kick back a substantial portion of the contract price to the fund companies that hired them).....BISYS has already been nailed by the SEC, but at least 27 fund companies on the receiving -- and initiating -- end of the kickback scheme haven't been officially named.....You'd think that 27 fund boards of directors would be up in arms at this misuse of shareholder money, and those boards would be demanding that every fund company involved make a full, immediate, and public disclosure of its relationship with BISYS......Who are
we kidding?.....So far, just one fund family -- Victory -- has publicly acknowledged that the SEC is investigating it for accepting kickbacks from BISYS, and a couple of others (Pacific Trust, BNY Hamilton) have made mealy-mouthed disclosures suggesting that they were involved.....Other, so-far silent companies that hired BISYS during the kickback years include HSBC Funds, BB&T, Old Westbury, Pacific Capital, and Fifth Third*.....If we owned funds from any of these families, we'd be asking questions of our fund managers and directors, and insisting on answers.....The first question -- really the only question -- is a simple one: Did you ever have an agreement with BISYS, written or verbal, to receive a kickback of fund expenses?.....If the answer is "Yes," then your fund has stolen your money, plain and simple.
SEI Investments Co. is a competitor of scandal-scarred BISYS (above), and SEI is also being investigated for participating in BISYS-like kickback schemes.....HighMark is the first and, we guarantee, not the last fund company being investigated for receiving kickbacks from SEI.
The SEC recently introduced a service that allows text searches of documents in the EDGAR database.....Mutual fund investors will be pleased to know that the Seven Heavenly Virtues (faith, hope, charity, fortitude, justice, temperance, prudence ) far outnumber the Seven Deadly Sins (pride, envy, anger, sloth, avarice, gluttony, lust) in fund shareholder reports (there are 9,587 references to the "virtue" words, and just 690 references to the "sin" words)*.....For those inclined to less frivolous pursuits, the new text search actually could be a useful research tool.....For example, if you like the way Warren Buffett thinks, and you're looking for like-minded fund managers, a quick search for "Warren Buffett" within all Forms N-30D (shareholder reports) turns up 49 hits, and you can then follow those hits to see what the managers have to say about the smart guy from Omaha.....The text search feature can be found at www.sec.gov, or you can click here.
A recent column by Timothy Middleton (moneycentral.msn.com) identified the "5 worst investment ideas of the year," and Roy's pick for "worst" investment idea was #2 on Tim's list: The new Direxion mutual funds that come with two-and-a-half times leverage (for example, the Direxion S&P 500 Bull 2.5x Fund is designed to replicate two-and-a-half times the daily movement of the S&P 500 stock index)......We can't conceive of a reputable financial advisor using these 2.5x funds as part of a legitimate investment plan, which leads us to believe that these funds are designed for use by gamblers and flaky market-timing services (a Direxion spokesperson says that the funds are "for financial advisors using sophisticated strategies," but the relatively low $10,000 investment minimum seems to confirm that these funds are intended for the individual market).....Other worst investment ideas of 2006, according to Tim Middleton: (1) an exchange-traded fund that allows its owners to bet on the krona, the Swedish currency ("Why not the Thai baht? Or the Myanmar kyat?"), (2) asset bloat and fund overlap at the American funds, (3) variable annuities sold for retirement accounts, and (4) a free-market-run-amuck idea to eliminate mutual fund boards.
Bill Miller, Bob Rodriguez, Ron Muhlenkamp: All three of these fund managers have solid, long-term records, and all three are struggling in 2006.....We agree with a recent column, at morningstar.com, that these managers
probably haven't become stupid overnight, and they continue to deserve investor support (translation: don't sell their funds).....And then there's Steven Burlingame and Craig Blum, of TCW Select Equities.....These guys took over from Glen Bickerstaff, another solid veteran, in January 2005, and the two new managers have almost consistently trailed their benchmark ever since.....Morningstar counsels patience, and notes that the strategy of Burlingame and Blum "will pay off in the long run," while we note that this is the classic situation in which fund investors should think about bailing out.....True, Burlingame and Blum apprenticed under Bickerstaff, but they have no prior public record, on their own, at any mutual fund.....In almost two years at their new charge, they have failed to do the job, which means that they have never done the job at any mutual fund in the entire history of their collective careers......On what, exactly, does Morningstar base its confidence? Bickerstaff fairy dust?.....Burlingame and Blum may yet prove to be the most dynamic duo in mutual fund history, but mutual fund investors must always make the sell decision with the best information they have at hand today.....On that basis, these managers haven't earned investor loyalty, and TCW Select Equities seems like a very sensible candidate for dumping.
If you take more investment risk, you'll earn a higher return: Almost everyone, even the casual investor, has heard about the tradeoff between risk and return, and we suspect that most people accept that tradeoff like a law of nature.....Sometimes, however, the risk/return tradeoff doesn't hold, at least according to a new retirement planning tool from Fidelity......The retirement tool in question is quite basic, and the inversion of the risk/return tradeoff is relatively minor, but there's an interesting issue here that's worth investigating further.
| Strategy | Investment allocation (%) | |||
|---|---|---|---|---|
| Stocks | Bonds | Short-term | ||
| Balanced (current) | 50 | 40 | 10 | |
| Growth | 70 | 25 | 5 | |
| Aggressive Growth | 85 | 15 | 0 | |
| Most Aggressive | 100 | 0 | 0 | |
| Strategy | Projected asset accumulation (assuming "average" market performance) |
|---|---|
| Balanced (current) | $724,000 |
| Growth | $743,000 |
| Aggressive Growth | $754,000 |
| Most Aggressive | $753,000 |
| Strategy | Projected asset accumulation (assuming "average" market performance) | Projected asset accumulation (assuming "poor" market performance) |
|---|---|---|
| Balanced (current) | $724,000 | $506,000 |
| Growth | $743,000 | $457,000 |
| Aggressive Growth | $754,000 | $418,000 |
| Most Aggressive | $753,000 | $377,000 |
A new, small fund with a silly name --- the Chicken Little Growth Fund -- carries an expense ratio of 3 percent, even after waivers, but manager Stephen Coleman makes no apologies.....Rather, Coleman says that he "loves" his clients, and love "has a metric".....Practitioners of the world's oldest profession have long attached a metric to love, and we're surprised that Coleman would want to make that kind of association.....In any event, Coleman says that his clients should be "happy to pay for the work of an aggressive portfolio manager" who makes caring for his clients the key to his business.....According to well-placed FundAlarm spies, Coleman is serious about this touchy-feely stuff, and the next version of his fund's prospectus will take his lovefest to a level never before seen in the fund industry:
Speaking of lovefests: As we reported in October, the Putnam funds are up for sale.....Ordinarily, the prospective buyer of a fund company like Putnam would have free rein with its purchase -- for example, the buyer might choose to leave Putnam intact, as a separate unit, or the buyer might want to fire all the Putnam execs and replace them with its own people......But not this time: The chairman of the Putnam funds has said that any successful bidder for Putnam will "clearly...have to be acceptable to Putnam management" in order for a deal to go through.....So, what if a prospective buyer wants to fire all of the current Putnam execs, and use the cost savings to cut fund management fees?.....Sorry, that's unacceptable to Putnam management, so it's also unacceptable to the Putnam trustees.....OK, then, what if a prospective buyer wants to merge a dreadful fund (Putnam Voyager, anyone?) into a stellar NO-ALARM fund?.....Sorry, but if that's unacceptable to Putnam management, it's also unacceptable to the Putnam trustees.....Last time we looked, the "independent" chairman of the Putnam funds made about $420,000 a year for his part-time job and, for that kind of money, you'd think that he would at least keep quiet, and let people think that he represents the interests of fund shareholders.....Instead, he's telling the press that he "could not be more supportive" of the Putnam execs, and his number one priority appears to be job retention in the Putnam executive suite.....Let's see: By stacking the deck in favor of Putnam management, do you think the head Putnam trustee might also be trying to protect his own six-figure, part-time job?
When the folks who run the Firsthand funds created a new line of Black Pearl funds, in November 2005, it was pretty clear that they wanted a fresh start in the marketplace: The Firsthand funds had been decimated by the technology-stock implosion, and the Firsthand name was more of a liability than a respected brand.....The problem with a fresh start, however, is that it must be both "fresh" and a "start"......Black Pearl Long Short, one of two new Black Pearl funds, turned out to be a dismal loser (down 17.9% through October 31, 2006), and the fund will be liquidated early this month......If the Firsthand folks want to try yet again, may we suggest Three-Time Losers as their next fund family name?
According to a soon-to-be-published survey, the average hedge-fund manager spent almost $4 million on "fine art" last year.....Other upscale
expense categories include yacht charters ($429,000 a year), jewelry ($376,000) and hotels ($304,900).....We haven't seen any separate numbers for mutual fund managers but, at the upper levels, you can assume that mutual fund managers wouldn't be embarrassed in hedge-fund company.
If you're looking for this month's report on Roy's market-timing experiment, you're about a month late.....The timing experiment wrapped up with last month's issue of FundAlarm, and all 12 monthly reports are now locked away in the FundAlarm archive, where they will be released only to readers who promise not to try the same silly stunt on their own......Have you guessed that the experiment didn't work out so well?
Robert Gates had been Fidelity's lead independent fund director.....Now that he's been nominated to succeed Donald Rumsfeld as Secretary of Defense, Gates will be resigning from the Fidelity fund board (you'll miss him, won't you?).....The search for Gates' successor is on, and FundAlarm has learned that Fidelity is planning an extensive recruiting campaign, complete with banner ads:
