FundAlarm - Highlights & Commentary - (Updated 1st of Each Month)

David Snowball's
New-Fund Page for December, 2008

[Open for business | Coming attractions | Stars in the shadows]

Dear friends,

Welcome to the unofficial start of Winter and the middle of the beloved Fourth Quarter Holiday Retail Season. Black Friday sales, driven by occasionally-desperate discounts, rose about 3% from last year. There is, however, the prospect of a mighty shopping spree in the offing: there's a record $3.7 trillion parked in money funds, earning just over 1% -- barely one-quarter of the rate of inflation. It's really hard in the long term for institutional investors, who hold $2.5 trillion of the total, to charge even 1% -- much less "2 and 20" -- for an account producing pennies. (Data from the ICI, 11/20/08) On top of that, the federal government has now committed up to $7 trillion in its various bailout packages ("Bailouts: $7 trillion and rising," CNNMoney.com, 11/28/08). The prospect of a new presidential administration and the movement of even half of that $11 trillion pot raises the likelihood of interesting times early in the new year.

Could It Be The Sound of Schumpeter’s Trumpet?

Joseph Schumpeter (1883-1950) was a remarkable figure in early 20^th century economics. He was an economist, iconoclast, Austria’s minister of finance, bank president and professor. His declared ambition was to become Europe's greatest lover and greatest horseman, "and perhaps also its greatest economist." He fled Hitler’s Europe in 1932 to accept a professorship at Harvard and, eventually, presidency of the American Economic Association.

All of which is to say: Schumpeter was one smart cookie. Also rather wicked.

Before Schumpeter, economists tended to focus on the importance of price: whoever produced a good at the lowest price, won. Schumpeter was one of the first economists to grasp the importance of what we now call "disruptive change." Organizations thrived, grew, then grew fat and happy. Shortly thereafter they were eaten alive by new, small, aggressive competitors. All of the good created by the old organizations – entire factory towns in 19^th century New England, good union jobs in the late 20^th century and retirees’ health benefits in the 21^st – was swept away with them. Schumpeter saw these waves of destruction as permanent and essential. Here’s how he put it in 1942:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. . . .

Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . .

But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization – competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.

In short, you’re not beaten by other competitors who are playing by your rules. You’re beaten by folks who shred the old rulebook and sweep away the stunned leviathans who didn’t see it coming.

If you’re looking for evidence of a gale blowing through the financial services industry, you don’t need to look far:

Fund companies are liquidating a huge number of funds. When all share classes are counted, something like 400 funds have been liquidated so far in 2008. In the last month or so, fifteen Reserve money market funds have been wiped out. As has the entire Utopia fund family. Liberty Ridge, successor of the great PBHG funds of the 1990s, is going. Two of three Bjurman, Barry funds. The Sierra Club fund. Analytic Global Long-Short. RS Asset Allocation.

Fund companies, likewise, are liquidating a huge number of employees. The list of companies with substantial layoffs ranges from the industry’s smallest players to its largest.

American Century is laying off 17% of its workers
Ariel is laying off 20% of its staff
Fidelity is cutting 15% of its UK workforce and about 7% of its huge US staff
Janus announced a 9% workforce reduction
Legg Mason is cutting 33% of jobs at its Capital Management unit, the investment group headed by Bill Miller
MFS is laying off 5%
Putnam is laying off a relatively modest 5%, including 12 portfolio managers, though the changes are linked to changing corporate strategy as much as deteriorating economics.
The Hartford is laying off 500, about 2% of its staff
Waddell & Reed, adviser to the Ivy funds, is laying off 15%

Setting up "death watches" is becoming a popular pastime: Morningstar star, for example, started an "ETF Death Watch" to track the rising number of ETFs which are simply not economically viable. By some estimates, that number is creeping up toward 100 – perhaps 15% of all ETFs in existence.

Even reopened funds are experiencing outflows. The 66 funds that have reopened this year have posted a total of $24.3 billion in net outflows year-to-date through Oct. 31. ("More mutual funds reopen for business," Investment News, 11/16/08)

Much of the question is how the mutual fund industry responds; that is, whether they’re part of the gale or part of the landscape being scrubbed clean.

If the Investment Company Institute’s recently released 2008 annual report and Congressional testimony is any indication, the operating term will be "fundosaurus." In the next three months, we’ll be looking at industry innovations, such as tactical asset allocation funds, to give folks a better sense of who’s the predator and who’s the prey.

"...never send to know for whom the bells tolls; it tolls for thee."

My academic home, the Department of Communication Studies at Augustana College, has just launched a major in Multimedia Journalism and Mass Communication. We’ve structured the program to help students, from the first day of the first class, to confront the gale created by interactive media and the blurring of the line between the producers and consumers of "news." Based on a fair amount of research, we reached two conclusions that drove the program’s design: (1) people want the news and always will and (2) traditional media outlets are going to be toast. Most have no real idea of what to do in order to survive and are flopping around like flounders on the sidewalk.

Which brings me to, "the magazine death pool." That’s actually a web service run by a person (or people) who appear to be insiders in the world o’ magazines. MDP tracks the declining fortunes of magazines, based in part on their inability to draw advertising and in part on their failure to define a distinct identity for themselves. High on the list of the soon-to-be-dead are three publications covering personal finance: Conde Nast Portfolio, Kiplinger’s Personal Finance and SmartMoney. Here’s MDP’s analysis of each:

Conde Nast Portfolio: "The usual pulse check at Si's and David's folly is feeble. Last September's issue was 122 ad pages, and this year it's, gulp, 45! I've said this many times that when the readers don't stick around or aren't there, the advertisers will desert the ship. This is Cargo redux. When fellow Conde Nast publication Brides magazine gets more buzz than you, it's time to cut your losses."

In October, a couple weeks after that profile ran, Conde Nast announced its decision to cut Portfolio from 12 annual issues to 10 issues and to scale-back its web presence.

Kiplingers Personal Finance vs. SmartMoney: "One magazine for the AARP set, the other with the bloom long off its rose. SmartMoney has a super web site with clever widgets and tools that it licenses out. Kiplingers has, well, you can read Knight Kiplinger's defense from back in June here. Maybe his magazine is being propped up by his newsletters, but Kiplingers Personal Finance smells like the US News & World Report of personal finance magazines to me." http://www.magazinedeathpool.com/magazine_death_pool/page/4/

In an e-mail exchange with Jon Fine of Business Week, the site’s anonymous authors place much of the blame on the current financial crisis and the self-destructive tendency of mutual fund companies to respond to bad times by giving up on marketing and focusing blindly on cost reduction:

Oh, some mutual fund companies do play it smart and keep pushing their marketing. But in general, and history proves this, a number of these companies get spineless and cut back. Their view is "the sky is falling, people are scared and shaky with this market, so let's pull back." They are conservative and institutional by nature, so when the going gets rough, they pee in their pants and run away. http://www.businessweek.com/innovate/FineOnMedia/archives/2008/09/magazine_death.html

All of which I discovered just as Kiplinger’s wrote to ask if I wouldn’t please renew my subscription at the rate of $30 for three years. I might be naïve, but that sounds a lot like an organization trying to raise cash right now rather than one setting a price that will actually allow them to make a profit three years from now. Hmmm….

On the upside, fund reopenings continue

In November, I posted a list of 30 newly-reopened funds. The openings continued in November as investors continued pulling their funds. The most surprising was Bridgeway Ultra-Small Company (BRUSX), which has been shut tight for the past seven years and reopened to existing shareholders who purchase shares directly from Bridgeway.

Other newly-opened offerings include:

Acadian Emerging Markets Portfolio (AEMGX)

Bridgeway Micro-Cap Limited (BRMCX)

Buffalo Small Cap (BUFSX)

Evergreen Special Values Fund (ESPAX)

Fidelity Mid-Cap Stock Fund (FMCSX)

Robeco Boston Partners Long/Short Equity Fund (BPLSX)

Vanguard International Explorer (VINEX)

Vanguard Precious Metals and Mining (VGPMX)

In addition, Oakmark Equity & Income (OAKBX) reopened to investors who buy through third-parties.

We’ve now reached the point where only about 40 (of 6733) funds remain closed.

Celebrating the Pilgrims, Puritans and Putzes

Rob Wherry penned SmartMoney’s annual list of "turkeys," retail funds which have finished at the bottom of the pile for the past 1-, 3-, 5- and 10-year periods. Mr. Wherry came up with a list of 20 forgettable worthies:

Wherry's Worthy	FundAlarm’s take
Ariel Fund	A "Most alarming, three alarm" fund
Calvert World Values International Equity	A team from Acadian took over in early ’06 but it’s still wretched.
Davis Appreciation & Income	Not in our database
DWS Dreman High Return Equity	A three alarm fund
Evergreen Diversified Capital Builder	A "Most alarming, three alarm" fund
Fidelity Advisor Growth Opportunities	A record-setting "Most alarming, three alarm" fund, since Fido managed to create five different share classes, no one of which is worth a pitcher of warm spit
Fidelity Asset Manager 70%	A "Most alarming, three alarm" fund
Fidelity Growth & Income	A "Most alarming, three alarm" fund
George Putnam Fund of Boston	A "Most alarming, three alarm" fund
Legg Mason American Leading Companies	A "Most alarming, three alarm" fund
Legg Mason Partners Lifestyle Allocation 85%	Three alarm
Legg Mason Special Investment Trust	A "Most alarming, three alarm" fund
Skyline Special Equities	A three alarm fund
Managers Special Equity	A three-fer
MFS Mid Cap Growth	A "Most alarming, three alarm" fund
Morgan Stanley S&P 500	Three
Oppenheimer Capital Income	A "Most alarming, three alarm" fund
RiverSource Growth	A "Most alarming, three alarm" fund
UBS U.S. Allocation	Three alarm
W & R Advisors Retirement Shares	Three alarm

Not that we’re telling folks what to write, but we here at FundAlarm might modestly urge the inclusion of several funds which are currently the most alarming of the most alarming of the three alarm funds:

Legg Mason Opportunity (LMOPX) – At this most alarming U.S. stock fund, the folks at Legg Mason charged outrageous fees (1.99%) for access to Mr. Miller’s expertise back when it was supposed to be the best way to get in to a small, nimble vehicle with him. Since then, the vehicle in question whacked into three fire hydrants, a lightpost, and a truck hauling fireworks before rocketing off a cliff. As of 11/28, the fund trails 99% of its peers for the past week, month, year, three-year, and five-year periods. The folks at Morningstar "like this struggling mutual fund’s prospects" (8/13/08). The folks at FundAlarm, rather less so.

Just a tiny bit less miserable than LMOPX is Legg Mason Partners All Cap (SPAAX) which has managed to land in the 98th or 99th percentiles for every period longer than one day. That’s better than LMOPX which hasn’t made it out of the bottom 1%, but cold comfort for the folks who’ve lost 55% with the fund over the past twelve months. The folks at Morningstar, "like what we see at recently remodeled Legg Mason Partners All Cap" (as of their latest report, 6/4/07). Roy, contrarily, glanced at the fund’s prospectus, shrieked and ran out of the room, crying "it burns! It burns!"

The most alarming diversified international fund is Oppenheimer Quest International Value (QIVAX) whose "B" class shares managed the rare distinction of landing in the 100^th percentile over the past five and ten years. That is to say, there is no worst choice you could have made. Morningstar’s last analyst report (5/10/07) promises that "this fund is better than it looks," which I suppose you could also say of a fish three days dead in the sun. But we still wouldn’t urge patience with it.

Kensington Select Income (KIFAX) – our most alarming income fund invests largely, and poorly, in real estate. It’s managed to trail 88-98% of its peers over the past one-, three- and five-years while losing money at the rate of 14% annually. The folks at Morningstar "like this mutual fund's unusual approach" (as of their latest analyst report, 7/12/07). No word on whether their ardor has been dimmed 55% loss over the past year. As for us, we’ll pass.

If you're interested in finding out how deeply alarming some of your funds are, check out FundAlarm’s lists of alarming and honorable funds. If you’d like to read Mr. Wherry’s original article, which includes a discussion of how he set up the screen and his detailed results, will find it here at the SmartMoney website.

Briefly noted:

The Ironwood Isabelle Small Company Stock Fund (IZZYX) is being rebranded as Ironwood Discovery Fund (still IZZYX). I don’t really know why. It appears to have the same manager (Warren Isabelle, a star manager in the 90s who hasn’t found a consistently winning formula since), the same strategy, roughly the same (high) expenses and the same sorrowful one-star / three-alarm ratings from Morningstar and FundAlarm, respectively. The only visible change is a much higher investment minimum: up from $1000 to $10,000.

The former New River Small Cap Fund (NRVSX) has been reorganized and rebranded as the SouthernSun Small Cap Fund (SSSFX). The new fund maintains the same management team, investment minimum ($1000) and expense ratio (about 1.5%) as its predecessor. It has a small portfolio (currently 24 names) and a low portfolio turnover rate. Through the middle of 2008 (the last reported data that I have access to), the fund beat its small cap benchmark by 2.5 – 4% annually for the trailing one- and three-year periods and since inception.

Northern Multi-Manager Emerging Markets Equity (NMMEX) and Northern Multi-Managed Global Real Estate (NMMGX) both launched on November 19^th. Both offer access to a suite of institutional investment managers for an initial investment of $2500, or $250 with an automatic investing plan.

According to Post-Effective Amendment 122, which designates a new effective date for a previously filed post-effective amendment (which amended an amendment which itself had amended an amendment), FascianoFunds Small Cap will launch on December 19^th.

The fourth installation of our new-fund profile updates

Starting in summer, we launched our fund profile updates, and we're continuing this month with an update of four global value funds. Three of the four have posted great relative returns while the other turned in a stunningly bad performance. The updates appear in a box at the end of the original profile.

Here are the links to this month's updates (scroll to the bottom of each page to find the update):

Artisan Global Value (ARTGX)

Dodge and Cox Global Stock (DODWX)

Oakmark Global Select (OAKWX)

Tweedy, Browne Worldwide High Dividend Yield Value (TBHDX)

Since this is a continuing experiment, please do let us know what you’d find useful. For this and any other feedback, you can (as always) reach us through FundAlarm’s feedback link.

FundAlarm remains dependent, as ever, on the financial support of its readers. If you’ve made it this far down the page, you’re definitely one of the 4,000 or so folks who read this New-Fund page in a typical month. The Discussion Board saw its 240,000^th post this month and is accumulating new links, leads, insights and arguments at the rate of 1,000 per week. And Roy’s careful tracking of Alarming Funds and manager changes helps folks dodge nasty surprises.

All of which will work if you help support FundAlarm, either through a direct contribution or by using our Amazon link when you buy books and other merchandise. I’ve been finding spectacularly cool holiday loot at Amazon, well beyond my normal book buying (Pizza: A Global History. I’m so happy). Among the tastier options: LCD TVs with free shipping and set-up (some down near $100 and a bunch under $300, which is incredible given where they sold two or three years ago), stainless steel water bottles, a wickedly cool Baker’s Edge brownie pan that has interior walls that guarantee every piece has chewy edges; and even lists of gift ideas sorted by personality type (for "Geeks" consider iPods, energy drinks, and foosball tables). The options are neatly laid out here.

As always,

David

Open for business: These funds have already begun accepting investments.

NEW Discussed this month:
	PIMCO Global Multi-Asset (PGAIX): PIMCO lured Mohammed el-Erian back from Harvard this year, where he had been overseeing the university’s $26 billion endowment. El-Erian, long distinguished for heading PIMCO’s emerging markets operations, is now charged with managing a fund designed to protect against "black swan" events. If you don’t know what those are, you’ve probably already lost -- but keep reading.

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Coming Attractions: These are funds that have filed a prospectus with the Securities and Exchange Commission, but won't be available for purchase for a while. We'll keep an eye on these funds, and discuss the more interesting of them at length as their opening date draws nearer.

Global X [ ] Argentina ETF, Global X [ ] Colombia ETF, Global X [ ] Egypt ETF, Global X [ ] Peru ETF and Global X [ ] Philippines ETF are . . . interesting. No, I don’t know why there are [ ] in each fund’s name. No, I can’t explain why the prospectus filed in November for a firm launched in March is dated last January. No, they don’t yet know the expense ratios. And, finally, no, I’m not sure why you’d want to invest in Peru, much less in Peru with folks who have no demonstrated track record.

The Sherwood Forest Long/Short Fund seeks to achieve long-term capital appreciation by applying "proprietary, trend following methodologies to invest in exchange-traded funds ("ETFs") which represent general asset classes, including: both U.S. and overseas equity markets; U.S. fixed income markets; broad commodity indices; and the U.S. Dollar." The fund can have a net exposure which can range from 130% net long to 50% net short. The fund will be managed by Douglas A. Stewart who has been "a Regional Banker" and "an Independent Advisor" who possesses his life and health licenses along with his Series 7 and holds a BA in Education from Virginia Commonwealth University. If you’re wondering how he’s done, the prospectus offers the following performance table for his separately-managed accounts:

Time period	Net of fees	Gross of fees	S&P 500
Since inception (XX/XX/XXXX)	XX.X%	XX.X%	XX.X%

Which gives me some confidence that the fund will consistently return around XX.X% over X years. (OK, OK, I know this is an early draft.) A 5.75% front load complements a 1.90% expense ratio, and a $2500 investment minimum.

SouthernSun Mid-Cap Fund seeks to provide long-term capital appreciation through a non-diversified portfolio of mid-capitalization U.S. companies that are selected "using a research-driven, value-oriented investment strategy." The fund will be managed by a team headed by Michael W. Cook, Sr., who founded SouthernSun in 1989 and is the firm’s chief investment officer. His bio mostly highlights his speaking engagements and media appearances though the separate-account composite has modestly, though not consistently, outperformed the Russell 2500. Minimum investment not disclosed, expenses of 1.3% after waivers.

TheKidsFund (KIDSX) will charge a 5.75% front load and 2.05% expenses to help teach kids and their parents, and eventually the fund’s investment adviser, the same grim lesson taught by SteinRoe Young Investors (which became Columbia Young Investor), Monetta Young Investor and others. To wit: targeting your portfolio at companies which sell products to children and young adults (and which companies don’t?) is not a very effective marketing gimmick and rarely a very effective investing strategy. Minimum investment is $1000.

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Stars in the shadows (funds that perhaps you should have noticed, but haven't): These are mostly tiny funds, already open (some for quite a while), whose achievements far outstrip their public presence. Why? In many cases, these will be funds offered by institutional money managers as a sideline. They're often created to benefit their clients' (or their own) employees. Such fund managers have no incentive to solicit huge inflows, tend not to charge marketing fees, and often absorb much of the cost of running these little funds into their own overhead. As a result, stars-in-the-shadows funds often offer average investors affordable access to the services of high-powered institutional or other private account managers. While these funds aren't guaranteed winners, their unique role in their sponsoring firms gives them a leg up.

NEW Discussed this month:
	David is out searching for an original Red Ryder carbine-action, two hundred shot Range Model air rifle with a compass in the stock and a thing which tells time. When he finds it, he's hoping not to shoot his eye out. "Stars in the Shadows" will be back next month.