Highlights and Commentary

By Roy Weitz

(Originally posted December 1, 1999) [Archive Table of Contents]

Ryan Jacob has been slow to launch his new Jacob Internet fund.....The SEC appears to be the main stumbling block, as regulators scrutinize the new fund's prospectus, and try to fine-tune the presentation of Jacob's eye-popping track record at his previous fund (WWWFX).....Meanwhile, Jacob has decided on his new fund's Board of Directors, and it reads like a Who's-Not-Who of the financial world:

• William B. Fell, age 29, Manager of Accounting Services, Maritrans Inc
• Christopher V. Hajinian, age 30, Self-employed attorney
• Jeffrey I. Schwarzschild, age 28, Associate attorney, Melbostad, Gibson & Harris, LLP
• Leonard Jacob, age 50, Chairman and CEO, InKine Pharmaceutical Company, Inc.

Ryan Jacob and Uncle Leonard share a chuckle over their favorite stock listings

If that last name seems suspiciously familiar, it is.....Ryan Jacob's Uncle Leonard will be one of the new fund's "independent" directors, and the SEC has no problem with this.....Ryan says that Uncle Leonard is a really smart guy, with oodles and oodles of business experience.....And even though Leonard is the brother of Ryan's father, Leonard will always have the best interests of the fund's shareholders uppermost in his mind.....(This, of course, flies in the face of everything you and I know about family relationships and human nature, but never mind).....Why didn't Ryan Jacob hire a more prestigious Board, and skip Uncle Leonard?....At the moment, it appears that Jacob is a bit short of cash, and he can only afford to pay his directors $4,000 per year....At $4,000, says Jacob, "I'm somewhat limited" Some advice from Uncle Roy: Ryan, remember when I taught you how to spell NASDAQ? Well, you're a big boy now, and you're managing big money. Maybe a billion dollars -- yes, that's "billion" with a "b." I know you're a nice kid, and you mean well, but it's time to grow up. Take out a loan. Get some financial backing if you have to. Hire an experienced Board, and pay them the going rate. Otherwise, your investors will wonder where else you're cutting corners. If you run this company the right way, it will be good to you for the rest of your life. If you run it like a fraternity party, there's a good chance you'll screw up. Oh, and one more thing. Stop pouting so much. Money managers don't pout. If you want to be Keanu Reeves, move to Hollywood. There, that's enough lecturing for now. Go wash up. Aunt Shirley is making your favorite pot roast!

In journalism, there's nothing more important than credibility: We recently received a promotional mailing from Investor's Business Daily, with the following irresistible hook:

AIM Aggressive Growth -- up 89.6% in 36 months
PBHG Emerging Growth -- up 115% in 36 months
Well, maybe there was some 36-month period during which these funds were up by these percentages, but certainly not the current one.....For the three years ended October 31, 1999, AIM Aggressive Growth was up only 37%, and PBHG Emerging Growth gained only 8%.

The mailing continues:

"Please don't feel badly if you didn't know much about these opportunities."

Thanks, but we've already gotten over it.

How private is private? Your online broker has a lot of information about you and, these days, no self-respecting broker would be caught without a rousing privacy statement.....(Well, there are a couple of exceptions -- more about those later).....But if you read beyond a broker's initial assurances of privacy, you discover that a surprising number of online brokers manage to weasel their way out.....Below, you'll find FundAlarm's survey of online broker privacy practices.....First we present excerpts from each broker's obligatory pledge of privacy.....Then we present the weasel words (if any) that the broker uses to weaken its privacy pledge, and we award each broker an overall Weasel Rating.....If your broker earns a "3-Weasel" rating, our worst, your personal information could be anywhere....."2-Weasel" and "1-Weasel" brokers aren't as bad, but they still have serious privacy deficiencies.....Five online brokers earn our "No-Weasel" rating.....At least according to published policy, you can be reasonably confident that these folks will keep your private information private.

This online broker...	...makes this ringing declaration of privacy...	...followed shortly thereafter by these weasel words	FundAlarm Weasel Rating (3-Weasels = worst)	Comments
The 3-Weasel brokers.....
NDB	"At NDB.com we strive to instill customer confidence by maintaining strict restrictions on all customer information"	"In rare cases, NDB may share information with a select company that provides a product we believe will be of interest to you."		The cases may be "rare," but your choices are none. The NDB Web site offers customers no way to stop the dissemination of their personal information.
Quick & Reilly and Suretrade (both owned by Fleet Financial Group, Inc.)	"The safeguarding of customer information is an issue we take seriously..."	"[We] may share information with [unaffiliated] companies if they provide a product or service that may benefit our customers"		When do customers get to decide if they want to "benefit" from third-party products or services? Never. Like NDB, Quick & Reilly/Suretrade offer no way for customers to stop the dissemination of personal information.
MSDW Online (Morgan Stanley Dean Witter)	FundAlarm couldn't find a privacy statement on the MSDW Web site, so we sent an e-mail inquiry....."Please clarify what you mean by a privacy statement," came the ominous reply.....We did, and we haven't heard from them since.			No published privacy policy. Also, clueless and unresponsive. Where do we sign?
The accompanying page presents FundAlarm's 2-Weasel, 1-Weasel and No-Weasel brokers.....The following firms are rated: Ameritrade, Charles Schwab, Datek, DLJ Direct, E*Trade, Fidelity, Siebert, and TD Waterhouse.

From Schwab's most recent customer newsletter:

	Do this...		"History has shown that long-term investors who stay fully invested through market cycles have enjoyed higher returns than those who have tried to second-guess the market." [page 1]
	No, do this...		"...we've enhanced SchwabAlerts to include Pager Alerts...You'll receive short messages with personalized news that could affect your investments." [page 3]

"Net asset value" (NAV) seems like it should be an important number.....After all, it's quoted in the newspaper every day, and many investors think of NAV as the equivalent of a stock's share price.....In reality, NAV is often irrelevant, except over short periods of time.....Amerindo Technology fund (ATCHX) had a huge swing in NAV during 1999.....On the theory that extreme cases make the best examples, here's an example showing how NAV works using Amerindo's actual 1999 numbers.

Example:
On May 1, the NAV of the Amerindo Technology fund was 27.44.....On October 28, its NAV was 23.52 (in a minute, you'll see why we picked this date).....Therefore, you might conclude that Amerindo lost value from May 1 through October 28.....But when we look closely, we see that there was more going on with Amerindo than the mere change in NAV would indicate.....The key missing piece for Amerindo, as for many funds, was a dividend distribution.....On May 1, as we said, Amerindo's NAV was 27.44.....On October 27, the day before Amerindo paid its 1999 capital gain dividend, its NAV was 33.28.....On October 28, "ex dividend" day, Amerindo paid a whopping dividend of $10.15 per share, and its NAV dropped by the same amount, ending the day at 23.52:

Amerindo Technology D - 1999
Date	NAV
May 1	27.44
October 27	33.28
October 28	23.52

Does the October 28 drop in NAV have any economic significance?.....No.....If you elected to receive your dividend in cash, Amerindo sent you a check equal to $10.15 for every share owned on October 27 (the "record date").....If you reinvested your dividend and bought additional shares, you ended the day on October 28 in exactly the same financial position as the person who took the dividend in cash.....Here's how:

	Took dividend in cash	Reinvested dividend in shares
May 1 (initial purchase):
NAV	27.44	27.44
Amount invested (assumed)	$10,000.00	$10,000.00
Shares acquired	364.4	364.4
October 28 (ex-dividend date) :
NAV	23.52	23.52
# shares already held	364.4	364.4
Value of shares already held	$8,570.69	$8,570.69
Cash distributed (@$10.15/share)	$3,698.66	N/A
Shares distributed	N/A	157.26=$3,698.66
Total value of investment	$12,269.35	$12,269.35
Increase in value (May 1 to Oct. 28)	$2,269.35	$2,269.35

In the case of Amerindo, the increase in the dollar value of your investment was $2,269.35.....Even though the NAV seems to indicate that this fund lost 14.3% (27.44 vs. 23.52), you're actually ahead 22.7% ($2,269.35/$10,000).

So much for NAV.


Did we just say that you're ahead 22. percent?.....In a nontaxable account, we'd be right.....But in a taxable account, Amerindo serves as another kind of example (if one be needed): Large fund distributions can have punishing tax consequences.....Returning to our example above, an investor in the highest tax bracket (39.6%) would owe tax of $1,199 on her $3,699 Amerindo distribution (a sizeable portion was short-term, and therefore not eligible for the 20% capital gains rate).....On an after-tax basis, this brings the Amerindo return down to 10.7%, or less than half of the pre-tax number.


Let's milk this example for all it's worth.....In the spring of 1999, Amerindo warned investors that it might make a large capital gains distribution in October.....Yet investors continued to pour money into the fund, including almost $20 million in September.....What mistake did these investors make?......(Everyone say it together:) "They bought a dividend!".....If you invested $10,000 in Amerindo on September 1, your pre-tax return was $771 through October 28 (7.7%).....Unfortunately, your tax bill could be as high as $1,053, which means that you actually would have lost money after taxes (-2.8%).


We were recently using our favorite search engine (go2net.com) to find an article by mutual fund columnist Charles Jaffe.....We entered the term "Charles Jaffe," and the search engine offered some provocative suggestions for additional searches:



When the Van Kampen name last appeared in these pages (October 1999), Van Kampen Emerging Growth was seeking an unjustified fee increase (since dropped), and the SEC had just penalized Van Kampen Growth for goosing its return with IPOs and failing to disclose that fact to investors.....This month, Van Kampen is at the center of a new controversy over its bank loan mutual funds, of which Van Kampen Prime Rate Income Trust is the largest.

Here's the background: Many banks issue floating-rate loans to businesses, and the banks then sell these loans to mutual funds and other institutional investors.....Most of these loans are junk or near-junk quality, but they offer attractive yields with low volatility (because of the floating-rate feature).....There is a fairly active secondary market for these loans, and there are "pricing" services that can assign a daily market value to these loans.

How do mutual funds handle bank loan investments?.....Most mutual funds rely on one or more of the pricing services, which means that most funds "mark" these loans to "market" every day.....If the XYZ Bank Loan Fund owns a loan that was made to Terminal Health Care Company, and Terminal Health Care declares bankruptcy, it stands to reason that the Terminal Health Care loan will decline in value, and that drop in value will be reflected in the share price (net asset value) of the XYZ fund.....Now, back to Van Kampen: Along with Eaton Vance, Van Kampen is one of the few firms that doesn't use pricing services for its bank loan funds.....Instead, Van Kampen uses the "fair value" system of pricing, which means that Van Kampen funds determine the value of their bank loans internally.....The results can be surprising.....Recently, for example, loans issued to several troubled and bankrupt companies were trading on the open market as low as 50 cents on the dollar.....Van Kampen mutual funds continued to place a "fair value" on these troubled loans between 89 cents and par ($1.00).....If the market is right about these loans, and Van Kampen is wrong, then the net asset value of the Van Kampen bank loan funds is overstated -- by how much, nobody knows.....How does Van Kampen defend its practices?.....We can't tell you, because Van Kampen refuses to answer reporters' questions.....Eaton Vance, on the other hand, is willing to talk with reporters, and its position is likely to surprise even a first-year economics student....Basically, Eaton Vance says that market values are wrong, and "fair values" are correct, because Eaton Vance has more information about these loans than the market does....The market was unavailable for comment.....But a spokesman said that the market hears this kind of argument quite often,, usually just before a major financial blow-up.
* "Is Van Kampen's Fair Value Fair?", Joe Niedzielski and Pallavi Gogoi, Dow Jones Newswires, October 27, 1999; "Fund Investors Worry Values May Be Off Base," Gregory Zuckerman and Pui-Wing Tam, The Wall Street Journal, October 29, 1999; "Floating-Rate Illusion," Lewis Braham, SmartMoney.com, November 2, 1999

Last month, we introduced our eight new Specialty fund benchmark groups -- Communications, Financial, Energy/Natural Resources, Gold/Precious Metals, Health, Real Estate, Technology, Utilities.....This month, we thought it would be interesting to see how these Specialty groups have performed over the past 36 months relative to each other, and also relative to the large-cap benchmark.....The chart below contains one vertical line for each Specialty fund group.....The top of each line represents the annualized 3-year return of the best-performing fund in that group, while the bottom of the line represents the worst-performing fund in that group.....The horizontal line, in red, represents the 3-year return of the Vanguard 500 index fund, which is FundAlarm's large-cap benchmark.


Some observations:

• In the Communications group, all 16 funds outperformed the S&P 500 over the past three years.....This is the only Specialty group in its entirety to outperform the large-cap benchmark, and it's also the smallest group.
  
  
• Financial and utility funds performed about the same, although you wouldn't have known this from the relative amounts of media coverage.....Financial funds are sexier and their holdings are easier to understand.....Attention follows.
  
  
• Only two health care funds (out of 51) beat the S&P 500*.....We suspect that most investors would have guessed better performance.
  * Fidelity Select Biotechnology (FBIOX), Vanguard Health Care (VGHCX)
  
  
• Three Specialty groups --Energy/Natural Resources, Gold/Precious Metals, and Real Estate -- contain a total of 183 funds.....Over the past three years, not a single fund in any of these groups came close to beating the S&P 500.
  
  
• The very best fund in the Precious Metals group* still trailed the worst fund in every other group, except Natural Resources.....How do gold fund managers get out of bed in the morning?
  * Oppenheimer Gold & Spec Min A (OPGSX)
  
  
• As a group, Real Estate was less volatile than Natural Resources.....But the best either group could do was a couple of funds in the 8% range.*
  * Fidelity Select Energy (FSENX), Putnam Global Natural Res A (EBERX), Delaware REIT A (DPREX), Delaware Pooled Real Est (DPRIX)
  
  
• Technology funds (no surprise) had the most volatile returns.....And even in the recent tech-happy environment, four tech funds still managed to underperform the S&P 500.*
  * AIM Global Tel and Tech A (GTTCX), AIM Global Tel and Tech B (GTTBX), Monterey Murphy Technology (MNWTX), Monterey Murphy Tech Conv (MNWCX)

Briefly noted:

• A couple of months ago, FundAlarm was named a "Forbes favorite" Web site.....Now, Money magazine has selected us as one of its top-50 financial sites, and one of only two sites in the mutual fund category (that pesky Morningstar is the other one).....What can we say?....We take FundAlarm very seriously, and we're extremely gratified when people find our efforts to have some value.....During the new year, we're going to be making FundAlarm even better.....Stay tuned.
  
  
• For several years, exchange-traded funds (ETFs) have been lurking in the shadows of traditional mutual funds, but that may be about to change.....Barclays Global Investors is set to roll out 51[!] different index ETFs, specifically designed for the individual, retail market.....What are exchange-traded funds?.....Perhaps the best known examples are "SPDRs": Basically, ETFs are hybrid funds (a little bit closed-end and a little bit open-end), which trade like stocks on the American and NASDAQ stock exchanges.....And who is Barclays?.....Only the second-largest investment management company in the world, after Fidelity.....Barclays knows what it's doing in this area, it has the muscle to carry through, it will have an exceptionally diverse line of index products, and at least some of Barclays ETFs are likely to have lower expense ratios than the equivalent Vanguard index funds.....Vanguard would seem to have the most to fear from the Barclays invasion....But Vanguard CEO John Brennan is calm, having learned his lessons well at the Marie Antoinette School of Business Management.....Brennan sneers at the threat from the exchange-traded rabble, claiming that ETFs appeal only to "frenetic traders"....."If you like those funds, then you're not the client we want."
  "Vanguard's Index Funds Attract Imitators," John Hechinger and Pui-Wing Tam, The Wall Street Journal, November 12, 1999
  
  
  
• On second thought, maybe Brennan is out of touch with everyone..... A Vanguard spokesman, recently quoted in The New York Times, says that Vanguard has been looking at exchange-traded funds "for a few months"....."They seem to have a lot of potential and therefore warrant more study."
  
  
  
• The aforementioned SPDR ("Spider"), an exchange-traded fund that tracks the S&P 500 index, currently has over $14 billion in assets.....If it were an open-end mutual fund, it would already be among the 40 largest funds overall, and the fifth-largest index fund.
  
  
  
• MetaMarkets.com is the company that recently launched OpenFund, the world's first interactive no-load fund managed live in real time for New People living the New Paradigm in the New Economy for the New Millennium.....In early November, MetaMarkets announced that Nolan Bushnell, inventor of the computer game PONG, had joined its "Think Tank".....According to a MetaMarkets press release, Bushnell "will add a unique perspective on the past, present, and future of the digital revolution...We'll be listening closely to his views on the future of digital technologies, businesses, lifestyles, and culture."
  
  

  He says "No" to the MetaMarkets Think Tank
  		In a related story, another computer pioneer has declined an offer to join the MetaMarkets Think Tank....."Over the past few years," according to PacMan, "I've bit off more than I can chew. Maybe some day, after I've had a chance to digest everything, I'll give MetaMarkets a call".....Asked if he could match the investment credentials of Mr. Bushnell, the usually easy-going PacMan appeared to bristle with anger: "Hey, when it comes to advising mutual funds, I'm at least as qualified as that PONG guy. People seem to forget, but I've got a pretty good head on these feet."

  
  
  
• We've never done a survey, but we suspect that a significant majority of FundAlarm readers are do-it-yourself, no-load investors.....Sorry to break the bad news, folks, but it looks like we're losing the war.....No-load funds have been a flat 40% of all fund sales for the past three years, and the true do-it-yourself market may be as small as 20% (the remainder of no-load sales appear to be generated by fee-based financial advisors).....Load funds continue to outnumber no-loads, 3,143 to 2,281, and load funds control more assets ($1.8 trillion vs. $1.4 trillion).....We still think the Internet will tip the scales in favor of no-loads, but right now it doesn't look good.....Founders, Gabelli and Kobrick are the latest to add classes of load shares, and Janus and T. Rowe Price are said to be considering them.
  
  
  
• Several readers have recently asked why we seem to be so biased against the Janus funds.....The answer is, we're not.....The Janus record speaks for itself, and it's one they should be proud of.....But, every once in a while, doesn't Janus seem just a bit, just a touch, just a mite -- arrogant?.....As of November 28, dozens of fund companies both large (Fidelity, Vanguard) and small (Fremont, Royce) had posted estimates of 1999 capital gains distributions on their Web sites.....Clearly, this is something investors are concerned about, and also have a right to know.....What about the Janus Web site?.....Here's the sum and total of what Janus had to say:
  
  

  "Year-end distributions for Janus Equity funds will be paid on December 10 this year. This marks a change from previous years when they were paid during the last week of December..."

  
  Try plugging that into your year-end tax projection.
  
  
  
• Haven't we seen this before?.....Kevin Landis is now the manager of five Firsthand mutual funds .....Three of his funds (Technology Value, Technology Leaders, and Technology Innovators) recently held a total of 107 stocks, with little overlap.....Landis also runs two new mutual funds (E-Commerce and Communications), and a private hedge fund.....The portfolios of the latter three funds haven't been published, but let's be conservative and say they hold 15 stocks each.....All told, then, Landis is responsible for managing 152 different stocks -- every one of them in a fast-moving, dynamic industry.....Landis admits that he's short-handed on the research side, but he expects to increase his analyst staff from three to six "in the next year".....There's also a chance that Landis will open one or more new funds during 2000.
  
  Here's a little exercise that will help you walk a mile in Kevin Landis' shoes: Think of a subject area that you know well (it could be anything: gardening, sports, music, cars, etc.).....Take 152 slips of paper, and write down 152 words associated with your area of expertise, then divide the slips of paper into six piles of 25 slips each.....These are your six "portfolios".....Number your portfolios from 1 to 6, and study them for as long as necessary.....Now, put your portfolios aside, and try to remember what's written on each slip of paper in each of your six portfolios......This is the challenge that Kevin Landis faces simply remembering what he owns in his funds.....Now, shuffle your portfolios and try to memorize them again.....While you're doing this, have somebody call you on the phone every couple of minutes, try to pay attention to three television programs at the same time, and try to think of five unique characteristics of each of the 152 items in your portfolios......You've just experienced a tiny slice of life for an understaffed solo manager in a hot fund family.....Since the first of the year, undaunted investors have given Landis about $350 million of new money to manage.
  
  
  
• At a recent New York press briefing, Ron Muhlenkamp, of the Muhlenkamp fund, was holding forth on the future of the stock market.....In response to a reporter's question, Muhlenkamp was unable to name even one of his fund's top stock holdings.....At the same meeting, Todger Anderson (manager of Westcore Midco Growth), noted that Real Networks was one of his favorite tech stocks, because of its leadership in streaming media....."Not that I can explain what that is," admitted Anderson.
  TheStreet.com, October 22, 1999
  
  
  
• What does back-pedaling look like?.....Kansas City Southern Industries (KCSI) is delaying the spinoff of Janus and its other financial services companies, so that it can recapitalize its railroad business (amazing how those major restructuring transactions can sneak up on you!).....While the spinoff sits on the sidelines, KCSI and Janus will almost certainly try to work out their differences (as reported here last month).
  
  
  
• For a while now, we've had our doubts about Bill Miller, benchmark-beating manager of Legg Mason Value.....With a record like his, we mostly doubted that Miller would remain a Legg Mason employee for long, since he could almost certainly command a substantial ownership interest at any of a dozen other fund companies.....Legg Mason must have had its doubts, too.....Miller's new fund, Legg Mason Opportunity Trust, will be managed by a new firm jointly owned by Legg Mason and Miller.....As an employee of this firm, Miller will run the fund day-to-day, and presumably earn a salary.....But Miller's big upside comes from his 50% ownership interest in the management firm.....If Opportunity can raise even $5 billion, Miller's ownership stake could be worth as much as $100 million.....When the current management contract for Legg Mason Value comes up for renewal, don't be surprised if Miller's new company picks up that plum, as well.
  
  
  
• What a coincidence! On October 29, James Cramer, of TheStreet.com, announced that he was the "new sheriff in town"....."So look out, Morningstar and all you cottage-industry mutual fund raters who have done nothing to illuminate or be critical of the most important industry that affects your pocketbook".....Less than two weeks later, a Morningstar "Quicktake" report characterized TheStreet.com stock "as speculative as they come"....."TheStreet's income statement resembles a geyser of red ink, [and we give] it grades in profitablility and financial health of F and D-plus, respectively".....It's your shot, Sheriff Jim.
  
  

---

[Top | Home]

FundAlarm © Roy Weitz, 1999