Highlights and Commentary

By Roy Weitz

(Originally posted January 1, 2001) [Archive Table of Contents]

This month, for the first time since August 1998, Janus Twenty has fallen off the FundAlarm Honor Roll.....Also this month, for the first time ever, the deep-value Clipper fund has moved onto the Honor Roll.....We're not the first to note this, but the mutual fund world is changing.....To help you get a handle on these changes, we've prepared two tables: The first table lists every fund that was 3-ALARM exactly one year ago, and it shows that fund's alarm status today.....The second table does the same thing with every fund that was on the Honor Roll a year ago.....Are there some surprises?.....Quite a few, we think: See what's happened to last year's 3-ALARM funds See what's happened to last year's NO-ALARM funds (Honor Roll)

If you had invested $10,000 in ProFunds Ultra OTC fund two years ago (January 1, 1999), you'd now have $10,573 in your account.....If you had invested the same $10,000 in Longleaf Partners Small Cap, on the same day, you'd have exactly the same amount ($10,573).....So, what's the big deal about two funds that end up in exactly the same place after two years?.....Take a look at the performance of each fund on an annual basis:

Fund	Return		$10,000 on 1/1/99 would have grown to:*
	1999	2000*
ProFunds Ultra OTC Inv	233.26%	-68.27%	$10,573
Longleaf Partners Small Cap	4.05%	1.61%	$10,573

* Through 11/30/00
Given a choice between these two funds (and without seeing the final numbers) we suspect that most people would have preferred Ultra OTC, because 233% minus 68% appears to be a lot better than 4% plus 1%.....But, as we've pointed out before, mutual fund returns aren't a matter of simple addition and subtraction.....The ProFunds offering more than tripled in value during 1999, but it proceeded to lose 68% of that value during 2000, which brought it back almost to where it started.....The Longleaf fund barely budged in two years, but its small net gain was enough to exactly meet ProFunds Ultra OTC on the way down.

Want to see some other examples?.....Listed below are four more funds that returned 100% or more during 1999.....Each of these rabbit funds is paired with a tortoise fund that didn't perform nearly as well during 1999, yet both funds would have increased your net worth by exactly the same amount (+/- $29) from January 1, 1999 through November 30, 2000:

	Fund	Return		$10,000 on 1/1/99 would have grown to:*
		1999	2000*
	Federated Aggressive Growth B	110.09%	-51.10%	$10,273
	Neuberger Berman Guardian	8.46%	-5.28%	$10,273
	Janus Enterprise	121.90%	-32.89%	$14,891
	Royce Opportunity	32.34%	12.53%	$14,890
	Fidelity Aggressive Growth	103.02%	-30.99%	$14,010
	Lord Abbett Mid-Cap Value C	3.62%	35.48%	$14,039
	Millennium Growth	103.00%	-47.64%	$10,629
	Bear Stearns Balanced A	-0.19%	6.52%	$10,631

* Through 11/30/00. All returns are before taxes on fund distributions, if any.
We're not necessarily recommending any of these funds, and we're also not suggesting that one fund is an exact substitute for the other.....Still, in these times of volatile markets, it helps to remember the whole point of investing in the first place: To increase your net worth.....Without consistency, even spectacular annual returns can be of little benefit.....The flip side, of course, is that even relatively modest returns, without large losses, can provide a significant boost to your balance sheet.....In the tables above, "slow and steady" didn't always win the race, or it didn't win the race by much, but it did a lot better than many folks might have expected.....This is an excellent point to keep in mind for the future.


Here's another "Naw, it can't be" comparison: If you had invested $10,000 on January 1, 1999 in both ProFunds Ultra OTC and Vanguard Total Bond Market Index, the bond fund would now be ahead by $288:

Fund	Return		$10,000 on 1/1/99 would have grown to:*
	1999	2000*
ProFunds Ultra OTC Inv	233.26%	-68.27%	$10,573
Vanguard Total Bond Market Index	-0.76%	9.44%	$10,861

* Through 11/30/00

Sucker bait:


From Schwab.com

It's cynical.....It's shameless.....It's profitable.....It's a deal: New mutual funds bear absolutely no relationship to newly-issued stocks, but that didn't stop Schwab.com from recently flogging shares of Janus 2 during the fund's subscription period (above).....As reporter Ian McDonald points out,* subscription offers are often designed to entice investors to (incorrectly) think of a fund's share price as if it were a stock.....Marketers like Schwab create a sense of urgency, and investors start to think of the new fund as if it were some hot technology IPO.....In fact, exactly enough shares of a new fund are issued to ensure that the beginning net asset value (NAV) is the amount promised during the subscription period (in the case of Janus 2, $10 per share).....The NAV of these initial shares will rise only if the fund's underlying stocks rise in value, which is the way it works for every mutual fund.....It doesn't matter how popular Janus 2 (or any new fund) becomes: It's never going to have an IPO pop.....So, who really benefits from a subscription period?.....For brokers like Schwab, subscription periods provide a nice, easy source of fee income.....For fund companies like Janus, subscription periods give a nice head start on profits (funds typically turn profitable at about $100 million of fund assets).....A subscription period also gives the fund a capital base, so that it can hold a diversified portfolio from its Day One..... Otherwise, the fund company might have to step in, and put up some of its own to cash to seed the fund.
* There's No Such Thing as a Hot IPO of a Fund," Ian McDonald, TheStreet.com, December 13, 2000


From the FundAlarm catalog of mutual fund merchandise:

		SURPLUS! The Amerindo Technology Fund Air Compressor. Dozens of these units kept the Amerindo Internet bubble inflated. Now that the bubble has burst, and Amerindo investors have lost hundreds of millions of dollars, their loss is your gain! Heavy-duty 5HP motor. 75 in stock, all must go.
Item# 1909 $139.95 Order now! Additional air compressors, from other tech funds, are arriving daily. Call for a price quote.

What are the absolute worst funds in the mutual fund universe?.....TheStreet.com recently took a stab at answering this question, and it came up with three plausible candidates: Value Line, Dresdner RCM Small Cap Growth, and Legg Mason Total Return.....(Actually, the search covered less than the entire fund universe: Only no-load funds with at least $200 million in assets were included, and the funds had to be situated in the large-cap growth, large-cap value, or small-cap growth categories).....A senior portfolio manager at Value Line gave three reasons for the poor performance of the company's 50-year old flagship: (1) There have been three different groups of managers within the last five years, (2) the fund lacks "spark or sizzle," which has led to internal neglect, and (3) the Value Line computer model for picking stocks doesn't work particularly well with large-caps (now you tell us!).....Dresdner refused to comment on the performance of its Small Cap Growth fund......Nancy Dennin, manager of Legg Mason Total Return, blamed the poor performance of her fund on its relatively large percentage of higher-yielding (i.e., dividend-paying) securities.....Presumably, those securities didn't just show up on Ms. Dennin's doorstep one day, demanding to be let in, which means that Ms. Dennin bought them of her own free will.....In any event, Dennin decided earlier this year to "change her approach a little" -- but the fund is still trailing its large-cap value peers by about 5% (500 basis points) for the year
"Funds to Dump for 2001," K.C. Swanson, TheStreet.com, December 22, 2000


How does FundAlarm view the three "worst" funds (above)?

"Worst" Fund	versus Benchmark			Alarm status	Bench
	12 Mo. (%)	3 Yrs. (%)	5 Yrs. (%)
Dresdner RCM Small Cap Growth (DRSCX)	-16.39	-8.94	-3.3	3-ALARM	Vang SmCap Idx
Legg Mason Total Return Prim (LMTRX)	-4.22	-15.35	-8.38	3-ALARM	Vang 500 Idx
Value Line (VLIFX)	-5.87	-3.93	-4.62	3-ALARM	Vang 500 Idx

"Well, I'm a runnin' down the road, tryin' to loosen my load, I've got seven women on my mind": We're not so sure about the seven women, but Legg Mason's Bill Miller definitely does seem to be interested in lightening his work load.....Miller has resigned as co-manager of Legg Mason Special, and he's added Nancy Dennin as co-manager of the firm's crown jewel, Legg Mason Value.....As we noted above, Dennin currently manages Legg Mason Total Return, where she has posted dismal numbers, and it's not clear what she brings to the table for Legg Mason Value.....As we write this item, on December 30, Value has just outperformed the S&P 500 for the tenth straight year under Miller's leadership, an astonishing achievement.....If bringing Dennin on board is a signal that Miller intends to spend less time working on the Value fund -- and we can't see what other kind of signal it might be -- this move is not good news for Value fund shareholders.


Now, if we could only get the Nasdaq index to follow this advice:

A crock		"If you feel a strong inner inclination to..try a particular investment, then place more trust in that hunch. This is your divine guidance encouraging you to take a risk, to ignore the ways of the herd, to be the unique individual that you are. Prosperity will be your experience of life, if that is how you begin to process life inside. It is inside that counts the most."
--From Real Magic, by Wayne Dyer

In the old days, if you wanted information from the Oracle at Delphi, you had to sacrifice a goat.....Recently, if you wanted information from the folks who run the Janus funds, even animal sacrifices wouldn't have helped......So why did Janus suddenly throw open its doors to the financial press on December 14?.....Perhaps the following chart of year-to-date returns will shed some light on the answer:

Name of Janus fund	Year-to-date return (%) (through 12/14/00)
Enterprise	-26.3
Global Technology	-25.6
Mercury	-16.3
Olympus	-16.9
Overseas	-14.9
Special Situation	-16.3
Twenty	-23.5
Venture	-43.7
Worldwide	-12.0

Yes, it appears that Janus managers are fallible after all.....And now, when the going has gotten tough, the tough folks at Janus have turned to their PR people, and the PR people now snuggle up to the same financial journalists who couldn't get the time of day from Janus nine months ago, when Janus was flying high.....The Janus managers now admit (A) that they might have gotten too caught up in the "overenthusiasm" for technology growth stocks, (B) that they got a "little carried away," (C) that they didn't recognize certain stock valuations had become "overextended," and (D) that they didn't pay enough attention to their heavy overweightings in the tech and telecom sectors.....In other words, the folks at Janus now admit that they kinda sorta blew it, in exactly the way that many people over the last two years said they were blowing it, but which Janus consistently and arrogantly denied.....Unfortunately, no one can tell if the Janus managers are being sincere with their mea culpas, or if humble confession is merely the marketing flavor of the day.....Perhaps Janus has learned a lesson from the political arena: Nobody will care what you did -- much less hold you accountable -- if you hang your head and say that you've learned a lesson.


Here's your bonus, what's your hurry: Janus fund managers are expected to receive their year 2000 bonuses early in 2001.....Once that money is securely in-pocket, it wouldn't surprise some observers to see one (or more) Janus managers jump to another firm, or start a firm of their own*.....During the recent media love-fest (above), Janus CEO Tom Bailey insisted that Janus managers are "not going anywhere".....Still, it would make overwhelming personal financial sense for some top-name Janus manager to leave the womb, and build a business of their own.....If we assume that the Janus managers are all competitive, confident, financially savvy people, the odds still greatly favor a Janus manager defection sometime soon.
* "Star flight may put Janus in orbit," Frederick P. Gabriel Jr., Investment News, December 4, 2000


It's nice to know that defense contractors have a sensitive side:

	"General Dynamics spent the 1990's reinventing itself as a powerhouse defense contractor with a guilt-edged balance sheet."
--From Wall Street Research Net (wsrn.com); thanks to FundAlarm reader Bill Walcott

Your New Year's present from the FundAlarm Discussion Board: Led by Board regular "Karl," a group of Discussion Board devotees has put together a model mutual fund portfolio for 2001.....Karl has agreed to track the model portfolio over the course of the year, and periodically report on its performance.....Initially, Karl will file his reports on the Discussion Board.....In a month or two, we'll also try to bring you Karl's model portfolio performance reports as a regular part of the Highlights and Commentary page.

View the Discussion Board Model Portfolio for 2001

Bob Cochran is another Discussion Board regular ("Bob C"), who also happens to be a professional financial planner.....Bob has been kind enough to share his model portfolio with the Board, and Karl has also agreed to track Bob's portfolio during the year.....Stay tuned: It should be an interesting (and instructive) horse race.

View Bob Cochran's Model Portfolio for 2001

Briefly noted:

• "Asset location": It's not a process that requires a global positioning satellite, but it might be simpler if it did....."Asset location" refers to choosing the asset classes that should be placed in taxable vs. tax-deferred accounts.....Conventional wisdom holds that income-generating investments, such as bonds and bond mutual funds, should be sheltered in tax-deferred retirement accounts (IRAs, 401k plans, etc.), while stocks and stock mutual funds should be held in taxable accounts.....The latest academic study to address this issue stands conventional wisdom on its ear.....According to three professors who work at a couple of pretty good schools (MIT and Stanford), your first priority should be to park stock funds in tax-deferred accounts, because stock funds typically make significant taxable distributions over time.....If you end up buying bond funds in taxable accounts, consider tax-exempt funds.....The authors of this study looked at a 37 year period (1962 through 1998), and they assumed two types of investor: One investor who first deferred stocks (using an "average" stock mutual fund), and one who first deferred bonds.....The stock investor ended up with about 9% more net worth than the investor who deferred bonds.....Even when the "average" stock fund was replaced by a more tax-efficient index fund, the investor who deferred stocks still came out slightly ahead.
  "In Asset Allocation, Think Location, Location, Location," Mark Hulbert, The New York Times, December 17, 2000
  
  
  
• There's another benefit to holding stock funds in tax-deferred accounts: You can sell long-term, poor performers without worrying about the potential capital gains tax bite.
  
  
  
• More from our anonymous source, about goings-on at the Value Line funds:
  
  

  "Recently, VL placed a classified advertisement in the Wall Street Journal. The position offered was Chief Investment Officer and Portfolio Manager. However, the position is currently held by Phil Orlando, who has suffered the indignity of seeing his own job advertised. Stress anyone!? He had no idea he was on such thin ice. The job listing was carried in a blind ad with instructions to FAX a resume to a certain phone number. A current Value Line employee who is in the job market thought the description sounded a bit close to home so he entered the phone number into an Internet reverse directory. Turns out the number is the home phone of VL's personnel director! What a shocking way to find out things aren't working out! If Phil Orlando loses his job, he will be giving up the management of the Value Line Fund, VL's flagship, which has lagged the Dow and S&P this year."

  
  This story is also making the rounds on the Yahoo! Value Line discussion board, with even more specific information
  
  
  
• I was riding in a high-rise elevator the other day, and it had one of those new advertising video screens stuck on the front wall, just below the floor indicator.....I thought, "How annoying".....A few days later, I read that Pioneer plans to start advertising its mutual funds on elevator video screens.....I thought, "How annoying."
  
  
  
• "Institutional" and "investor" classes of a given mutual fund usually differ only in their fee structure.....Institutional class shares generally charge lower fees, because their investment minimums are higher, and day-to-day operating costs (such as printing, postage, etc.) are lower.....Otherwise, institutional class shares and investor class shares hold identical portfolios, and the performance of the two share classes typically differs mainly by the amount of their fees.
  
  

  Example: Vanguard Total Stock Market Index (which is the "investor" class) and Vanguard Total Stock Market Index Institutional have expense ratios of 0.20% and 0.10%, respectively, and they hold the same portfolios. Therefore, you would expect the Institutional class to outperform the investor class by about 0.10%, which is the difference in their expense ratios. In fact, year-to-date, the Institutional class has outperformed by 0.06%.

  
  Now, take a look at the year-to-date performance figures for the two classes of the Deutsche European Equity fund:
  
  

  	Year-to-date return (%)
  Deutsche European Equity Institutional	84.02
  Deutsche European Equity Investment	75.00

  
  What's going on here?.....As Charles Jaffe points out in his annual "lumps of coal" newspaper column, the discrepancy between the two Deutsche European fund classes stems from an administrative error by the fund management company in mid-2000.....A large amount of cash was placed in the institutional class shares by mistake.....By the time the error was discovered, the market had gone up.....Deutsche moved the principal amount into the investment class, where it belonged, but the company elected to leave the profits with the Institutional class shares -- a lawful move, but not standard industry practice.....In fact, it represented a royal screwing of Deutsche's small-money investors.
  
  
  
• Among the other recipients of Jaffe's lumps of coal: San Diego lawyer James Krause, "for the dumbest settlement of a class-action suit against a fund company, ever".....Seems that Krause sued Alliance Capital Management in 1995, on behalf of investors in the Alliance North American Government Income fund, which (among other things) was making investments on an entirely different continent.....The case bounced around the courts for several years.....Krause finally settled the case in March 2000, when aggrieved shareholders got the right to invest a collective $250 million in other Alliance funds without paying a sales load.....As Jaffe asks, "That's a victory? Imagine the people suing Firestone settling for a discount on the same type of Firestone tires..."
  
  
  
• Boys and girls, can you say "overextended"?.....Turner Investment Partners is planning to add as many as six new Turner funds in 2001 to its existing 11-fund lineup.....Among the new offerings will be a fund that focuses on "new energy and power technology," as well as a fund that focuses on "future financial services".....The financial services fund would appear to present a unique management challenge, since it proposes to invest in something that apparently doesn't exist.....Turner is also planning to add two value funds, although Turner has no previous value fund experience, and no value managers are currently on board.
  InvestorForce.com, December 18, 2000
  
  
  
• The SEC says that it's currently investigating both "portfolio pumping" and "window dressing" by mutual funds.....Portfolio pumping typically occurs near the end of a reporting period (month, quarter, or year), when a fund buys more of a stock it already owns, in order to drive up both the stock's price and the fund's value.....Window dressing also occurs at the end of a reporting period, and it's designed to make a fund look pretty: Losers are sold, winners are bought, and style drift is corrected.....(It's worth noting that monthly reporting of all fund holdings, even with a significant time lag, would make both portfolio pumping and window dressing much easier to spot.....That couldn't be the real reason that most fund companies are opposed to monthly reporting of their holdings...could it?).....As usual, this SEC investigation has no time table, and no sense of urgency.
  "SEC probing funds for 'portfolio pumping'," Sara Hansard, Investment News, November 27, 2000
  
  
  
• What aboot Canada?.....Securities regulators there recently wrapped up a "high close" case against RT Capital Management, Canada's third-largest institutional money manager....."High closing" is the quaint, north-of-the-border term for portfolio pumping.....If pumping is going on in Canada's relatively sleepy money management world, it seems reasonable to assume that the practice is much more widespread in the U.S.....Or maybe not.....A spokesman for the Investment Company Institute (ICI), the U.S. mutual fund trade association, recently said that the ICI has never seen evidence that mutual fund managers act to artificially inflate the value of their securities.....Of course, they've never looked for it, either.
  
  
  
• Royce & Associates, which runs the Royce family of mutual funds, has put itself up for sale*.....If the funds are sold, nothing will change, except the manager will have less motivation, it will be harder to attract and retain good people, and the funds will become bloated due to improved distribution capabilities.
  *Aaron Lucchetti, The Wall Street Journal, December 5, 2000
  
  
  
• Mutual fund directors are supposed to protect the interests of mutual fund shareholders, so it's a fair question to ask "Where were the directors of the Heartland funds?".....(As we have reported over the last couple of months, on October 13 Heartland revalued bonds in two of its muni bond mutual funds (Heartland High-Yield Municipal Bond Fund and Heartland Short Duration High-Yield Municipal Fund.....In one day, the net asset values of these funds dropped by 69% and 44%, respectively--perhaps the biggest debacle in modern mutual fund history).....Heartland's troubled bond funds employed a total of 11[!] directors, and you'd think that at least one of these worthy souls might have awakened long enough to sense that something was amiss.....Alas, seven of the 11 directors receive their full-time paychecks from Heartland, two of the directors are public relations professionals, and one of the directors is Jon Hammes, who owns the half-empty building that Heartland occupies in downtown Milwaukee, and stands to lose a major tenant if Heartland goes belly-up.....The remaining "independent" director is A. Gary Shilling, a well-known economic consultant and a regular Forbes columnist.....Shilling's silence, above all, is inexplicable -- as one commentator recently noted, Shilling "knows how to figure out what happened and he knows how to communicate it"*.....Perhaps, even as you read this, Shilling is working on a dynamite, tell-all column about the Heartland disaster.....Or, perhaps not.
  *eRaider.com, November 15, 2000
  
  
  

  Shilling meets President Reagan

  Shilling meets President Bush

  Shilling meets his responsibility as an independent director of the Heartland mutual funds

  
  
  
• The world's supply of can't-miss investment strategies has shrunk by one, now that Motley Fool has quietly abandoned its six-year old "Foolish Four" strategy.....Once a cornerstone of MF's program for beginning investors, the folks at MF belatedly discovered that the Foolish Four strategy was "not nearly as good" as they previously thought it was....(For the uninitiated, Foolish Four is a contrarian strategy that involves buying the most beaten-up stocks in the Dow Jones Industrial Average).....New research, which goes back many more years than the old research, shows that the Foolish Four strategy would have outperformed the Dow by an average of only about two percentage points per year.....Such a slim margin could easily be eaten up by commissions and taxes.....A spokesman for the Motley Fool now says that "you're better off in an...index fund."
  "Prominent Online Investor Service Retracts Popular Advice Strategy," Dolores Kong, The Boston Globe, December 16, 2000. "Dimmy the Doodler" reported this item first on the FundAlarm Discussion Board, 12/11/00.
  
  
  
• Additional timely research: The Motley Fool is also rumored to be working on research which proves that many Internet stocks are risky.....This study, which is on the same fast track as the Foolish Four research (above), is expected to be released in late 2002.
  
  
  
• Submitted by FundAlarm reader "Chuck from Dallas":
  
  "This is a bit dated, but better late than never (from the Fidelity Select Portfolios annual report, 2/29/00):
  
  Ian Gutterman's note to shareholders, explaining the 25% decline in the Environmental Services fund over the previous 12 months:
  
  'Q: What were the main factors that hindered performance?
  
  A: Solid waste stocks - which make up a significant portion of the sector - continued to spiral downward.'
  
  Chuck's comment: "Flooshhhhhhhhhhhhhhh"

FundAlarm © Roy Weitz, 2001