Highlights and Commentary
By Roy Weitz
(Originally posted January 1, 2006)
[Archive Table of Contents]

What the directors of the Clipper Fund are saying:

"Mirabile dictu" (wonderful to relate)

What investors in the Clipper Fund are saying:

"Mirabile visu" (wonderful to behold)

What the owners of the Clipper Fund are saying:

"They did WHAT?????"


Mirabile dictu, mirabile visu: The independent directors of the Clipper fund have actually exercised their independent judgment, and they've selected a fund manager other than the one proposed by the owner of the fund.....The story began a couple of months ago, when three key members of the Clipper management team (led by James Gipson) suddenly announced that they were quitting.....All three managers were employees of Pacific Financial Research (PFR), which held the management contract to run Clipper and PFR, in turn, is an affiliate of Old Mutual Asset Management.....As soon as Gipson et al. announced that they were leaving, Old Mutual arranged for another one of its affiliates (Barrow, Hanley, Mewhinney & Strauss) to take control of PFR, and Old Mutual proposed that the newly-reconstituted PFR, under Barrow, Hanley, should continue to run Clipper.....The Clipper directors didn't immediately accept Barrow, Hanley.....Instead, the directors began a formal search for other potential managers.....We assumed the search was a sham, but it wasn't: On November 30, the Clipper directors announced that Chris Davis and Kenneth Feinberg, of Davis Selected Advisors, had been selected as the fund's new manager, and Barrow, Hanley was out even before it was in.....The new manager is a good fit for Clipper, and Clipper investors will probably want to stick around to see what Davis can do.....Fund directors almost never deviate from the wishes of the management company, and we suspect that the recent Clipper saga says more about the unique Clipper board than about fund boards in general.....Still, for whatever it's worth, we congratulate the Clipper directors.....It appears they made this decision as if the money in the fund were their own..... That's the least -- and the most --- any fund investor can ask of a director.



"I love my Red Robin Large-Cap Burger!"		Alas, not all fund directors deserve praise: Dennis Mullen is the independent chairman of the Janus funds, for which he was paid about $429,000 last year.....Mr. Mullen is also the new, full-time CEO of Red Robin Gourmet Burgers, a public company, for which he'll be paid $625,000 this year, plus a performance bonus of at least $281,000 and as much as $844,000.....Everyone knows that fund director is a part-time job, and we've contended for years that a fund director's duties don't put any great strain on the gray matter, so perhaps there's nothing newsworthy in Mr. Mullen's double-dipping.....On the other hand, Mr. Mullen does seem intent on writing a new chapter in the book of Brass Balls and Brazen Corporate Behavior .....The Janus funds have problems of their own and, for almost half a million dollars per year, you'd think that Mr. Mullen might make some attempt to curtail his other activities.....But you'd think wrong.....The lawyer who represents the independent trustees of the Janus funds, and a Janus spokesperson, are both blissfully unperturbed by Mr. Mullen's seriously divided attention.....The lawyer says that Mr. Mullen has been a "phenomenally good trustee of the Janus funds," who also "devotes an enormous amount of time to Red Robin," while the Janus mouthpiece says there has been "no change in [Mullen's] involvement" with the fund.....That latter statement, of course, isn't necessarily reassuring.
"Exec has hands full with Janus, Red Robin roles," James Paton, RockyMountainNews.com, December 21, 2005; thanks to Linkster Ted for spotting this item and bringing it to our attention



Speaking of fund directors who have other claims on their time and attention: Former CIA Director Robert Gates has taken over as lead independent director of the Fidelity funds, a position that paid $484,250 last year.....Mr. Gates is also the full-time President of Texas A&M University, a huge institution with more than 44,000 students and a budget of $800+ million.....Fidelity fund shareholders might reasonably question how much commitment they can expect from this very busy man.....And let's not ignore the symbolism of Mr. Gates' appointment.....Over a period of 27 years with the CIA, and in other government positions, the person who now represents Fidelity investors made a career out of nurturing bureaucracies, keeping secrets, and not communicating information beyond a small circle of insiders (did we mention that Gates also has zero investment and financial industry experience?).....Fidelity fund shareholders might as well spend the $484,250 on fairy dust, for all the good that Gates is going to do them.


As a Court of Appeal judge, Samuel Alito has been disclosing his personal investments for years, but only in broad value ranges.....Now that Alito has been nominated to the Supreme Court, he's also been required to submit a financial statement that shows the actual dollar amount of his investments.....Whatever you think of Alito's judicial rulings, he's clearly a smart, successful professional, and we thought it would be interesting to take a look at his portfolio in some detail, and then offer our critique.....Here's what we found:


Mutual fund managers hate letting outsiders know what they're buying and selling, because that kind of information can cost their fund money (when outsiders rush to buy ahead of a manager, they can make a stock more expensive, and when they rush to sell they can deflate a stock's price in a matter of minutes).....But in the case of at least two funds currently on the market -- Value Line and Value Line Leveraged Growth -- thousands of people can find out ahead of time what the funds' managers will be buying and selling.....It's all perfectly legal, the information is available with the click of a computer mouse, and the only people who can't act on this early information are the fund managers themselves.....How did all of this come about?.....The aforementioned funds (Value Line and Value Line Leveraged Growth) buy and sell stocks based largely on the Value Line Investment Survey, a weekly newsletter that assigns a quality ranking to over 1,700 stocks on a scale of 1 to 5 (a #1 stock is most desirable, a #5 stock is least desirable).....Each Thursday morning, when the new Investment Survey ratings are made available on the Value Line Web site, these two Value Line funds generally begin buying stocks that have newly received a #1 rating, and they begin selling stocks that have just lost their #1 rating.....These ratings are supposed to be available to everyone -- newsletter subscriber and fund manager alike -- at the same time (10 a.m. Eastern).....In practice, however, it appears that Value Line has been posting its weekly stock ratings about ten or fifteen minutes before the official 10 a.m. release time.....This doesn't seem like a big deal, but giving a 10 minute advantage to a sharp stock trader is as good as a gift of cash.....Sure enough, in the few minutes before the official 10 a.m. release time, it appears that the price of newly-rated #1 stocks is often driven up, and the price of newly-demoted #2 stocks is often driven down.....By the time the Value Line fund managers are allowed to begin trading, at 10 a.m., their funds are already at a disadvantage, and they've essentially lost money.....Value Line has refused to comment on this issue, which is no surprise, given the firm's history of indifferent public relations......But shareholders are entitled to an explanation of what went wrong, and how it's been fixed -- just don't hold your breath waiting for one.
"Value Line on the hot seat," Jonathan Burton, marketwatch.com, November 29, 2005


PIMCO Commodity Real Return Strategy (PCRDX) employs one of the fund world's most complex investment strategies.....As an enhanced index fund, PCRDX seeks to benefit from the inflation-hedging properties of both commodities and inflation-indexed bonds.....Rather than investing directly in physical commodities, the fund makes extensive use of derivatives linked to commodity-indexes, especially commodity swap agreements, and therein lies a problem, at least for the IRS: For technical reasons, the IRS has effectively disallowed the use of commodity swaps by PCRDX (and similar funds), and the managers of PCRDX have been sent scurrying back to the mutual fund drawing board.....PIMCO thinks it will be able to save PCRDX by substituting "commodity-linked structured notes" for commodity swaps or, even better, by pushing legislation through Congress that will make commodity swaps OK again.....Our guess is that PCRDX will survive, and it will continue to operate about the same as it does now, although returns may be nicked somewhat due to the new and more expensive structured notes......The IRS has given PIMCO until June 30, 2006 to work things out, which gives investors plenty of time to ponder one of Roy's surprisingly relevant (also, smug and annoying) Maxims of Fund Investing:

"Complicated investments often bring complications."

Thanks to "x," "Ira," and others, who were all over this issue on the FundAlarm Discussion Board, and did a terrific job explaining and dissecting it.


"In the nine years that I’ve been publishing FundAlarm, I’ve come to know and dislike a number of common phrases associated with the mutual fund industry — many of which deserve to be permanently retired."

Thus begins a guest column that I recently wrote for Ignites.com, a daily newsletter that covers developments in the mutual fund industry.....Ignites is a paid subscription service, mostly for industry professionals, but managing editor Chris Frankie gave permission to reprint my column.....If you're interested, the complete opus can be found on the accompanying page.


Roy finally makes a decision:





Back in April, I criticized the directors of Allianz RCM Global Technology D (DGTNX) for poorly handling a merger with another Allianz fund, as well as mishandling the related proxy disclosures.....DGTNX is one of my personal holdings and, at the time, I indicated that I'd be selling DGTNX and investing in another tech fund.....It's been a more difficult process than I expected.....My shares of DGTNX are split between two retirement accounts, one at Schwab and one at Fidelity.....While I have many fund choices through both plans, neither Schwab nor Fidelity would allow me to buy T. Rowe Price Global Technology (PRGTX), which was my first choice for replacing DGTNX.....Shut out of the T. Rowe Price fund, I ran several tech-fund screens, and many of the same suspects kept popping up.....Problem is, I wasn't interested in any of these funds, as you can see from the table below:

This name popped up on one or more of my tech-fund screens...But I wasn't interested because...
Columbia TechnologyFund management company was involved in market-timing scandal.
Hartford Global TechnologyLoad fund.
Ivy Science & Technology Load fund.
Jacob InternetI'm not ready to invest with Ryan Jacob. Maybe in the next life.
Kinetics Internet Emerging GrowthI'm not ready to invest with the company that used to employ Ryan Jacob. Will consider in the next life.
Matthews Asian TechnologyTerrific performance, but the extreme lack of diversification isn't for me.
Munder Internet KNo management continuity (i.e., chaos), confiscatory expense ratio.
ProFunds Ultra InternetI'm also not interested in bungee jumping.
RS InformationAge/RS Internet Age Fund management company was involved in market-timing scandal.
Seligman Commun & InformationFund management company was involved in market-timing scandal.
SunAmerica Focused Technology Load fund.
Turner New EnterpriseNot comfortable with Turner's hyperactive growth style. Also, I remember the way Turner pandered to investors during the tech boom (remember Turner B2B E-Commerce and Turner Wireless and Communication?), and that's not the kind of fund company I want to be associated with.

I also looked at various exchange-traded tech funds (ETFs), and combinations of tech ETFs, but either the performance wasn't good enough, the track record wasn't long enough, or both.....I finally settled on Wasatch Global Science & Technology (WAGTX), but only for my Schwab account, since WAGTX isn't available through my Fidelity account.....At least for now, it looks like I'll remain a reluctant shareholder in DGTNX at Fidelity.....Wasatch Global Science & Technology started in January 2001 and, since that time, the Wasatch fund has actually outperformed Allianz RCM Global Technology by quite a wide margin (5.77% annualized, versus -5.52%).....But Wasatch has also hit some bumps in the road, and 2003 and 2004 were dismal years for WAGTX (the Allianz fund came out way on top during those 24 months, with a return of 40.65% annualized, versus 19.19% for Wasatch).....In general, compared to Allianz RCM Global Technology, I expect Wasatch Global Science & Technology to have slightly less exposure to U.S. stocks, considerably more emphasis on small-cap stocks, and more exposure to Indian stocks (the manager attended college in India, and presumably grew up there as well).....I can handle all of that, especially since the two funds have historically exhibited about the same amount volatility.


From the company that promotes "Plain Talk About Investing" comes the new, improved "Plain Talk About Investing, But Only When We Feel Like It": Vanguard recently filed an amendment to the Statement of Additional Information (SAI) for its Windsor II fund.....Notably absent was a table that appeared in previous versions of the SAI, showing the fund's management fee structure, including breakpoints, for two of the Windsor II subadvisors (Barrow, Hanley, Mewhinney & Strauss and Equinox Capital Management):*


The old Windsor II fee table, with breakpoints --- now gone

We can see why the two money managers might want to keep their Vanguard fee agreement under wraps (other clients might be inspired to ask for similar concessions), but Vanguard certainly has enough clout to overrule` its hired guns, and disclose whatever it wants to.....At the very least, the "Plain Talk" company owes its customers an explanation for the omission of the Windsor II fee table.....As far as we can tell, that explanation is nowhere to be found.
* morningstar.com, Kunal Kapoor, December 22, 2005



Roy's Excellent Market-Timing Adventure:
Month Three: A Short Signal is Issued, and My Account Doesn't Like It

Intelli-Timer issued a new timing signal on November 29, just after the cut-off for our last report.....Since I was long the market in the last report, this new signal was to go short, which meant that I sold my shares of ProFunds OTC Investor (OTPIX) on November 30 and invested the proceeds in ProFunds Short OTC Investor (SOPIX).....This move wasn't a disaster but it wasn't the greatest call, either, as my account value at the end of December ($5,381) was lower than the value at the beginning of the month ($5,484), for an overall monthly return of -1.89%:

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, 200510/16LongOTPIX$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%
December, 200511/29ShortSOPIX$5,484.89$5,381.32-1.89%+7.63%
Notes:
(1) Signal was executed (i.e., fund bought) on the next business day.
(2) OTPIX=ProFunds OTC Inv.; SOPIX=ProFunds Short OTC Inv.
(3) Cut-off for valuation is 26th day of the respective month.
(4) Account value includes value of fund shares only. Cash in the account, as well as interest earned on the cash, is ignored. Brokerage commissions are paid out of this free cash, and commissions are not included in return calculations.


The problem with being short in December was that most segments of the markets continued to move up for the month and, on a relative basis, my market-timing account lost ground to every one of the usual FundAlarm benchmarks......For the first time since this experiment began on October 17, one of the FundAlarm benchmarks (Dreyfus MidCap Index) shows a better month-end cumulative return than my market-timing account, and by a considerable margin (9.53% versus 7.63%):


Current month
(11/27 thru 12/26)		Since inception
(10/17/05)
Dreyfus Mid Cap Index (PESPX) 0.85% 9.53%
Roy's market-timing account-1.89%+7.63%
Vanguard Small Cap Index (NAESX) -0.48% 7.29%
Vanguard 500 Index (VFINX) 0.20% 7.00%
Schwab International Index Inv (SWINX) 2.17% 5.12%
Vanguard Balanced Index (VBINX) 0.45% 4.89%
Sorted by return "Since inception"

Several readers have pointed out that the returns for my market-timing account don't reflect the commissions that I must pay when I establish each long and short position.....This is true: I've intentionally omitted the commissions from my return calculations, in order to make the arithmetic easier to follow, and also to reflect the fact that others might be able to execute the Intelli-Timer strategy with lower commissions, or no commissions at all.....So far, Scottrade has hit my account for $34 in commissions ($17 for establishing the original long position, and $17 for exchanging the long for the short position), and these commissions represent 0.68% of my initial $5,000 investment.....Also, the Intelli-Timer service (which I received for free) currently costs $183 for a six-month subscription, and that would have to be factored into any return calculation.....All of the FundAlarm benchmarks, above, are no-load funds and, as with all mutual funds, the returns are shown net of all fees and expenses.

To be continued...


Briefly noted: