| Highlights and Commentary |
| By Roy Weitz |
Most Honorable Honor Roll Funds: For many years now, we've been running a monthly list of Most Alarming 3-ALARM Funds, which is our take on the worst 3-ALARM funds in each benchmark category......Although we also run a list of NO-ALARM funds each month, which we call our Honor Roll, it occurred to us that we've never run a list of the best-of-the-best -- those Honor Roll funds that rise to the top of an already distinguished pack.....So to kick off the New Year, we'll briefly turn away from the underperformers and losers to focus on the winners among winners.....The rating system to determine the Most Honorable Honor Roll Funds is the same as the one we use for our Most Alarming funds, and you can find the complete list of Most Honorable funds on the accompanying page.....To give you a preview, here's the very top Honor Roll fund in each benchmark category:
| Benchmark category | Top FundAlarm Honor Roll fund |
|---|---|
| Large-cap | Kinetics Paradigm (WWNPX) |
| Mid-cap | Fidelity Leveraged Co Stock (FLVCX) |
| Small-cap | Schneider Small Cap Value (SCMVX) |
| Balanced | Bruce (BRUFX)* |
| International | ING Russia A (LETRX) |
| Specialty-Communications | T. Rowe Price Media & Tele (PRMTX) |
| Specialty-Financial | Fidelity Select Brokerage & Investment (FSLBX) |
| Specialty-Health | Jennison Health Sciences Z (PHSZX) |
| Specialty-Metals | U.S. Global Inv World Prec Min (UNWPX) |
| Specialty-Natural Resources | U.S. Global Inv Global Res (PSPFX) |
| Specialty-Real Estate | Morgan Stanley Instl Intl Real Est A (MSUAX) |
| Specialty-Technology | Jacob Internet (JAMFX)** |
| Specialty-Utilities | Jennison Utility Z (PRUZX) |
| * Blowing away its peer group | |
| ** Blowing away its peer group, and I never thought I'd live to say that | |
Last month, we wrote about the Chicken Little Growth Fund, and how its high expense ratio (3%, after waivers) was an expression of manager Stephen Coleman's love for his clients (trust us, it's a long story).....This month, the shareholders of Chicken Little Growth find themselves on the wrong end of another love offering.....For several months now, Coleman's management company has been unable to reimburse Chicken Little Growth for certain agreed-upon expenses.....Therefore, as of November 30, the fund's trustees (directors) reduced the fund's net asset value (NAV) by about 2%, to reflect those unreimbursed expenses, and the trustees also froze the sale of fund shares.....At that point, Coleman must have seen his Chicken Little dream going up in feathers, because he suddenly sprang into action......On December 4, Coleman made good on his reimbursement obligation, the 2% NAV reduction was retroactively reversed, and the directors allowed Coleman to resume the sale of fund shares, with a written warning to investors: YOU'RE AN IDIOT IF YOU INVEST IN THIS FUND, BECAUSE COLEMAN WILL PROBABLY FAIL TO REIMBURSE EXPENSES AGAIN, AND IF THAT HAPPENS YOU'LL END UP PAYING THE FULL EXPENSE RATIO, WHICH IS NOW RUNNING ABOUT 32%, BUT DON'T WORRY, YOU'LL NEVER REALLY PAY THAT MUCH, BECAUSE WE'RE GOING TO LIQUIDATE THIS MESS IF HE TRIES TO STIFF YOU AGAIN (we have paraphrased a bit)....In the end, we hope Coleman has learned an important lesson: Love means never having to say: "Uh, I don't have the money."
The Jeffries Group Inc. was recently slammed with a $10 million SEC fine, arising out of the company's entertainment policies.....On the face of it, this seems like the routine end (no admission, no denial) into another routine inquiry, but for fund investors there's more here than initially meets the eye......The settlement document with Jeffries details about seven pages of outrageous expense account abuses, all incurred by a Jeffries employee to woo the business of stock traders at a certain "Fund Adviser," which turns out to be Fidelity.....Among the gifts that Fidelity stock traders accepted from Jeffries:
Abacus Bull Moose Growth (BULLX), a decent little fund that never attracted much interest, has changed its name to Roosevelt Anti-Terror Multi Cap.....In order to make sure that investors don't miss this remarkably desperate and exploitive name change, the folks who run this fund have also redesigned its logo, as follows:
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The MFS mutual funds are owned by Toronto-based Sun Life Financial, and Sun Life was trying to find a buyer for the funds.....Sun Life agreed to give MFS executives a "very large" say over any potential purchaser, but Sun Life was apparently unable to find a buyer who also wanted to keep the MFS executive team.....The MFS funds are now off the market, and it seems that the MFS execs have indeed managed to kill any deal that didn't guarantee their jobs.
The Pebblebrook Fund, founded in June 2003 and liquidated in June 2006, never made much of a splash in terms of performance, size, or anything else.....This fund's only claim to fame may be the most amusing comment ever written by an outside accountant......Here's the story: As part of the audit of every mutual fund, the outside accountants must satisfy themselves that the fund follows proper "control procedures," including procedures to comply with various SEC rules (for example, that the fund prepares and files required documents on time).....During the final audit of the Pebblebrook Fund, the outside accountants discovered a "material weakness" in the fund's control procedures and, as required, the accountants reported that weakness to the fund's shareholders and board of directors, in the form of an "internal control letter"..... In the typical internal control letter, the accountants also present management's side of the issue, in other words, management's explanation for why the control weakness exists.....Here's the accountant's version of Pebblebrook's response, after the accountant informed Pebblebrook management that its fund suffered from a serious control weakness (our favorite sentence is highlighted in red):
| "The Pebblebrook management team believed it had control procedures in place to ensure compliance with regulatory matters. Management deluded itself. During the audit, it became clear that the Pebblebrook management team did not have a firm understanding of the regulatory complexity of the 1940 Act [i.e., the major federal securities law governing mutual funds]..." |
Mutual fund columnist Chuck Jaffe has awarded his Lump of Coal Mis-Manager of the Year to Carole Kinney, and even diligent FundAlarm readers are no doubt asking "Who?".....But when we tell you that Ms. Kinney is the daughter of Charles Steadman, founder of the worst-ever Steadman funds, this particular award begins to make more sense......In the 30 years prior to his death in 1997, Steadman's worst fund lost 90% of its value, while the S&P 500 index gained more than 1,500%.....The Steadman funds were renamed Ameritor and Carole Kinney, along with husband Jerome, have been listed as managers of Ameritor Investment since April 2000, although day-to-day stock picking is handled by a "consultant".....During their time at the helm, the Kinneys have turned a $10,000 investment into $48 -- yes, you are reading that correctly, $10,000 has become slightly less than $50, for a cumulative loss of 99.5%.....Ameritor's net asset value (i.e., share price) was recently one cent and, as Jaffe notes, the fund is set to become the first in U.S. history "to ride bad management all the way to zero."
If you want to know about the proxy-voting policies of the Hartford mutual funds, you're probably out of luck: Most Hartford funds are subadvised by Wellington Management, and Hartford discloses absolutely nothing of substance about Wellington's proxy-voting policies, other than to say that Wellington votes proxies in the "best economic interests" of its fund shareholders*.....For several years now, the SEC has required every fund (including every subadvised fund) to disclose "the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities".....It's clear that the SEC intends for a fund to disclose something about its proxy policies, not merely that those policies exist, and it's also clear that Hartford fails to meet even this basic SEC requirement....Hartford's says that its non-disclosure disclosure meets SEC guidelines.....To us, it looks like a mockery of the SEC proxy-vote rule, and begs for some kind of SEC response.....The Hartford fund directors also could step up to plate on this issue, but we won't waste any more pixels calling for that to happen.
Roy speaks: I was recently a guest on Chuck Jaffe's MarketWatch podcast, and Chuck asked me for quick evaluations of several mutual funds: Julius Baer International Equity II, Dodge & Cox International Stock, Vanguard European Stock Index, Fidelity Canada, Fidelity Freedom 2040, Bridgeway Balanced, Vanguard Wellington, Janus Fund, Bruce Fund, Longleaf Partners, and Marsico Focus.....If you own one of these funds, or you're considering it, you might want to check out what I had to say (hint: mostly pretty good).
Earth to Planet Schwab: According to the current issue of Schwab's client magazine ("OnInvesting"), one of the top 10 mutual fund investor mistakes is "Not knowing who is managing your money".....Schwab advises investors to "stay apprised of managerial changes," and it's hard to argue with that piece of advice.....Schwab also suggests that "you can learn who is now managing your fund" by checking your fund's website, prospectus, or annual report -- all true, but none of those sources will necessarily tell you if the listed manager is new, which we thought was the whole point of this exercise.....Anyhow, once you get whiff of a manager change, Schwab suggests that you "contact the firm's senior management and get answers to the following questions":
Bank of New York will be acquiring the Dreyfus funds, which come as part of the Banks' recent deal for Mellon Financial.....Say goodbye to the Bank's BNY Hamilton funds, which almost certainly will be merged out of existence.....Also in the wheeling and dealing department, Power Corp. of Canada will be purchasing the Putnam funds.....Some individual funds may be weeded out, but the Putnam fund trustees had previously skewed the process so that Putnam's top executives should all keep their jobs.
Keepin' it real: As of last October 31, assets under management in traditional, open-end mutual funds exceeded $10 trillion for the first time ($10.013 trillion, to be exact).....Assets in exchange-traded funds (ETFs) were $383.3 billion, or less than 4.0% of the total assets in mutual funds.....Even if we exclude money-market and bond-fund assets from the open-end totals, assets in stock ETFs represent only about 6.4% of the assets invested in open-end stock funds.....Next time someone tries to convince you that ETFs have taken over the fund world -- as readers try to convince us, all the time -- you might reply, "Well, not quite yet."
Thanks, John, you wrote this just the way we discussed:
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I started investing in mutual funds in 1989 at the age of 24. I used Money magazine as my guide for choosing mutual funds. I later discovered M* at my local library, which I then used in tandem with Money magazine for choosing which mutual funds to invest in (and sell!) But I've learned more about investing in the past year of logging onto the FundAlarm discussion board than all of the years since 1989 combined! The many excellent investing articles and comments posted on this board have humbled me. I just wish that FundAlarm (and the internet for that matter) existed in 1989 as I'm sure that my portfolio would be worth much more than it is now. |