Highlights and Commentary

By Roy Weitz

(Originally posted January 1, 2000) [Archive Table of Contents]

Up and down, up and down: Exactly one year ago, 126 funds appeared on the FundAlarm Honor Roll.....How have they performed since then?.....Not counting Specialty funds, which had a change of benchmark during the year, 47 of the January 1999 funds are still on this month's Honor Roll.....27 Honor Roll funds have descended into 3-ALARM territory, and 52 funds are off the Honor Roll but still out of 3-ALARM territory.....You can view the complete list on the accompanying page.

	His Lunch: On December 13, the first day as head of his own fund, Ryan Jacob (Jacob Internet) had tomato bisque soup for lunch.
	His Plans: About a week after opening his new fund, Ryan Jacob told CBS MarketWatch that he plans to open more Internet-related funds in 2000, and introduce a hedge fund.....Jacob says that he wants to position himself as "the premier investment advisory firm," and that he's seeking to create an investment "brand" like Fidelity, Vanguard, and Janus.....Responding to rumors circulating in the investment community, Jacob also said that the sudden and scary swelling of his head is not a life-threatening condition..... "Almost everyone at Janus has the same thing, and they're all doing fine."
	His Portfolio: Ryan Jacob revealed the top holdings of his new fund on December 16.....Although eight of his top 10 names have losses ranging from 63 cents to $7.22 per share, Jacob told TheStreet.com that his stocks were not "overvalued".....Ironically, within a few hours of Jacob's statement, the word "value" finally passed away from the English language.....According to friends, who were with value at the end, Jacob's comment appeared to be the final blow in value's long, valiant struggle...."He was already tired of being exploited, misused, and misunderstood," said a spokesman for value. "When he heard Jacob's comment, he just lost the will to live."

Sources:TheStreet.com, December 14/17, 1999; "Jacob plans to launch a hedge fund," Jon Friedman and Steve Gelsi, CBS.MarketWatch.com, December 23, 1999

A two minute discussion on wash sales: A certain publisher of an independent newsletter for Vanguard investors, who shall remain nameless, recently wrote about tax loss selling, and he made the following statement about wash sales:

"Just be sure you don't exchange funds that are exactly alike, such as one S&P 500 index fund for another. The IRS will be breathing down your neck."

There are two problems with this statement. In the first place, nobody knows for sure how index funds should be treated for purposes of the wash sale rules. A wash sale is triggered by the sale of one security at a loss, and the repurchase of a "substantially identical" security within 30 days before or after that sale. One school of thought says that all funds keyed to the same index are "substantially identical" -- in other words, you couldn't sell one S&P 500 index fund at a loss, and buy any other S&P 500 fund within 30 days, without causing a wash sale. This is the position declared by our newsletter publisher. But another school of thought says that index funds are not subject to the wash sale rules if they are sufficiently different -- for example, two S&P 500 funds managed by different fund companies might not be considered "substantially identical." Risk-averse taxpayers will probably want to treat all index funds as "substantially identical" if they are keyed to the same index. But other taxpayers might want to take the more aggressive position, which could open up some interesting tax planning opportunities with index funds.

Second point: If you decide to take an aggressive position on wash sales, the IRS definitely won't be "breathing down your neck." That's because a wash sale is almost impossible for the IRS to spot from the face of a tax return, unless it's flagged on Schedule D. If you take an aggressive position on the exchange of one index fund for another, and you believe the transaction doesn't qualify as a wash sale, it obviously wouldn't be shown as a wash sale on your tax return. So how does the IRS identify these "potential" wash sales? In the vast majority of cases, they are spotted only if your return is under audit for something else, and even then it's rare. This doesn't mean that investors should flout the wash sale rules, but it does give quite a bit of leeway for legitimate tax planning.


The weasel revisited: Morgan Stanley Dean Witter (MSDW) doesn't post a privacy policy on its Web site, and that's why the company earned a "3-Weasel" rating in our recent survey of online broker privacy practices.....Several concerned FundAlarm readers wrote to MSDW for clarification, and they all received basically the same reply:

"Thank you for being a customer of MSDW Online. As MSDW Online is part of a large corporation comprised of several companies with varied interests, we cannot give you assurance that, as our customer, your name and address might not be used for solicitation purposes at some time by one or more of the related companies under the Morgan, Stanley, Dean Witter & Co. umbrella"

This is a fairly astonishing response, and it would seem to call for a follow-up.....Here's a suggestion:

"Dear MSDW: Thank you for your recent response to my inquiry about your online privacy policy. However, I was disturbed to hear that you cannot give me "assurance" about the use of my personal information within your company. It sounds like nobody is in charge of your computer system, or, even worse, that your computers may have fallen under the control of an alien force. If you are still in charge of your own computers, please explain why some executive can't simply set a policy that prohibits the dissemination of my personal information. If you are under the control of an evil power, I understand that it may be impossible for you to send an intelligent reply. In that case, please feel free to send me another BS answer. I will understand your situation, and alert the appropriate authorities.

Readers are welcome to use this as a model for their own follow-up, or make changes as necessary.


In any line of work, the ability to focus is a key ingredient of success.....So, how are fund managers doing?.....Not great.....According to a recent article, over 1,700 managers run more than one fund (and as many as five), while about 180 managers oversee up to 10 funds*.....Statistics for separate accounts are almost impossible to come by, but it's safe to assume that every half-way decent fund manager has at least a couple dozen of those as well.....Does a heavy workload affect manager performance?.....To answer this question, it helps to look at what managers do, rather than what they (or the fund companies) say.....When Fidelity's George Vanderheiden felt that his performance was slipping, he didn't ask for more money to manage.....Instead, he asked Fidelity to cut his workload.....When Jim Craig wanted more time to impart wisdom to his acolytes, he turned the Janus fund over to Blaine Rollins.....When the workload at Pioneer got too much for Warren Isabelle, he left the firm for a long trek in the wilderness.....Maybe, some day, the SEC will require fund companies to disclose all of a manager's professional commitments (how difficult would that be?).....Until then, investors must rely on fund companies to keep a manager's workload reasonable.....Not a comforting thought.
* "More Managers Juggle Several Portfolios," Laura Saunders Egodigwe and Aaron Lucchetti, The Wall Street Journal, December 17, 1999


Not quite:

Data for PBHG Technology & Communications Fund
(from the PBHG Web site):
The description of beta ("the tendency of the fund to react to general market swings") is accurate.....But after that, the discussion falls apart....If the S&P 500 rises 10%, a fund with a beta of 1.15 would be expected to rise 11.5% (.10 x 1.15), not 25% as stated.....As for that 5% number, we have no idea where it comes from.....They probably mean -5%, but even that would be wrong.
[Thanks to FundAlarm reader "Mike" for bringing this item to our attention.]

"I'm the dean of the business," crows Alberto Vilar [of Amerindo Technology Fund], smacking his enormous marble slab of a conference table with an elegantly beringed hand. He pauses to point out that the chandelier in his Park Avenue office is an exact replica of one that hangs in New York's Metropolitan Opera. "I'm the four-star general...the heart surgeon of tech investing."--"The Triple Digit Club," Lisa Reilly Cullen, Money, December 1999

Three tech opportunities that Alberto Vilar missed out on:



Most investors probably assume that their fund manager is an employee of their fund company.....At most firms, this is true: Janus managers get a paycheck from Janus, T. Rowe Price managers are on the payroll of T. Rowe Price, and so on.....But several fund companies are merely administrative and marketing shells, which farm out the actual work of money management to outside firms.....There's no good name for fund companies structured like this.....One recent article called them "virtual funds," but that makes them sound like they don't really exist.....We prefer the term "hire-out" funds.....Vanguard is probably the best-known sponsor of hire-out funds, since all of Vanguard's non-index funds are managed by outside firms.....Other firms that rely heavily (or entirely) on hire-out funds include Citizens, Enterprise, Fremont, Harbor, Managers and Masters.

Theoretically, hire-out funds should show better performance than funds run by in-house managers.....That's because hire-out funds have the entire world of managers to choose from, and firing an underperforming outside manager should be easier than firing or reassigning an employee.....The accompanying page shows performance data for 35 funds from the leading hire-out firms in this month's FundAlarm database.....Although the sample is small -- a total of only 81 measurement periods -- these hire-out funds have indeed outperformed their respective benchmarks in 53% of those periods.....This might seem like an underwhelming result, but it's actually quite good..... Of course, there are some concerns with hire-out funds.....Expense ratios can be high, especially in the Enterprise family.....Since the manager is a hired gun, and any given fund is likely to be a small portion of his or her total assets under management, there's a good chance that your manager doesn't live and breathe your fund.....Remember, too, that the performance of a hire-out fund ultimately depends on the ability of the sponsor to monitor the outside manager.....If the sponsoring company nods off, or loses key personnel, or is simply slow to respond to poor performance, you have almost no way of knowing until those lapses are reflected in your fund's performance.
Some of the material above was drawn from: "When It's Time to Make a Change," Virginia Munger Kahn, Individual Investor, December 1999

No squat thrusts, but plenty of financial advice

Later this month, Strong Funds is scheduled to open a new section of its Web site, called "My Strong".....Investors will be a able to design and monitor their portfolios, and receive advice from "personal coaches," who are Strong employees formerly known as "part-time phone reps".....For a modest fee (and, most likely, a modest wage), Strong's personal coaches will be asked to do some heavy financial lifting: Initiate contacts with investors, arrange quarterly meetings, suggest changes in portfolio allocations, and help select funds.....These instant experts will be trained by Strong, and Strong has decreed that no conflicts of interest will exist.

Sources: "From the Coach's Corner," Richard Teitelbaum, New York Times, December 5, 1999; "Firms take steps to reach out and touch customers," Bill Barnhart, December 19, 1999

Briefly noted:

• X.com is the unlikely name for a new financial services Web site, with one big gimmick: A no-fee, no-minimum S&P 500 index fund, which everyone at the company admits is a loss leader.....(The fund also pays you -- a penny -- for every $100 you invest).....What's a free index fund worth, compared to (say) the Vanguard 500 Index?.....In our part of the world, $10,000 invested in the X.com fund would save you enough money each year to buy two Fiesta Burritos, two sides of beans (black or pinto), chips with guacamole, and the beverage of your choice.....In exchange for these savings, you become a customer of a company founded and run by Elon Musk, a 28-year old Web entrepreneur who describes X.com as a "really terrific financial play".....At least there are no illusions: You get lunch, and Musk gets his IPO.
  
  
  
• The management fee for Fidelity Magellan is subject to a "performance adjustment," which is a fairly unusual arrangement for a large fund (or any fund, for that matter).....Basically, Magellan's performance over the previous 36 months is compared each month to the S&P 500 over the same period.....For every 100 basis points (1%) by which Magellan underperforms the S&P, Fidelity cuts its management fee by 2 basis points (.02%), with a cap of 20 basis points.....For outperforming the S&P, Fidelity increases its management fee according to the same schedule.....These numbers may not seem big, but when it comes to Magellan they are.....Recently, Fidelity has been taking a $100 million annual pay cut due to Magellan's performance penalty.....As the months roll along, and as returns from the Jeff Vinik era roll off, Fidelity stands to earn considerably more.....For the fiscal year ended March 1999, Fidelity earned about $325 million in management fees from Magellan, even though the fund was still in the penalty box.....By 2001, when all of Vinik's months have rolled off, Magellan could generate as much as $600 million per year in revenue for Fidelity.
  "Magellan Steams Ahead," Barry Henderson, Barron's, December 13, 1999
  
  
  
• If Fidelity Magellan were a stand-alone company, it would be more profitable than several of the Fortune 500, including Barnes & Noble and Host Marriott.....Assuming an 80% profit margin, and even with a significant performance penalty, Magellan's 1999 profit is running neck-and-neck with The New York Times.
  
  
  
• A FundAlarm reader thought we might be interested in publishing news about Scudder's "bait-and-switch event".....We are, so here it is:
  
  

  "A couple of years ago Scudder offered a Preferred Investment Plus Account. If an investor maintained a $100,000 balance he could trade just about any mutual fund at no cost - as long as the fund was held six months or more. Other perks were included as well. In this week's mail this investor received notice that, voila!, a "strategic alliance" had been formed (do you feel it coming?) with DLJdirect. That "alliance" transfers my account to a DLJ account, with all its attendant fees, that I never requested and don't want. The Scudder account just disappears. If there is an entity promoting a "Screw-The-Customer-Award" I'd like to nominate Scudder."

  
  
  
• Department of Deep Thinking:
  Mark Herskovitz, manager of Dreyfus Premier Technology Growth, recently revealed to CNBC that we are living in a period of "extraordinary innovation in technology".....According to Herskovitz, innovation is having an "unusually large impact on the economy," and demand in Internet-related areas "is at exceptionally high levels".....Let the rally begin!
  Dow Jones Newswires, December 9, 1999
  
  
  
• We think exchange-traded funds (ETFs) will be one of the big investment stories of the new decade, and the 51 ETFs coming soon from Barclays should help kick off the action.....Scott Cooley, a Morningstar analyst, disagrees.....In a recent column, he referred to the Barclays challenge as "another bogus threat" to traditional mutual funds.....According to Cooley, transaction costs are one of the main reasons ETFs will never catch on in a big way.....Because ETFs trade like stocks, and investors have to pay a brokerage commission each time they buy or sell, Cooley feels that ETFs will always be at a disadvantage to no-load, open-end funds.....But what happens when online brokers offer free trading of ETFs?.....If this isn't already in the works at one of the online brokers, then the marketing people must be working too hard on their look-alike ads.....Free ETF trading (even five or 10 free trades per month) would be a chance for some online broker to stand out in a crowded field, and take the lead in a major new investment area.....It's coming: That's our first fearless prediction of the new century.
  
  
  
• Another prediction: You'll be seeing many more "all-cap" funds over the next few years, both new funds and retooled older ones....."All-cap" funds aren't stuck in the nine-box style grid, so managers can load them up with their best ideas, period.....That is potentially good news for investors.....The not-so-good news is that the performance of all-cap funds can be difficult to evaluate.....(If we were going to be cynical here, we would say that the difficulty in evaluating performance is also one of the reasons fund companies like them).....Benchmarks based on capitalization don't work for all-cap funds, and many all-cap funds mix growth and value stocks, so traditional style benchmarks also aren't appropriate.....The new Lipper fund rating system has a "multi-cap" category, and that may become a useful standard, but it's still too early to say.....For the time being, investors will probably have to eyeball several benchmarks, and try to come up with something that blends them.
  
  
  
• If you can't stand the heat, get yourself a hedge fund: Christine Baxter, the industry's most famous boss's daughter, has resigned as manager of PBHG Emerging Growth, which means that she will no longer manage any mutual funds.....Erin Piner will take over for Baxter, and Piner will continue to run PBHG Limited.....Baxter will join PBHG's private equity group as a Managing Director.....According to a spokesperson for PBHG, Baxter has already helped with "conceptualization" for a private investment partnership, and she will now apparently concentrate on "enjoying a cushy job."
  
  
  
• We've been cranking out FundAlarm for quite a while, and we follow mutual funds very closely, so we're always surprised (and pleased) when an interesting fund seems to appear out of nowhere.....Julius Baer International Equity A (BJBIX) sounds like it should be run by someone's uncle, but it's actually one of the top-performing diversified, no-load international funds over the past three years.....How well has it done?.....Let's compare Julius Baer International Equity to Janus Overseas and Artisan International, two somewhat better-known funds that are 100-times and 18-times larger, respectively:
  
  

  	12 Mo. Return	3 Yr. Return (Annlz'd)	Assets (mil)
  Julius Baer International	59.6%	30.5%	$76
  Artisan International	58%	27.9%	$1,340
  Janus Overseas*	62.9%	28.6%	$7,100

  *Closed to new investors
  
  As always, we aren't recommending any of these funds.....But, as always, it can pay to look beyond the list of usual fund suspects.
  [Thanks to FundAlarm reader Robert Cochran, CFP, of PDS Planning, Columbus Ohio,
  for bringing this fund to our attention]
  
  
• It took Paine Webber brokers just three months to raise $2.1 billion for the new Paine Webber Strategy Fund.....The brokers were so successful that the fund recently closed to new investors before making its first trade.....The Strategy Fund will be built around the investment ideas of Ed Kerschner, Paine Webber's chief investment strategist, who has a good record as a stock picker -- on paper.....But Kerschner is hardly a household name, and Kerschner's list of favorite stocks is not the same as a mutual fund.....With asset-gathering competition like this, is it any wonder that no-load funds suffer from broker envy?
  
  
  
• John Muresianu runs Fidelity Fifty.....Like all Fidelity managers, you can bet that Muresianu knows the Saga of Jeff Vinik, especially the part where Vinik loads up on bonds and cash, guesses wrong, and gets fired.....You can also bet that Muresianu has been told, time and again, not to time the market, and to stay fully invested.....So what was Muresianu thinking this past October, when he sold off some of his tech stocks, and let his fund accumulate 19% cash?.....He had to know that he would be taken to the wood shed by his boss, which he was.....He also had to know that shortly thereafter he would "decide" to reduce his cash position, which he did*.....Does Muresianu have some unresolved problems with authority?.....Did he fall asleep at the wheel?.....Or, like a prisoner of war, was Muresianu trying to send a message to the outside world, which we must now decode: "The market is overpriced. Tech stocks are crazy. Accumulate cash. I can't hold out much longer. I love you, ma."
  * "Fidelity Manager Pulled Back on Stocks," John Hechinger, The Wall Street Journal, December 13, 1999
  
  
  
• Neuberger Berman Genesis reopened to investors last June.....Since then, the fund has gone nowhere, and it's down about 1% for the year.....As SmartMoney recently pointed out, Genesis has been underweighted in technology, and it has about a third of its assets in beaten-down industrial stocks.....According to chief investment officer Michael Kassen, "the biggest problem is not that we've fallen on our face...It's that the whole small-cap category is out of favor"*.....Included in this out-of-favor category are 13 small-cap funds that have returned 100% or more over the past year, and an additional 49 small-cap funds that have gained more than 30%.....Out of 273 small-cap funds in this month's FundAlarm database, Genesis ranks 187th, which seems pretty close to face-falling to us.
  * "Thanks for Nothing," Lauren Young, SmartMoney, January 2000
  
  
  
• In the world of easy, part-time jobs, it's hard to beat being a mutual fund director.....It's also hard to beat the pay at some of the larger fund companies.....Robert Gates, former head of the CIA, pulls down $223,500 to attend 11 board meetings for his 260 Fidelity funds (multiple funds are handled at a single meeting, since many boards are identical).....Ex-IRS Commissioner Shirley Peterson, who serves on the boards of several tax-exempt funds (oh, the irony!), draws $108,800 per year.....And, big surprise: If you are hoping to land one of these jobs, political connections don't hurt:
  
  

  Director	Political connection	Fund company	Compensation
  Wendy Gramm	Wife of U.S. Senator Phil Gramm	Invesco	$79,000
  Warren Rudman	Ex- U.S. Senator	Dreyfus Funds	$82,000
  Nancy Kissinger	Wife of Henry Kissinger	Mainstay Investments	$53,000
  Elizabeth Moynihan	Wife of U.S. Senator Patrick Moynihan	Oppenheimer	$99,000
  Lowell Weicker Jr.	Ex U.S. Senator	Phoenix	$66,250
  Edwin Garn	Ex U.S. Senator	Morgan Stanley DW	$132,450

  Source: "Nice Work If You Can Get It," Thomas Easton and Michael Maiello, Forbes, November 29, 1999
  
  
  
• Boys and girls, can you say "epistemological"?.....Bill Miller can, and did, in a recent guest column for Barron's.....Miller is officially a value manager (Legg Mason Value), and he raised some eyebrows several months ago when he first took a plunge into Amazon.com stock.....The Barron's column was Miller's defense of his Amazon purchase, and Miller drew in part on the writings of William James, the 19th century American psychologist and philosopher.....Miller's argument, a la James, goes something like this: The level of evidence needed to believe something is a function of how important it is not to be wrong.....If being wrong isn't especially costly, and being right has a high payoff, then the evidence needed for belief can be relatively low.....With Amazon, the most an investor can lose is his purchase price, while the reward is huge for being right......When Miller bought Amazon, he insisted on some evidence that the company would be successful (for example, cash flow and valuation models), but Miller acknowledges that his information threshold was considerably lower than usual.
  
  
  
• Even without the benefit of a philosophy degree, many people who are interested in Internet funds have come to roughly the same conclusion as Bill Miller: "I don't understand what's happening, but I think it's gonna be big".....The problem, of course, is timing.....Miller focuses on the long-term upside of Internet stocks versus the long-term downside, and he makes a good point.....But what should investors do now, when the short-term risks of the Internet sector seem to far exceed the short-term rewards?.....Our best advice, were we giving advice, would be to buy now and be prepared to hold for a long time, even when Internet funds hit the skids.....But how many people will follow the "buy" part, and ignore the "hold" part?.....We don't know, but probably quite a few.
  
  
  
• Through the first 10 months of 1999, more new money has gone into tech mutual funds ($17 billion) than the previous 10 years combined.
  Los Angeles Times, December 12, 1999
  
  
  
• Ameritrade has "Stuart." Now, other online brokers are preparing to fight back:
  
  

  "Yo quiero Datek!"

  
  
• Eaton Vance recently announced that it will start publishing after-tax returns for its three tax-managed mutual funds.....Which means that Eaton Vance wasn't publishing after-tax returns before, which seems to be the whole point of these funds, which shows once again that fund companies live in a world of their own.....For comparison purposes, consider how consumers would respond to a "fuel-efficient" car if the manufacturer didn't provide mileage information.
  
  
  
• "Selective disclosure" is a nasty little Wall Street secret: In conference calls, phone calls, and probably a dozen other ways, companies routinely provide important information to stock analysts before they disclose it to the investing public.....The SEC recently proposed a new Regulation FD (for fair disclosure) that would require companies to disclose all material financial information to analysts and the public at the same time.....This is America, at the dawn of a new century, and you'd think it would be difficult to find anyone who opposes "full disclosure".....But wait!.....Stuart Kaswell, the top lawyer for the Securities Industry Association, says that full disclosure could have a "chilling effect" on the ability of companies and analysts to share information.....In an apparent attempt at stand-up comedy, Kaswell also contends that stock analysts act as proxies for the general investing public, as they seek to "ferret out information" and convey it to investors.
  "Wall Street Snarls at S.E.C. Proposal on Disclosure," Floyd Norris, The New York Times, December 16, 1999
  
  
  
• If I were a betting man, I'd wager that fund-of-funds manager Bob Markman is going to lose his bet with John Bogle.....According to a footnote in Bogle's current book, the Vanguard guru made a $25 bet with Markman that the Vanguard 500 Index fund would outperform Markman's MultiFund Moderate Growth Portfolio for the five years ending April 1, 2000.....The bet isn't officially over, but Markman doesn't stand a chance.....From the inception of the bet in April 1995, through November 1999, Vanguard 500 Index had an annualized return of 26.7%.....Over the same period, Markman's fund returned only 19%. [Thanks to "Ted," of FundAlarm Bulletin Board fame, for bringing this item to our attention]
  
  
• Are you familiar with the CheckFree Fund?.....Technically, it's still called the Gintel Fund, even though 47% [!] of the fund's assets were recently invested in CheckFree stock.....According to the fund's lead manager, "CheckFree is a pioneer in consumer and business home banking. It's become a very big thing".....Indeed it has.
  
  
  
• Speaking of undiversified: Many investors know that Sequoia fund has a huge stake in Warren Buffett's Berkshire Hathaway (currently about 30% of fund assets).....Several lesser-known funds have also placed big bets on Buffett, and recently all have been disappointed.....Among the other Berkshire Hathaway fans: Legg Mason Focus (16.4% of the fund), Megatrends (10.8%) and Oak Value (9.1%).....Sequoia, Legg Mason Focus, and Oak Value also own significant amounts of Buffett's favorite stocks, such as Coca-Cola, Gillette, Freddie Mac, and The Washington Post, which Berkshire Hathaway owns as well.....Therefore, these three funds have even more exposure to Buffett than might appear at first glance.....Total Buffett exposure: 45.8% for Sequoia, 26.4% for Legg Mason Focus, and 22.2% for Oak Value.
  Source: "Following Buffett Down," Brian P. Murphy, Money, December 1999; also, fund Web sites and SEC filings
  
  
  

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FundAlarm © Roy Weitz, 2000