Highlights and Commentary

By Roy Weitz

(Originally posted February 1, 2001) [Archive Table of Contents]
Still waiting for a market they like: 2000 was the year in which small, value, and "Old Economy" stocks generally performed well.....1999 was the year in which large, growth, and "New Economy" stocks posted some once-in-a-lifetime numbers.....Between these two years, you'd think that every stock fund would have been able to produce at least 12 months of respectable returns.....But it was not so: A total of 46 funds in this month's FundAlarm database still managed to lose money in both 1999 and 2000, including eight funds that lost more than 10% in both years.....One fund, American Heritage, managed to lose more than 20% in both years, a feat that is sure to fascinate students of the inept for many years to come.....Check out the accompanying page for the complete list of funds that still can't find a market they like.....While you're there, you can also take a look at the flip side: 64 funds that thrived, and returned at least 25% in both years.


Please try to contain your excitement: Yes, it's time for our annual peek at Roy's mutual fund portfolio.....No big surprises this year, but Roy did make a few changes, plus a classically dumb timing move.....On another front, for those of you who remember (or care), Roy sold his interest last July in Longleaf Partners fund, and he reinvested the proceeds in Weitz Partners Value.....After five months, you can see if he made the right decision.

[View Roy's mutual fund portfolio]

"Whenever the market makes a big one-day move, a fund's performance sends messages about volatility, portfolio holdings, and more".....That's the idea behind a recent article by mutual fund columnist Charles Jaffe,* and it's an intriguing one.....On an ordinary day, the stock market is full of noise and random motion, and it's pointless to get excited (or concerned) about how your funds have performed over a given 24-hour period.....But on January 3, 2001, when the Fed suddenly lowered interest rates, many funds made huge, revealing moves.....Consider, for example, the following chart:

Fund	% Gain on January 3, 2001
PBHG Select Equity (PBHEX)	17.8%
E*TRADE Technology Index (ETTIX)	16.8%
Nasdaq 100 (QQQ)	16.8%
Neuberger Berman Focus (NBSSX)	11.0%
Vanguard 500 Index (VFINX)*	5.0%
Vanguard Small Cap Index (NAESX)*	4.7%
Dreyfus Mid Cap Index (PESPX)*	4.0%

*A FundAlarm benchmark fund

While FundAlarm's small-, mid-, and large-cap benchmarks (NAESX, PESPX, VFINX) had a good day on January 3, the technology indices (such as ETTIX and QQQ) were off the charts.....If you own a fund like PBHG Select Equity, which outperformed even the technology benchmarks, you are reasonably safe in assuming that PBHG Select Equity is (a) basically a tech fund, and (b) quite volatile.....Similarly, if you own a "value" fund like Neuberger Berman Focus, and it posted almost 60% of the return of tech-heavy Nasdaq 100 on January 3, you can be fairly certain that your "value" fund has a large tech stake (in the case of NB Focus, tech holdings turn out to be about 33%).

If all of your funds went up on January 3, you were probably pretty happy on January 4.....But remember: Excessive returns on January 3 could signal that your portfolio is tech-heavy and undiversified.....If that's where you want to be, fine.....But as we saw in 200l, volatility on the upside can also foreshadow volatility on the downside.....If you're concerned about being overexposed to tech stocks, or if you just want a check on portfolio diversification, treat January 3 as a unique window on your portfolio.....Here's a little project: Find out how each of your domestic stock funds performed on January 3, compare your fund's performance to the benchmarks above, and see if you're surprised by the results.
*"Beware when a day makes a big difference," Charles A. Jaffe, The Boston Globe, January 14, 2001


How do you obtain the closing price of a mutual fund for January 3 (or any other past date, for that matter)?.....The not-very-helpful answer is, "Find The Wall Street Journal for the following day".....Fortunately, there are also several free Web sites that offer historical fund prices.....We use Yahoo!, and here's how it works:

Step 1: Go to http://chart.yahoo.com/d [note: no "www"]

Step 2: Enter the fund ticker symbol (arrow #1), the date range for which you want prices (in this case, January 2 - January 3, 2001; arrow #2), and the frequency with which you want those prices (in this case, daily; arrow #3). Click the button to "Get Historical Data."



Step 3: The small table that you see below (arrow #4) will then come up. To compute the difference between the "3-Jan" closing price (Net Asset Value, or NAV) and the "2-Jan" closing price, which is the same as computing the January 3 return, subtract the January 2 return from the January 3 return, and divide by the January 2 return. In this case, that's ((42.46-36.05)/36.05), or 17.78% (which we have rounded to 17.8%) -- the return of PBHG Select Equity (PBHEX) for January 3, 2001. Note that this method of computing fund returns does not work if there has been a dividend distribution between dates.



A Suisse miss? You wouldn't know anything has changed if you visit the Warburg Pincus Web site, but Harold Sharon, a senior international fund manager, left Warburg in December.....Sharon was manager or co-manager of four WP funds (International Small Company, Global Post-Venture Capital, International Equity, and Major Foreign Markets.....Another senior international manager, Harold Ehrlich (WP Major Foreign Markets), left the firm in the Fall of 2000, also with barely a whisper from WP.....To round out the recent Warburg Pincus turnover, reliable sources tell us that an experienced head of trading has also left the firm.....The head trader is a back-office position that you don't hear much about, but it's a critical job in a well-run organization.....Warburg Pincus was acquired by Credit Suisse in July 1999, and our sources tell us that things have not been going well since.....Internal politics is rife, manager control and autonomy have been interfered with, and there's been a general "dumbing down" of the firm.....According to our source, "WP is a vastly different firm than it was one year ago".....Several important management contracts expire July 1, 2001, and our source is "certain" that there will be additional turnover: "Morale is at an all-time low, and members of the Titanic crew were probably more optimistic".....FundAlarm will keep you posted.


And what would a month of FundAlarm be without another Heartland item?.....This gossip comes to us from a well-placed source, and the story isn't pretty:

"Apparently after a significant reduction in assets under management from a little more than $4 billion to just a shade over $1 billion, a result of the muni bond shake up and overall sub par performance, the Advisor [Heartland] has started to let people go. Recently seven associates were laid off and the notoriously stingy $$$ Heartland Advisors gave severance of 2.5 days pay for each year worked. As a result two people who worked at Heartland for 6 years, growing the firm and then defending the joint against all complaints, got a whole 15 days of severance money. 'Thanks for all of your help and loyalty,don't let the door hit you on the way out.' It gets better. These layoffs came only a month after the President Bill "Nasty-vitz" Nasgovitz had just rallied these same troops with a great speech about how the people that are here now are the 'cream that has risen to the top' and their 'loyalty will be rewarded.' Wait, I'm not done yet. This all comes on the heels of several employees trying to leave and join crosstown mega-firm Strong. Only once Bill "Nasty" found out, he supposedly called his buddy Dick Strong to tell him not to hire any of his employees, so Dick cancelled all of the interviews and offers in process. The sad thing about all this is that these hard working, intelligent, seasoned, fund employees all got fired only a few months after Bill nixed their employment options. Now they have nowhere to go but out of town if they want to stay in the fund business."

The SEC legal staff gets ready to release yet another new mutual fund rule

SEC Chairman Arthur Levitt is leaving office in a few days, and you get the feeling that staff members have been putting in a few overtime hours lately.....During January, the SEC released three new mutual fund rules, and portions of these rules might actually provide some tangible benefits for the average fund investor:

• Independent directors: By July 1, 2002, a majority of each fund board must consist of directors who are "independent" of fund management (up from 40% under the current rule).....Independent directors also must control the selection process for other independent directors, and independent directors cannot use the same lawyers as the fund company, unless the board determines that the company lawyers are also "independent".....For investors, probably the most noticeable change will be a new, standardized table, which must now appear in each fund's annual report, and must contain certain basic disclosures about each director, including principal occupations within the past five years, number of portfolios overseen within the fund complex, and other directorships held outside of the fund complex.....Other required disclosures -- even more revealing -- include potential conflicts of interest between each director and the fund, as well as the number of fund shares owned by each director.....Unfortunately, the latter two disclosures are not required in the fund's annual report, only in the Statement of Additional Information and the proxy statement, and this sure looks to like an SEC cop-out to us.....Also, directors aren't required to disclose the exact dollar amount of their fund ownership, only broad ranges, the highest of which is "over $100,000".....But at least investors will finally be able to identify those directors who own zero shares of their fund.....While we're on this subject, we also have one question: Why can't fund managers be required to make the same kind of minimal ownership disclosure?
  
  
• Investment company names: A fund with a name suggesting that it focuses on a particular type of investment must now invest at least 80% of its assets in the type of investment suggested by its name, up from 65% under the old rule.....Many observers thought that the SEC would use this new rule to become a style policeman, but it now appears that growth-investors-in-value-clothing have nothing to worry about....When the SEC rule talks about "type" of investment, it's clear that the SEC has in mind only the highest level cuts, such as "bond" and "stock" funds.....Thus, XYZ Stock Fund, which is consistently invested 70% in stocks, might be in trouble under the new 80% rule.....On the other hand, there would be no trouble for the ABC Value Fund, which is invested 90% in stocks, but has an average P/E of 120 (in other words, it's really ABC Growth Fund in disguise).....The new rule also requires funds to meet the 80% test if they have names that suggest they focus their investments in particular countries (e.g., the ABC Japan Fund), particular geographic regions (e.g., the XYZ Latin America Fund), or if the name suggests that the fund's distributions are "tax-exempt."
  
  
• After-tax returns: Beginning April 16, 2001, stock and bond fund prospectuses will be required to report after-tax returns for one-, five- and 10-year periods.....The information must be presented in the same part of the prospectus as the performance table, and returns must be computed two ways: (1) after taxes on all distributions, assuming sale of the fund shares, and (2) after taxes on distributions, assuming that the fund shares continue to be held.....In most cases, however, after-tax returns won't be required in fund advertisements, unless the fund is marketed as tax-advantaged or tax-managed -- another SEC cop-out.

Van Kampen has a "high yield" municipal bond fund (Van Kampen High Yield Municipal Income), and so does Putnam (Putnam Tax-Free High Yield).....Here's how the quality ratings of the two funds recently appeared on each company's Web site:

Van Kampen High Yield Municipal Income

Putnam Tax-Free High Yield

The Van Kampen high-yield fund (left) looks like an accident waiting to happen, with 77% of its bonds "Not Rated," while the Putnam fund appears to be a much more solid offering, with no unrated bonds, and only about 4% of its holdings below "B" quality.....But wait, there's more to this story: Van Kampen's quality ratings are obtained solely from outside sources (Standard and Poor's and Moody's), and any bond not rated by one of these third parties is, appropriately, designated as "unrated" by Van Kampen.....Putnam's managers take a very different approach, and Putnam provides its own in-house "rating" if a bond hasn't been rated by an outside service.....Putnam's self-rated bonds are then lumped in with bonds rated by third parties, which means that investors have no way of knowing how many bonds in the Putnam fund got their ratings from outsiders, and how many got their ratings from the Putnam managers themselves....Is Putnam's self-rating practice legal?.....Yes, and other funds do the same thing.....Does Putnam disclose its self-rating practice?.....Yes, there's a one-sentence disclosure, buried deep in the fund's prospectus.....Are Putnam investors confused and misled by the self-practice?.....We suspect that they are, and we also suspect that the vast majority of investors in the Putnam Tax-Free High Income fund would be surprised to learn that the bonds they own have never been rated for quality by anyone outside of Putnam.


Even if Putnam were 100% reliable and accurate with its in-house bond ratings, there's another reason why you might want to own bonds with ratings from third-party services: Bonds with real quality ratings tend to be more liquid, since potential buyers are more comfortable with them.....In a crunch, unrated bonds can be difficult to value and difficult to unload, as two Heartland bond funds famously demonstrated last October.


Responding to the competitive threat from FundAlarm, Morningstar introduces its new, super-premium "Crystal Ball" service:

From Morningstar.com (1/4/01)


Clipper fund performance table

A message from the VP for Product Development at the Kinetics funds:

"Hey, come on in. You've probably been reading in the paper about all those energy problems in California, and so have I. Heck, I get some of my best ideas from the paper. Remember the Kinetics Middle East Peace Fund? That was my baby, and it worked for a few weeks, before they started fighting again. Oh well, live and learn. Anyhow, I was thinking that this California mess could be a great excuse for a fund, so I ran it by the boss, and he loved it, and here we are. The Kinetics Energy fund opened on December 31, and it's gonna invest in 'large, medium and small-cap companies, including alternative energy companies.' Yeah, I don't know what that means, either, but I'm sure the manager will figure it out. Speaking of the manager, it's the same guy who runs the Kinetics Medical Fund. Catheters and power plants seem different to me, but what do I know? I'm already working on the next idea. I'm thinking maybe we start a fund with 10 managers on a small island, and the shareholders get to vote them off, one by one, until there's only one manager left. Wait, there's the boss now...

If you insist on investing in the Kinetics Energy fund, you might as well start practicing now:



Briefly noted:

• The FundAlarm Discussion Board 2001 Model Portfolio has completed its first month, and the results are --- inconclusive.....For an update on portfolio performance, check the accompanying page.
  
  
  
• The Invesco family of funds apparently has about $120 million burning a hole in its pocket, so the company is currently negotiating to put the Invesco name on the new Denver Broncos football stadium.....Before you conclude that naming a stadium is nothing more than a huge ego trip for arrested-adolescent, hero-worshiping executives, consider this: Part of the $120-million deal would include "an Invesco kiosk at the stadium where fans could get information on investing"*.....The beer-proof keyboard will reportedly include several unique interactive keys, including "Show me how the cheerleaders invest," "Which way to the men's room?," and "Tell me more about funds, dude."
  * Reuters, January 22, 2001
  
  
  
• Now that Invesco is about to name a stadium, can other fund company namings be far behind?.....We're especially looking forward to:
  
  
  • Vanguard Stadium, where John Bogle's pre-game lectures on indexing are sure to pack 'em in;
    
    
  • Janus Stadium, where fans start the game in the upper deck, then crash to earth in the second half;
    
    
  • Dreyfus Stadium, where fans start the game in the lower deck, and stay there;
    
    
  • Berger Stadium, which is a tiny practice field off in one corner of Janus Stadium;
    
    
  • Fidelity Select Funds Stadium, where fans must find a new seat every 15 minutes;
    
    
  • Scudder Stadium, which is always empty, because no one really cares who's playing;
    
    
  • Dick Strong Stadium, nicknamed "Old Blowhard," for the gusts of hot air that always seem to be swirling;
    
    
  • The Amerindo Stadium, a Gift of Alberto Vilar, where every game starts with the singing of the "The Star-Spangled Vilar," and fans munch on "Vilar Dogs." Since it's always the first inning at Amerindo, fans celebrate the first-inning stretch with a rousing rendition of "Take Me Out to the Vilar Game."
  
  
  
• What were the worst financial ideas of 2000?.....Bloomberg Personal Finance magazine wanted to find out, and Roy was asked to provide his list of bad ideas from the mutual world.....Among Roy's picks that made it into print (January/February 2001 issue): The narrow and silly Golden Gate Fund, the "mileage class" of the American AAdvantage funds, and the slicing-and-dicing of the Internet sector into four new Kinetics funds (Internet Infrastructure, Internet Emerging Growth, Internet Global Growth, and Internet New Paradigm).
  
  
  
• Allegations of cocaine use.....Wild, frat-rat parties.....No particular passion for his job.....A disinterested, hands-off management style.....We don't know who you're thinking of, but we're talking about Tom Bailey, CEO of the Janus funds, who was recently the subject of a brutal profile in Fortune magazine....."In picking stocks, Janus has always prided itself on intensive research into a company's prospects and management. As one portfolio manager explained a few years ago: 'If there's ever a management credibility question for me, I walk away'".....Investing in a Janus mutual fund is not the same as investing in Janus, the company.....Still, when you read this profile, you have to marvel that so many people have decided to entrust so much money to a man with so many deficiencies.
  "The Hidden Face of Janus," Peter Elkind, Fortune, January 22, 2001
  
  
  
• If you never bought futures contracts, because you were afraid that a truckload of soybeans or pork bellies might end up on your lawn, you might want to steer clear of the new American Century Avanti fund.....To discourage market timers and other short-term investors, this fund will require at least 15 days notice if a shareholder wants to receive redemption proceeds in cash.....It's still possible to redeem with less than 15 days notice, but you'll be required to take your proceeds "in kind" -- in other words, you'll receive your pro-rata interest in the shares of stock that make up the fund portfolio.....It's a clever approach to a difficult problem, and it's almost certain to keep out short-termers.....Watch for other fund companies to adopt the same policy.
  
  
  
• Did someone say "pork bellies?" Greetings, FundAlarmists. Today I'm going to take a look at the new Kaufmann Fund. As you may recall, Federated bought the Kaufmann fund a few months ago, and now Federated wants to fold the existing Kaufmann fund into the new Federated Kaufmann Fund. No big deal there, but what did get my attention was the proposed expense ratio of the new Federated Kaufmann Fund. The old Kaufmann fund had an expense ratio that only a pig could love -- 2.10% -- which was voluntarily capped at 1.95%. Get ready to snort: The new Kaufmann fund will have an even higher expense ratio -- 2.42% -- which will be capped at the same 1.95% for at least two years. After two years? You figure it out. Just remember that Federated paid a premium price for the Kaufmann fund, and Federated isn't a non-profit organization. If you're a Kaufmann shareholder, and you think this new fee structure smells worse than a rancid pork chop, I've got one word to say: PROXY. Vote your proxy "NO," and surprise a lot of people who think you're a sheep. This pig, for one, will be mighty proud of you.
  Thanks to Hays Glover, Warwick Investment Management, Bryan, Texas, for bringing this item to Porky's attention
  
  
  
• Index funds are basically commodities, like sugar or salt.....As with any commodity, price is paramount, which makes it all the more amazing that some index funds continue to gouge their customers.....The ONE Fund: S&P 500 Index is the leading money drain among index funds, with an astonishing expense ratio of 1.58%, on top of a 5.0% sales load (by comparison, the no-load Vanguard 500 Index fund has an expense ratio of 0.18%).....Fortunately, the ONE index fund is still very small.....Among the larger funds, Mainstay Equity Index deserves to be heaped with the most scorn.....Even with a 0.94% expense ratio, and a 3.0% maximum sales load, Mainstay Equity Index has managed to accumulate over $1.2 billion in assets from investors who (we suspect) are unaware of their alternatives.
  "Index Fund Fees Are Not Created Equal," Danny Hakim, The New York Times, January 14, 2001
  
  
  
• If you've ever been frustrated dealing with human operators at your favorite mutual fund company, you'd better check your supply of blood pressure pills.....The Pioneer funds Web site has just introduced a pair of "virtual" customer assistants, "Janet" and "Logan," who attempt to use artificial intelligence to answer customer questions online.....According to Mutual Funds magazine, "other financial firms are likely to adopt the technology and use it to streamline their service and advice offerings."
  
  
  
• Our initial experience with Janet and Logan, Pioneer's "Cyber Guides," was not positive.....We found both of them somewhat pushy and unresponsive -- almost a programmed feel, if you know what me mean:
  
  "Janet," the Pioneer Cyber Guide
  
  
  "Logan," the Pioneer Cyber Guide
  
  
• We appear to be in the midst of a post-Christmas, mutual fund shopping frenzy: Among the fund companies recently sold, or reported up for sale: (1) Fortis, about to be acquired by Hartford Financial Services Group, (2) the Ivy funds (Mackenzie Financial), about to end up with Investors Group Inc., of Canada, (3) the Standish funds, being eyed by Mellon, and (4) the Artisan funds, officially not for sale, except for the suspicious little fact that Goldman Sachs is out soliciting offers.
  
  
  
• Beware of mutual fund founders bearing gifts: Frank Keating is Governor or Oklahoma, and he was thought to have a good chance of becoming Attorney General under George W. Bush.....Jack Dreyfus is the founder of the Dreyfus mutual funds, and Jack Dreyfus claims that the drug Dilantin helped him overcome a severe bout of clinical depression.....Back in 1988, when Keating was Ronald Reagan's assistant attorney general, Keating met with Dreyfus, who was promoting the use of Dilantin to control violent federal prisoners.....Dreyfus allegedly had no financial interest in the drug, and federal prison authorities weren't interested in using it, but Dreyfus and Keating became personal friends.....Two years later, Dreyfus began making $10,000 annual cash gifts to each of Keating's three children.....The gifts continued for several years, and they eventually totaled about $250,000.....Keating apparently broke no laws by accepting the gifts, and he has consistently included the gifts on federal disclosure forms.....However, Keating never disclosed the gifts in Oklahoma, because state law didn't require it.....Now, Keating has been passed over for Attorney General, and press coverage of the gifts has damaged Keating's political career in Oklahoma.....Meanwhile, Jack Dreyfus has presumably moved on to help other folks in high political office.
  Newsweek, January 15, 2001
  
  
  
• Give us a free book and we'll follow you anywhere: Investment Titans is the name of a new book by Jonathan Burton, financial journalist and FundAlarm reader.....We're always a bit frustrated by an interview format, because we end up shouting our own questions at the page.....But Burton does a nice job interviewing such financial stalwarts as Harry Markowitz, Jeremy Siegel, John Bogle, Peter Bernstein, and the ever-popular Josef Lakonishok ("finance professor at the University of Illinois...respected institutional money manager...staunch supporter of value investing").
  
  
  
• And let's not forget this shining moment in U.S. financial history: Checks are finally going out to about 7,200 investors in Nationsbank funds, mostly in Florida, who were victimized by fraudulent bank sales practices in the early 1990s.....Nationsbank (now Bank of America) hired inexperienced brokers, pressured them to sell in-house funds, misrepresented the risks of many funds, and generally took the view that, hey, a dollar earned by us is better than a dollar in our customer's pocket.....Is this kind of thing still going at other banks that sell mutual funds?.....You can count on it, so be careful.
  
  
  
• Next time you make a mutual fund investment, and you're feeling nervous or intimidated, here's a little trick: Imagine your fund manager sitting in the nude.....It sounds far-fetched, but in China, apparently, it's not an uncommon practice.....According to a report in a Chinese financial journal, "fund managers and their associates...meet in secrecy to make illicit deals to boost each other's portfolios"....."It's become a widely known picture -- in a stuffy sauna room, negotiators meet naked, with no possibility of a record or disclosure"*.....The only thing that's off-limits, of course, is any discussion of short positions.
  *Financial Times, October 18, 2000
  
  
  

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