FundAlarm - Highlights & Commentary Archive

Highlights and Commentary

By Roy Weitz

(Originally posted February 1, 2002) [Archive Table of Contents]

If it seems like we've said this before, we have: It's time for our annual peek at Roy's year-end mutual fund portfolio and, once again, there are no big surprises.....I did add one fund during 2001 (Vanguard Total Stock Market VIPER), and I'm in the process of replacing two others: T. Rowe Price Science & Technology and RS Internet Age.....Science & Technology is being jettisoned due to abysmal performance and a manager change (see below).....RS Internet is being sold because it no longer makes sense in my portfolio.....In both cases, the sales proceeds will be invested in a new technology fund (new for me, anyway).....Here's the year-end lineup:

Roy's Mutual Fund Portfolio
(as of 12/31/01, in descending order
of market value):

Weitz Partners Value
Vanguard Health Care
Vanguard 500 Index
Cohen & Steers Realty Shares
Vanguard Total Stock Market VIPER
Vanguard European Stock Index
T. Rowe Price Science & Technology*
FBR Financial Services
Invesco European
RS Internet Age*

* To be replaced; check back in March
As before, I also hold relatively small positions in three stocks: T. Rowe Price Associates, Franklin Resources, and TheStreet.com, the latter being, perhaps, my once-in-a-lifetime opportunity to own a penny stock.....In any event, TheStreet.com currently has much brighter prospects than Enron.....I guess some things do change in the course of a year.

Underperforming. Overrated. Gone. In mid-January, Chip Morris was finally kicked out the door at T. Rowe Price Science & Technology (PRSCX).....Morris had managed this fund since the early 1990s and, according to the official story, his departure was not performance-related.....Yeah, sure, like the recent departure of those villagers in Africa was not lava-related.....Compared to the average technology fund, PRSCX had a few relatively good years in the early 1990s, especially 1995.....Based on those few good years, Chip Morris managed to fashion a glowing reputation, and sucker a huge number of investors into sticking with this fund, including yours truly.....Michael Sola takes over from Chip Morris, and Mr. Sola may prove to be a stock-picking genius.....But according to almost every objective criterion, this fund is a screaming "sell".....Speaking personally, we hear the scream, and we're taking action.....By the next issue of FundAlarm, PRSCX will be gone.....Look for the replacement here, on March 1.

Underperforming. Inconsistent. Promoted. Those three words pretty much describe the investment career of Jim Goff.....Goff has run Janus Enterprise since its inception and, during his nine-year tenure, this has been a wildly inconsistent, mostly underperforming fund.....Now, Janus has decided to shuffle its corporate management and, voilà, Goff finds himself removed from Enterprise and put in charge of research for the entire firm.....In his new position, Goff will be responsible for expanding the firm's stock coverage, and coaching and training its staff of 43 analysts (presumably, to perform better than he has).....Jonathan Coleman takes over for Goff at Enterprise .....You may remember Coleman from a couple of years ago, when he was one-half of the team that presided over the collapse of Janus Venture.

Same guy, different look:

The casual
Jim Goff,
from the Janus
Web site

The corporate
Jim Goff,
from the IDEX
Web site
(a fund he
subadvises)

At the same time that Goff (above) was kicked upstairs, Helen Hayes was appointed Managing Director of Investments for Janus.....In that role, Hayes will be responsible for "directing all portfolio management functions at Janus".....It sounds like a big job -- it should be a big job -- but Hayes is also staying on as lead manager of Janus Worldwide and Janus Overseas.....Investors in these funds might as well assume that Hayes is gone, because that is almost certainly the reality as her new job kicks in.

We get mail: FundAlarm has been around for almost six years, and most regular readers are familiar with the workings of our 3-ALARM and NO ALARM ratings .....But, once in a while, we receive an e-mail that reminds us (a) we have some pretty sharp readers, and (b) the ALARM system isn't perfect.....Here's one such e-mail:

David was referring to last month's issue of FundAlarm, and here are partial data tables for the two funds in question:

Both of these funds are in the Specialty-Financial category, and we can definitely see David's point: Century Shares (CENSX) is on our NO-ALARM "Honor Roll," and Fidelity Select Insurance isn't, so Century Shares must be the better fund, right?.....Not necessarily.....The way we look at these tables, Century Shares has done a remarkable job of squeaking onto the Honor Roll, barely beating its category benchmark over the past 12 months and 3 years, and performing only slightly better than the benchmark over the past 5 years (+1.33%).....Fidelity Select Insurance has a much more impressive 3-year and 5-year record, and it falls short of the Honor Roll only because of its 12-month performance..... Even then, Select Insurance doesn't miss by much (-2.21%, compared to the category benchmark).....Notwithstanding the Honor Roll designation for Century Shares, and the recent underperformance of Select Insurance, we'd say that the Fidelity fund is the more attractive offering.....Our point is probably obvious to many, but it still bears repeating: All mechanical fund-rating systems, including ours, require interpretation, and sometimes careful interpretation.....Each month, FundAlarm contains mild 3-ALARM funds, weak NO-ALARM funds, and all gradations in between.....It's always a good idea to look at the numbers, not just the labels and colored squares, before you make any decision to sell or keep a fund.

A year ago, on January 3, 2001, the tech-heavy Nasdaq 100 index jumped 16.8%, and PBHG Select Equity jumped even more (17.8%).....As we pointed out at the time, the one-day performance of PBHG Select Equity strongly suggested that it (a) was basically a tech fund and (b) quite volatile.....During the first five trading days of this year (January 2 - January 8, 2002), the Nasdaq 100 took a 5.67% bounce -- not quite as dramatic as last year's jump, but enough to get investor attention.....And how did PBHG Select Equity perform this year in comparison to the Nasdaq 100?.....During the five days that the Nasdaq climbed 5.7%, the PBHG fund barely moved at all, gaining only 1.1%.....PBHG Select Equity wasn't the only one-time growth fund that lagged the Nasdaq during the first few days of 2002.....The following chart lists the twenty top-performing diversified growth funds of 1999, and indicates how those funds performed during the Nasdaq mini-rally at the beginning of January:

Fund	% return for 1999	% return for first five days of 2002
Nasdaq 100 Index	101.95	5.67
Morgan Stanley Instl Small Cap Growth (MSCGX)	313.91	-1.25
Van Wagoner Emerging Growth (VWEGX)	291.15	5.33
Nevis Fund (NEVIX)	286.53	5.14
Van Wagoner Post Venture (VWPVX)	237.22	5.18
ProFunds UltraOTC Inv (UOPIX)	232.01	5.30
BlackRock Micro-Cap Equity Inv A (BMEAX)	220.11	1.04
Thurlow Growth (THRGX)	213.21	8.54
Van Wagoner Micro-Cap Growth (VWMCX)	207.88	4.93
Loomis Sayles Agg Growth Ret (LAGRX)	197.84	3.11
Strong Enterprise Inv (SENTX)	187.84	0.45
RS Emerging Growth (RSEGX)	182.56	2.30
IPS New Frontier (IPSFX)	182.09	3.54
PBHG Select Equity (PBHEX)	160.89	1.11
Berger Mid Cap Growth (BEMGX)	151.46	1.15

Multiple classes of the same fund have been omitted

Among these funds that trounced the Nasdaq 100 during 1999, only one (Thurlow Growth) managed to beat the Nasdaq during the first few days of this year.....A few funds from the ever-wild Van Wagoner family came close to the Nasdaq 100, but most of the rest trailed by a considerable margin.....Obviously, we can't draw any long-term conclusions from five days of trading, but it seems equally obvious that something significant is going on here: These once hell-bent-for-growth funds are either temporarily out of the Nasdaq sweet spot, or they have permanently altered their investment approach.....In either case, you might want to investigate further.....If you own a growth fund -- or what you think is a growth fund -- find out how it performed during the first few days of this year.....If your fund lagged the Nasdaq 100, try to figure out why your fund has a new personality, and decide if that personality still has a place in your portfolio.
For a similar take on the same subject, see Michael Santoli's column in Barron's, January 14, 2002

How do you determine your fund's performance during the first five trading days of this year?.....The accompanying page presents an item that we ran last year, showing how to calculate short-term fund performance using the Yahoo! Finance Web site.....It's a handy tool, and you might want to check it out.

Speaking of growth funds that may have lost their touch or changed direction, here are the five top-performing Janus funds for 1999, and their performance during the Nasdaq mini-rally of January 2002:

Janus Fund*	% return for 1999	% return for first five days of 2002
Nasdaq 100 Index	101.95	5.67
Janus Venture	140.71	-0.23
Janus Enterprise	121.90	-0.18
Janus Olympus	100.12	1.44
Janus Mercury	96.23	0.48
Janus Twenty	64.90	-0.31

* Domestic only
And two more erstwhile high-flyers, this time from American Century:

American Century Fund	% return for 1999	% return for first five days of 2002
Nasdaq 100 Index	101.95	5.67
Amer Century New Oppty Inv (TWNOX)	147.97	-0.76
Amer Century Vista Adv (TWVAX)	119.06	-0.54

Mr. Consistency: Legg Mason Value (LMVTX) is managed by Bill Miller.....As you may have heard by now, LMVTX outperformed the S&P 500 index again in 2001, which is the eleventh straight year that Miller and the fund have accomplished that.....Four other funds have outperformed the S&P 500 for the past five years -- FMI Focus, GAMerica Capital A, Heritage Capital Appreciation A, and Weitz Partners Value -- but no other fund has been able to put together a longer winning streak.....Although Miller holds the consecutive-year record for outperforming the S&P 500, seven funds actually have better 10-year records than Legg Mason Value, as follows:

Fund	10 Yr. return (% annlz'd)	Mgr. tenure (yrs.)
Calamos Growth A (CVGRX)	19.27	10
Berger Small Cap Value Inst (BSVIX)	19.12	10
Weitz Partners Value (WPVLX)	18.93	9
PIMCO Renaissance A (PQNAX)	18.81	3
Smith Barney Aggress Growth A (SHRAX)	18.5	19
FPA Capital (FPPTX)	18.27	18
Wasatch Core Growth (WGROX)	18.26	10
Legg Mason Value Prim (LMVTX)	18.16	20
Vanguard 500 Index (VFINX)	12.84	15

But each of these funds also had at least one significant, underperforming year over the past decade, while Miller had none.....Weitz Partners Value probably comes closest to Legg Mason Value in terms of consistency, while slightly outperforming it.

Briefly noted:

You might not wake up every morning thinking about this issue, but Vanguard and Barclays Global Investors are locked in a competition over index funds.....Barclays is pushing hard to make its exchange-traded funds, called iShares, the recognized indexing leader, while the folks at Vanguard aren't about to relinquish their role as King of the Index Hill.....Recently, the Barclays/Vanguard battle spilled over onto the discussion boards at morningstar.com.....For several months during 2000 and 2001, someone posting under the name of "droption" left 167 messages on various Morningstar boards, extolling, shilling, and otherwise talking up Barclays iShares.....Dr. Option never revealed any affiliation with Barclays, but execs at Vanguard had their suspicions.....Finally, someone at Vanguard complained to the coordinator of the Morningstar boards, who suspected that Dr. Option might actually be Brad Zigler, a Barclays executive in charge of marketing iShares.....(Zigler is apparently not a master of deception, since he had previously written columns for another Web site under the pseudonym "Doc Options" or "Dr. Option")....The Morningstar coordinator e-mailed Zigler, inquiring about his potential double life as Dr. Option.....Zigler never replied, but the postings by Dr. Option stopped immediately.
"Barclays Plays Hard in Battle With Vanguard for Investors," Aaron Lucchetti, The Wall Street Journal, January 2, 2002
More corporate hijinks: FundAlarm has learned that Mr. Zigler (above) also tried to give a wedgie to Gus Sauter, the Vanguard index guru, at an important fund industry conference.
The folks who bring you the Royce funds, value investors to the core, are introducing Royce Technology Value.....As you may recall, Royce was recently acquired by Legg Mason.....Everyone who thinks Royce would have started a technology fund on its own, without the urging of its new owner, please raise your hand.....Higher, please: I can't see any hands.
Oops! For tax year 2000, MFS incorrectly reported dividend distribution amounts for its Mass Investors Growth Stock fund.....The original Form 1099-DIV, as sent to investors, was based on ordinary and capital gain distributions of 92 cents and 80 cents per share, respectively.....The correct breakdown for the 92-cent distribution tuns out to be only 18 cents per share ordinary, 49 cents capital gain, and 25 cents return of capital.....If you hold this fund in a tax-deferred account, you don't need to worry (except, perhaps, about who is in charge of tax calculations for MFS).....In a taxable account, this error has cost you between $40 and $150 per $10,000 invested, depending on your tax bracket and filing status.....The only way you can recover this money is to file an amended 2000 tax return which, of course, may cost more than the amount of the refund that you have coming.
"In realm of blunders, MFS's is a doozy," Charles Jaffe, boston.com, January 6, 2002
A broken watch tells the correct time twice a day and most mutual funds, even the worst ones, eventually hit a hot streak.....American Heritage is the latest broken watch to look like a Rolex.....Historically, American Heritage has been a fund of almost comically inept proportions, yet it gained 75% in the first few days of 2002, and it was up even more (87.5%) as of January 29.....So, did manager Heiko Thieme finally figure out how to run a mutual fund?....Hardly.....In fact, it's almost the exactly the opposite story.....During early January, 80% [!] of this fund's assets were invested in Senetek PLC, and Senetek stock got a huge boost when one of its products (an "antiaging compound") was licensed to several large retailers.....Morningstar.com reports a "surge" in readers viewing the American Heritage profile page, which presumably will be followed by a surge of investors.....As Morningstar says, rather succinctly, "Don't Buy This Fund!"
January 10, 2002
The mutual fund world offers something for almost everyone.....For example, let's say that you were formerly an investor in Vanguard U.S. Growth, and you were disappointed when Vanguard fired that fund's underperforming manager.....Good news!.....That same underperforming manager, Lincoln Capital Management, has been hired to run a new fund, Ariel Premier Growth.....Send in your money to Ariel, and we're sure that Lincoln Capital Management will be glad to start trailing its benchmark once again.
Speaking of new funds, here's a puzzling one: Jerome Heppelman and Kenneth Abrams have been selected as the outside managers (i.e., subadvisors) for AXP Partners Small Cap Core.....Heppelman currently manages PBHG Small Cap Value, where he's done a decent job.....But Heppelman is still basically a rookie manager at a fund shop known for its managerial revolving door.....Abrams works for Wellington Capital Management, which is rapidly becoming for the mutual fund world what IBM used to be for the computer world: The safe, boring choice, which will never put anyone's career in danger.....With hundreds of value managers in the country theoretically at its beck and call, you'd think (wish? hope?) that AXP could have come up with choices that were either more distinguished (Heppelman) or more original (Abrams).
Last November, Vanguard's new exchange-traded fund, the Vanguard Total Stock Market VIPER, began appearing on the list of the largest exchange-traded funds.....How did this $1 billion fund get so big, so fast, only five months after it was introduced?.....Well, there's nothing like using your own money.....Vanguard acknowledges that it has started investing up to half of the cash in several Vanguard mutual funds in the Vanguard Total Stock Market VIPER.....For example, between two and three percent of assets of Vanguard Windsor, Windsor II, Equity-Income, and Morgan Growth appear to be invested in this Vanguard VIPER.....We say "appear," because Vanguard considers the VIPER to be a "cash equivalent," which means that Vanguard doesn't separately show the VIPER in the listing of each fund's holdings.....Is Vanguard trying to hide its own little case of self-dealing?.....Vanguard-watcher Dan Wiener thinks so, especially since Vanguard initially posted VIPER holdings for several funds on its Web site, and then suddenly withdrew the information.....Vanguard doesn't have a legal problem, since it's clearly authorized to invest in its own VIPER.....And even though Vanguard earns fees from the VIPER, fund shareholders probably come out a little bit ahead (that's because the VIPER probably would be replaced by futures contracts, which would cost shareholders even more).....No, the problem here is one of perception and communication.....Given the appearance of a Vanguard conflict, and the potential for misunderstanding, it's astonishing that Vanguard doesn't simply lay all of its cards on the table.
"Viper assets soar on Vanguard stake," Craig Tolliver, cbs.marketwatch.com, December 28, 2001;
"VIPERs Success Self-Made," Dan Wiener, adviseronline.com, December 26, 2001
A new offering, the Pictet Global Water Fund, is now available....If this gimmick fund is successful, look for additional funds based on the other ancient Greek elements: Pictet Earth Fund, Pictet Air Fund, and Pictet Fire Fund.
Robert Kiyosaki is the author of Rich Dad, Poor Dad, and four other financial books that have sold over 11 million copies in 40 languages.....According to a recent interview with TheStreet.com, Mr. K. believes that 401(k) plans and mutual funds are "so risky, I don't think people will be able to retire on them.....Among Kiyosaki's other revelations: "Over the last several months, mutual funds have lost huge amounts of money,".....Mr. K says that he doesn't invest "without insurance, and mutual funds have got no insurance from a stock market crash"....Kiyosaki predicts that mutual funds will lose money again and, therefore, people "making less than $100,000 per year" should stay away from them.....Instead of 401(k)s and mutual funds, Kiyosaki likes real estate, both for himself and for the average Joe, because "in real estate, my banker requires me to have insurance from catastrophic losses".....For his personal portfolio, Mr. K. also likes options (currently, naked puts on gold stocks), and "controlling" interests but not "ownership" (whatever that means) in operating corporations, because he thinks he can't be sued.....Is this the biggest financial nonsense we've ever heard?.....We're reluctant to declare an all-time winner, but it certainly ranks near the top both in ignorance and destructive potential.....Kiyosaki claims to be worth "anywhere between $50 million and $100 million, depending on the day".....Even if we accept the low end of that range, Kiyosaki strikes another blow for the positive correlation between wealth and intelligence.
"Meet the Street: Rich Dad, Rich Author," Lee Barney, thestreet.com, January 11, 2002
Last July, the manager of Strong High-Yield Municipal Bond Fund told The Wall Street Journal that "the worst is over" for her fund.....Unfortunately, the fund appears to have missed that issue of the Journal, and it still refuses to cooperate with manager Mary-Kay Bourbulas.....Last summer, about 9% of this fund's portfolio was in default.....As of October 31, 2001, after some heavy redemptions, the default rate had crept up to 10.9%, and the performance of the fund was still dismal.....What is Bourbulas saying now?....."Our outlook for the high-yield muni market is positive".....Wow, that's a relief!
"Strong's 'High-Yield Muni' Stays Weak, Karen Damato, The Wall Street Journal, January 10, 2002
Many money market funds come with default insurance, which is supposed to pay off if one of the fund's investments becomes worthless.....Thanks to several recent, high-profile bankruptcies, premiums for default insurance have skyrocketed, and money market funds from Fidelity, Putnam, and USAA have quietly dropped this coverage.....Default insurance was always a bit of a belt-and-suspenders kind of thing, and the loss of default insurance is no great cause for alarm.....But if you're worried, and you want greater assurance, consider a money fund that invests only in U.S. Treasuries.....Yields may be a little lower, but the underlying securities are as solid as the U.S. government.
"Money funds drop default insurance," John Waggoner, USAToday.com, January 22, 2002
The Hulbert Financial Digest tracks nearly 500 model portfolios recommended by more than 150 financial newsletters.....The average portfolio in the Hulbert database, after all recommended buys and sells, lost 9.3% for the year through November 30, 2001.....If these model portfolios had simply been left the way they were on January 1, 2001, the average portfolio would have lost only 8.0%.....In other words, the advice of the average newsletter publisher cost its readers 1.3% in return during 2001.....Oh, and don't forget the cost of the subscription.
"Why the Best Action Is Often No Action at All," Mark Hulbert, The New York Times, December 30, 2001
FundAlarm has often been accused of taking a simplistic approach to complex issues.....In keeping with that tradition, here's our analysis of one current controversy within the mutual fund industry:
- Virtually no mutual funds disclose their proxy votes;
- Using the Internet, it would be extremely easy for mutual funds to disclose their proxy votes if they wanted to;
- Therefore, mutual funds have something to hide.
What do fund companies have to hide?.....Well, let's say that General Motors is looking for a fund company to service its 401(k) plan, and Fidelity discloses that it has voted an important proxy issue against General Motors in the past.....Isn't it likely that General Motors might decide to give its business to a friendlier fund company?.....Examples like that are probably rare, so we suspect that the fund industry opposes proxy vote disclosure for a more basic reason: Fund companies don't want to tell the rabble any more than they have to.....If funds routinely disclosed their proxy votes, investors might have one more reason to tie up the toll-free telephone lines, or write an e-mail, both of which require "customer service".....And, of course, any given proxy vote is likely to antagonize someone, and fund companies have a hard enough time getting customers without disclosing what they really think or do.....Mutual funds control nearly one-third of the equity voting power in the U.S., and failure to disclose mutual fund proxy votes makes a charade of corporate democracy.....But mutual funds are allowed to get away with non-disclosure, so of course they don't disclose.
"Activists renew push for proxy disclosures," Sarah O'Brien, Investment News, January 14, 2002
Last month, we reported a class action lawsuit against Van Wagoner Emerging Growth, for alleged pricing irregularities.....The class has since been expanded to cover all Van Wagoner funds purchased between April 28, 2000 and June 30, 2001.....If you'd like to join the class, or if you just enjoy reading legal filings, click on "Selected Web links" at the top of this page.....You'll find the name of one law firm bringing the case, and a copy of the legal complaint.
How about a Hall of Shame?.....This one comes from the Forbes 2002 Mutual Funds Guide, and the funds below are listed in descending order of ugliness:
Putnam OTC & Emerging Growth

PBHG Growth

USAA Growth

Phoenix-Engemann Capital Growth

AXP Mutual
All of these are also on the FundAlarm list of the Most Alarming 3-ALARM Funds, so you'll hear no arguments from us.
Vanguard discovers the telephone: Starting in March, shareholders in Vanguard's balanced and stock index funds will have limited rights to make phone and online exchanges into and out of their funds.....Currently, in an attempt to discourage market-timing activity, Vanguard only accepts written instructions from shareholders in nonretirement accounts.....The new rules will permit up to two exchanges out of an index fund within a rolling 12-month period, but no exchange orders will be accepted after 2:30 p.m. Eastern time on any trading day....When it comes to market timers, Vanguard has the courage of its convictions, and for that the firm deserves a lot of credit.....But, honestly, these new rules aren't exactly earth-shaking.....Couldn't Vanguard have come up with this solution sooner, like, perhaps, five years ago?