Highlights and Commentary
By Roy Weitz
(Originally posted February 1, 2003)
[Archive Table of Contents]

Buy and hold and hold: It's time for the annual peek at Roy's mutual fund portfolio and, once again, very little has changed.....Two funds that were in my portfolio at the end of 2001 -- T. Rowe Price Science & Technology and RS Internet Age -- were sold in early 2002, and I discussed those sales shortly after they occurred.....Otherwise, my portfolio holdings are exactly the same as they were a year ago.....Here's my complete fund lineup as of December 31, 2002:


Roy's Mutual Fund Portfolio
(as of 12/31/02, in descending order
of market value)
  • Weitz Partners Value
  • Vanguard Health Care
  • PIMCO RCM Global Technology D
  • Cohen & Steers Realty Shares
  • Vanguard 500 Index
  • Vanguard European Stock Index
  • FBR Financial Services
  • Vanguard Total Stock Market VIPERs
  • Invesco European Inv

I continue to hold relatively small positions in three stocks: T. Rowe Price Associates, Franklin Resources, and TheStreet.com, the latter being my best-performing investment of the year by far (+128.9%).....To all those who laughed at my holdings in TheStreet.com, or doubted the company's prospects, I have this to say: That's OK, I did, too.....Sometimes, you can look like a genius simply by doing nothing.

This is the fifth consecutive year that I've suffered the indignity of self-imposed portfolio revelation.....For those of you who enjoy sweeping, historical dramas, here's how my fund portfolio has changed (or not) over the years:

Fund name
(alphabetical order)		Owned by Roy as of December 31:
20022001200019991998
Cohen & Steers Realty Shares
FBR Financial Services
Invesco European    
Longleaf Partners      
MAS High Yield Instl        
PIMCO RCM Global Technology D        
RS Internet Age      
T. Rowe Price European Stock
   
T. Rowe Price Science & Technology  
Vanguard 500 Index
Vanguard European Stock Idx
Vanguard Health Care
Vanguard Total Stock Mkt VIPERs      
Weitz Partners Value    



You want a scandal? Here's a scandal: The firm that sold you your mutual fund may have cheated you.....The specific problem is breakpoints, which are the discounts that fund firms offer for large purchases of load mutual funds.....(For example, investors might pay a load of 5.75% when they buy up to $50,000 of XYZ Fund, 4.5% for purchases up to $100,000, and progressively lower loads for purchases up to $1 million. In this example, $50,000 and $100,000 are breakpoints for the load calculation).....Based on recent SEC field investigations, it turns out that some (as yet unnamed) fund companies and brokerage firms haven't been giving their customers the "break" in breakpoint, with the result that many customers have been overcharged.....Security industry regulators have started clucking, task forces are being formed, and you'll eventually get your money back if you're one of those unfortunate, overcharged customers.....In the meantime, if you want to learn some basic information about breakpoints, the kind of information your broker should have known all along, you can visit the NASD Web site.....(A new browser window will open on top of the current one. You can close the window by clicking the "X" in the upper right-hand corner.)


The Securities Industry Association, an industry trade group, has been asked to spearhead the effort to ensure that fund investors get full credit for appropriate breakpoints (see the item above)......In typical bureaucratic fashion, the Securities Industry Association (SIA) says that it must first meet with brokers, fund companies, and other parties "to develop a better understanding of the issues that need to be addressed regarding breakpoints"......Here's our input for the SIA, which might speed them along to a "better understanding of the issues that need to be addressed regarding breakpoints":

SOME MORONS DID THE MATH WRONG, AND A LOT OF PEOPLE GOT SCREWED

The SIA also says that it will call a meeting of major fund-industry players, to "identify and resolve any concerns" about the breakpoint issue.....Here's our suggestion of what is perhaps the biggest concern in this area:

SOME MORONS DID THE MATH WRONG, AND A LOT OF PEOPLE GOT SCREWED

We hope that helps.


We don't even want to think about it:

"The balls were spotless...And I never found anything unclean in the pits."
-- Paul Antico, manager of Fidelity Small Cap Stock, describing his investigation
of the Chuck E. Cheese ball pits before purchasing the stock
("The Wizard of Fidelity," Lauren Young,
SmartMoney, February 2003)


On January 23, the SEC voted on pending proxy disclosure rules, and it was a good day for mutual fund shareholders..... Beginning July 1, 2003, each mutual fund will be required to disclose its proxy-voting policies and procedures, and funds will also be required to disclose their complete record of proxy voting (this provision is effective August 31, 2004, for the twelve months ended June 30, 2004).....In the best tradition of high-level corporate whining, there's already talk that the fund industry will try to soften or repeal these rules by lobbying the new SEC Chairman.



Dancing to the same tune:
Fidelity CEO Edward Johnson (left) and Vanguard CEO John Brennan have developed an unexpected bond		About a week before the SEC proxy vote (above), Fidelity CEO Edward Johnson and Vanguard CEO John Brennan signed their names to a joint op-ed piece that appeared in The Wall Street Journal.....Their article was a patronizing, poorly-reasoned, and desperate attempt to forestall the inevitable decision on proxy-vote disclosure, but the piece apparently did give these fierce rivals a chance to become better acquainted......"They really hit it off," said one person who knows both men. "There's talk that they may oppose another progressive measure, soon."


Speaking of obnoxious public pronouncements, how about this press release from the socially-conscious (but not modest) Domini fund family:





Memo to Ms. Domini: We all know that you did some work in support of this proposal.....But what about the 8,000 people who took the time to write the SEC, and also supported it?.....What about the journalists who kept the flame burning, and the few politicians who lined up behind it?.....What about the Enron and Tyco scandals, and dozens of other events over which you had no control, that cost thousands of people their jobs and set the stage for this proposal?.....And why must you declare a "victory"?.....Wouldn't it be nice if we were all in this together, and nobody exploited this historic event for some easy public relations points?


Someday, someone will develop the perfect tool for measuring the risk of a mutual fund, and everyone will be able to pack up and go home.....Until then, folks will keep trying, and we'll all have something to talk about.....The latest entrant in the mutual fund risk-measurement sweepstakes is the Lipper-Barra Mutual Fund Risk Factor, a system that analyzes each fund's underlying stock holdings and produces three different measurements: the fund's risk across all equity funds, its risk compared to the fund's broad category (such as "international funds"), and its risk within the fund's Lipper classification (for example, Large-Cap Value).....Overall risk is expressed as a number which indicates the percentage of all equity funds that could have less risk in the next 12 months (for example, as of December 31, 2002, the overall risk rating for Vanguard Health Care was a very respectable 3, which means that only 3% of all stock funds could be projected to have less risk during calendar year 2003).....The new Lipper-Barra risk rating can be used to identify growth or sector funds (such as the aforementioned Vanguard Health Care) that might seem risky, but don't live up to their reputation for gyration.....The rating can also be used to identify funds that seem safe, but aren't, such as Gabelli Blue Chip Value AAA, which gets a risk rating of 92 (i.e., 92% of funds can be projected to have less risk during the coming year)......Among the other funds with a surprisingly high overall risk rating (indicated in parenthesis): Legg Mason Focus (96), Kelmoore Strategy (94), and Shaker (96).
Source: "Risky Business," Jody Yen, Forbes, February 3, 2003

Funds with a relatively low risk rating, in addition to Vanguard Health Care, include Fidelity Select Food & Agriculture (1), Fidelity Select Natural Gas (15), MFS International Value (5), and Prudential Pacific Growth (17).


If he's this sloppy with his Web site, why should he be any better with his fund?

[From the Thurlow Funds Web site, January 29, 2003]



FundAlarm reader Michael Kahn recently raised an interesting point about shareholder reports:

"What I can never understand when I receive my quarterly statements from mutual funds is why so few of them show the cost basis of the individual stocks in the portfolio, only the number of shares and the current value. Surely they know their cost basis, which would be very helpful to me in [determining] if their results were from one or a few outlier winners or losers, or a larger number of smaller gainers. My preference is to choose a fund that has hit lots of singles and doubles instead of the occasional grand slam, [and that isn't possible without cost basis information]. Why isn't there pressure placed on the funds to show their cost basis? "

In addition to his perspective as an investor, above, Michael has seen the cost-basis issue from another side:

"This issue became apparent when I worked for a Silicon Valley company whose stock skyrocketed in 1998 while I worked there. It was the [San Francisco] Bay Area stock that had the greatest price appreciation during that quarter. A 'smallish' mutual fund that had the highest return for the quarter had a large investment in this company...I wonder how many people invested in that fund based on its quarterly return. It was actually a terribly run company with a product that was in short supply. The stock price plummeted soon afterward. I think the public was 'duped' by not being able to see [the fund's cost basis information]."


Take a look at this excerpt from a print ad for Strong Ultra Short-Term Income, and you realize that mutual fund advertising might benefit from just a bit more regulation:




Even without the red highlighting, which we've added, your eye is naturally drawn to the large print with the "30-day current yield" of 3.47%.....That's a very attractive yield in today's market, but there's one big problem: This fund is being marketed "for your savings goals of one year or longer" (red underline, at the top), so a 30-day current yield is essentially irrelevant to your investment decision.....For a fund like this, which isn't a money market fund (although the ad creates some confusion about that fact, too), the relevant numbers are its total return, and you have to look down at the bottom left to find that information.....When you do find the total return information, in the bizarre ransom-note format (large and small typeface), you discover (if your eyesight is good) that this fund has barely eked out a positive return of 0.71% over the past 12 months -- far less than the current yield, and less, even, than some money market funds for which this fund is offered as a "potential solution".....Ultimately, this ad is a mishmash of both useful and useless information, poorly organized, with no context and no real guidance for the potential investor.....There's only one thing in this ad that's designed to make a lasting impression -- that seductive yield number -- and if you think that's a coincidence, we'd like to talk to you about an attractive investment opportunity in a Baghdad timeshare. This ad appeared in the February issue of Bloomberg Personal Finance, as well as several other financial and business magazines. A version of this ad has also appeared on television.


Be careful what you wish for:

"If we are going to get kicked out of screens, we want to be kicked out based on our performance"
-- A senior VP of the TCW Galileo funds, explaining why his funds have
lowered their investment minimum from $25,000 to $2,000,
in an attempt to attract more do-it-yourself investors
("LA Fund Firm Drops Minimums," mutualfundwire.com
January 22, 2003)


OK, if you really want to get kicked out based on performance, how about this: TCW Galileo Small Cap Growth is a truly horrendous fund.....Not only does it deserve to get kicked out of every mutual fund screen on the planet, it deserves to be purged from every portfolio in which it's currently owned.


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 2002, which is the twelfth straight year that Miller and the fund have accomplished that feat.....Although Miller holds the consecutive-year record for outperforming the S&P 500, nineteen funds actually have better 10-year records than Legg Mason Value, as follows:

Fund10 Yr.
return
(% annlz'd)		Mgr.
tenure
(yrs.)
Vanguard Health Care 18.56 19
Fidelity New Millennium 17.04 10
Calamos Growth A 17.02 12
Eaton Vance Worldwide Health A 16.97 13
Fidelity Select Brokerage 16.53 1
Fidelity Select Electronics 16.47 1
Fidelity Select Software 15.81 1
Fidelity Select Home Finance 15.75 2
FPA Capital 15.52 19
Mairs & Power Growth 15.42 23
Sequoia 15.19 33
Clipper 15.16 19
Weitz Partners Value 15.1 20
Excelsior Value & Restruct 15.08 10
Berger Small Cap Value Inst 15.06 18
Fidelity Select Insurance 14.82 2
Fidelity Select Energy Service 14.76 1
Wasatch Core Growth 14.7 16
Fidelity Select Defense & Aerospace 14.58 2
Legg Mason Value Prim 14.46 21

With the exception of the revolving-door Fidelity Select funds, it's interesting to note that every one of these ten-year stars has a manager who's been around for at least ten years, and almost every one is closely associated with a single, talented individual who is largely responsible for its success.....In this rarefied group of funds, management by committee simply doesn't cut it.


Is it possible for a fund to lower its expense ratio, and still tick off its shareholders? Ordinarily, you'd think even a mutual fund company would have a hard time antagonizing people while saving them money, but that seems to be exactly what's happened at Julius Baer International Equity (the same story applies at Baer's Global Income fund, but we're only going to talk about the equity offering here).....In January, Baer mailed out proxy materials for the two classes of its International Equity fund ("A" and "I"), asking for permission to raise its management fee by a hefty 20% (from 0.75% to 0.90%).....As usual, the stated reasons for this fee increase were nonsense, and the increase amounts to nothing more than a money-grab by a reasonably successful fund that is feeling its oats.....The proposed fee increase generated some heated comments on the FundAlarm Discussion Board ("Whatever you do, stay away from Julius Baer International"), and we also received an e-mail from a financial planner objecting to the increase and vowing to vote his shares "no".....But that isn't the end of the story.....Buried deep within in the proxy materials were a couple of off-hand sentences about the elimination of a 0.25% "co-administration" fee for the "A" shares, which not only offsets the proposed management fee increase of 0.15%, but actually results in a net cost saving of 0.10%.....A "before" and "after" expense table also shows this net cost savings, but the table is dififcult to read, and it's buried even deeper in the proxy booklet.....Based on the shareholder reaction that we've seen, we suspect that Baer is going to get a large "no" vote on the proposal to increase its management fee, and many of those "no" votes will have been triggered solely by Baer's inept communication with its shareholders.....Lawyers write proxy materials, but somebody at Baer should have reviewed the lawyers' opaque legal prose and insisted that the lawyers highlight the big picture, which is this: Even with the requested increase in the management fee, the overall expense ratio for "A" shares was being reduced.....If Baer loses this vote, they only have themselves to blame.....Even if Baer wins, they've managed to generate considerable misunderstanding and ill will from a vote that should have been a slam dunk.....Bad shareholder communications are inexcusable, and they are always bad business.....It looks like Baer may be the latest, but certainly not the last, to learn this.


Briefly noted:
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FundAlarm © Roy Weitz, 2003