| Highlights and Commentary |
| By Roy Weitz |
Roy: The Portfolio
 | Continuing the rite of humiliation and full disclosure that started in 1999, here's my personal mutual fund portfolio as of December 31, 2003: |
(as of 12/31/03, in descending order of market value) |
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Not a good sign:
If you paid someone to help you buy a car, you'd expect that person to get you the lowest possible price, not the "median" price paid by all buyers of that particular make and model.....So why should independent fund directors be any different?.....They shouldn't.....You're paying directors, in large part, to negotiate the investment contract for your mutual fund, and you should expect them to push for the lowest possible management fee.....Try telling that to John Hill, the independent board chairman for over 100 Putnam mutual funds.....According to Mr. Hill, "[The directors'] job is to protect the interest of fund shareholders...We've had a rule for years [at Putnam] that fund expenses can't be any higher than the median expenses of comparable funds across the country"*.....Mr. Hill seems pretty pleased with his expense rule, but it's just one more indication that fund directors are still the pawns of fund company management.....In any true arm's-length fee negotiation, where both parties have their own money at stake, the concept of a "median" fee is meaningless -- the seller wants to receive the most it can, and the buyer wants to pay the least.....If Mr. Hill goes into fee negotiations with Putnam expecting to pay the industry median, then he's clearly not protecting the financial interest of fund shareholders.....He's a failure at his $400,000 a year job, and he should be replaced by someone who's at least completed Negotiating 101.
Another shining moment for Putnam fund directors: If you're looking for a profoundly mediocre fund that invests in government-backed mortgages, look no further than Putnam U.S. Government Income A.....It consistently ranks in the bottom half of its peer group for return, and it's definitely not cheap, with an expense ratio of 0.85% (by comparison, American Century Ginnie Mae charges 0.59%, Fidelity Ginnie Mae charges 0.57%, and both are better performers).....According to Forbes, which recently awarded a booby prize to Putnam U.S. Government Income, "the fund's trustees get a total of $62,000 a year to guard the interests of shareholders. If they were really doing so, they would fire Putnam and hire a new manager."*
Look who's talking:
 longer find you attractive" | Bank of America manages Nations International Equity, which was a double loser in the recent fund scandals (the Bank invited market timers to loot the fund, and the fund was also ransacked by late traders).....In reality, the Bank did none of the day-to-day stock picking for this fund, which was farmed out to three subadvisors (Marsico, Putnam, and INVESCO).....The trustees of Nations International Equity recently fired Putnam and INVESCO as subadvisors, partly because those two firms have been implicated in the fund scandals, but the trustees left Marsico in place, and they also left Bank of America as the fund's primary advisor.....We don't have a problem with Marsico continuing as subadvisor, but how could the trustees of this fund not also fire Bank of America for its involvement in the fund scandals?.....We think we know the answer: It's easy to find fault with Putnam and INVESCO for their misdeeds, because they're outsiders.....But the trustees of this fund owe their jobs to Bank of America, so somehow Bank of America doesn't look as ugly as the other two miscreants.....Give us a few minutes, and we can probably think of a case of more blatant ethical blindness.....But the Nations trustees take the early lead, and will be tough to beat, for this year's "Look Who's Talking" award. |
Eliot Spitzer, New York's crusading Attorney General, thinks that mutual fund management fees are generally higher than pension plan management fees, and he has an academic study to prove it.....The Investment Company Institute (ICI), the fund industry trade association and lobbying group, thinks that mutual fund management fees are just about comparable to pension fees, and the ICI also has a study to prove it.....It's not surprising that Spitzer and the ICI can't agree on the fairness of management fees, but it is surprising that no one -- not Spitzer, not the ICI, and certainly not you or me -- can even figure out what many funds charge for their management services, let alone compare those charges from fund to fund, or to other money management firms.....What we're talking about here isn't the overall expense ratio, which is easy to determine, and easy to compare from fund to fund.....No, what we're talking about is the payment that we make purely for the security selection services of our fund manager, and not what we pay for custody, or accounting, or any of the other costs that are included in the overall expense ratio.....Consider, for example, the "expense" section of the financial statement for two of Roy's personal holdings:
| Bridgeway Ultra-Small Company Market | Buffalo Small Cap | |||
|---|---|---|---|---|
| Management fees | $543,140 | Management fees | $8,803,000 | |
| Accounting fees | $164,500 | NA | ||
| Audit fees | $39,766 | NA | ||
| Custody | $105,566 | NA | ||
| Insurance | $3,422 | NA | ||
| Legal | $4,854 | NA | ||
| Registration fees | $57,048 | Registration fees | $160,000 | |
| Directors' fees | 3,152 | NA | ||
| Miscellaneous | $1,437 | Miscellaneous | $24,000 | |
As long as we're talking about presentation of important fund information, consider the following three expense tables, which are reproduced exactly as they appear in each fund's printed prospectus:
Maybe they should change the name from "annual shareholder report" to "annual shareholder sentence": The most recent "annual report" for AllianceBernstein Premier Growth contained exactly one sentence that specifically addressed the performance of the fund's holdings, as follows:
| "Strong positive contributions from Amgen, UnitedHealth Group, Intel, Lowe's, eBay and AT&T Wireless were more than offset by negative performance from Tenet Healthcare, Johnson & Johnson, Microsoft, Kohl's, Best Buy and General Electric Co."* |
On the other hand, maybe there's such a thing as too much communication: Bill Gross is PIMCO's star bond manager, and Gross recently told The New York Times that he's pulled all his own money out of PIMCO Total Return, the huge bond fund that he manages (he says that he's moving his Total Return money to "closed- end municipal bond funds, commodities derivatives, and Treasury inflation-protected securities," or TIPS)*.....Gross is a smart guy and a hugely experienced investor, with instincts, resources, and discipline that the average fund investor can only dream about....When Gross makes a move like this, he's playing on a field that simply isn't available to the rest of us, and that's probably just as well.....Gross' comments should come with a Jackass-like warning:
The world of mutual funds is like an ever-changing sea, so it's nice to know that there's always at least one fixed beacon: American Century Giftrust was a lousy fund when we started FundAlarm, in 1996, and it's still lousy today.....Giftrust was originally a small-cap growth fund, and then it morphed into a mid-cap growth fund, which placed it smack in the center of last year's market sweet spot.....Unfortunately, someone forgot to tell the Giftrust managers, whose 19.9% return for 2003 trailed the FundAlarm mid-cap benchmark (at 34.9%), and also trailed the average mid-cap growth fund (at 38.9%) .....If you're stuck in this fund, you really are stuck, since Giftrust requires a long-term lockup of your money..... (For new Giftrust investors since August 2003 -- surely there can't be more two or three of these hapless souls -- -- there's a minimum commitment of 18 years; investors who got trapped prior to that date are sentenced to investment purgatory for a minimum of ten years).....So why would anybody sign on for a deal like this?.....In exchange for your long-term commitment, you're allowed to name a "recipient" and treat your investment as a current gift for tax purposes....The only way out of Giftrust is to hire a trust-busting lawyer, and the problem with that, of course, is the lawyer's fee, which could run several thousand dollars, plus several thousand dollars in costs.....Since the average Giftrust account is just $2,300, it's not surprising that the average Giftrust investor is going nowhere.....Still, there is hope for the larger Giftrust account: American Century says that it doesn't plant any special roadblocks in the way of investors trying to get out of Giftrust, and about ten people have managed to extricate themselves over the years.
They feel your pain, six months at a time: Due to poor performance, American Century has agreed to waive the management fee for Giftrust, from February 1 through July 31, 2004.....This unusual move comes at the request of the Giftrust directors, who may soon discover for themselves that no good deed goes unpunished.....In effect, the directors have now set a baseline for Giftrust performance, and it will be difficult for them to justify a resumption of the management fee if future performance doesn't exceed the baseline.....And what if the future performance of Giftrust falls below today's baseline.....In that case, the trustees are going to have a hard time renewing American Century's management contract -- which, come to think of it, may suit American Century just fine.
When you're out fighting the bad guys, you don't always have time to do your own housekeeping: Here's an excerpt from the "How to Invest" page on Eliot Spitzer's official (New York Attorney General) Web site (we've added the highlighting):
Briefly noted:
| "This weekend I received a survey from Strong which they are sending to former customers. Item 2 in the survey asked which of a list of items influenced my decision to withdraw assets from Strong. The last item listed is 'Negative publicity about Strong.'
What irks me is that they seem to think the problem is 'negative publicity' instead of unethical and illegal business practices. Like it is the reporters' fault for writing negative stories about them. They just don't get it . . . " |
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| first implicated in the current market-timing scandal. | ||
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his role in the market-timing scandal, including what he knew and when he knew it. | ||
 | The "Invesco Field" letters First Enron lost its stadium, and now it could be Invesco's turn. If and when Invesco goes under, FundAlarm has obtained exclusive rights to auction the 12 letters that currently stand atop Invesco Field (photo at left). Bid on all of the letters as a group, or pick your favorite letter as a memento of corporate corruption and greed. These 32-foot tall letters will attach easily to any flat wall surface, or complement any den or family room with a very high ceiling. A unique opportunity for mutual fund investors, football fans, and collectors of large letters. | ||
| Item #2TLL Now accepting bids! | |||
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