| Highlights and Commentary |
| By Roy Weitz |
Dull. Monotonous. Unexciting. Unvaried. Well-worn. With the help of my handy thesaurus, it's time to take our annual look at my personal mutual fund portfolio. As of December 31, 2004, my complete mutual fund holdings (in descending order of market value) were as follows:
| Roy's Mutual Fund Portfolio | |
|
| Roy's fund | 2004 return (%) |
|---|---|
| PIMCO RCM Global Technology D (DGTNX) | 17.46 |
| Weitz Partners Value (WPVLX) | 14.99 |
| Buffalo Small Cap (BUFSX) | 28.82 |
| Vanguard Health Care (VGHCX) | 9.51 |
| Cohen & Steers Realty Shares (CSRSX) | 38.48 |
| Vanguard European Stock Index (VEURX) | 20.86 |
| Vanguard Total Stock Market VIPERs (VTI) | 12.56 |
| Vanguard 500 Index (VFINX) | 10.74 |
| FBR Large Cap Financial(FBRFX) | 11.74 |
| Bridgeway Ultra-Small Company Market (BRSIX) | 19.13 |
It's now 16 months since the mutual fund scandals first broke, and any fund company that still hasn't confessed to its involvement with market timers deserves the full wrath of the law (not to mention the full wrath of its investors).....While we wait -- and wait -- for fund companies and fund directors to come clean, or for the SEC to act, a surprisingly simple pair of calculations can spotlight funds that have been preyed upon by market timers: All we need to do is compute the ratio of a fund's redemptions to net assets, along with its ratio of redemptions to sales.....If a fund's annual redemptions divided by average net assets (R/ANA, expressed as a percentage) is greater than 200%, and redemptions divided by sales (R/S) is greater than 95%, there's an excellent chance that the fund has been churned by market timers.
| Average net assets (ANA) | $1.49 billion |
| Sales | $12.26 billion |
| Redemptions | $12.51 billion |
| Ratio of redemptions to ANA x 100 (R/ANA) | 840% |
| Ratio of redemptions to sales x 100 (R/S) | 102% |
| Fund | Ratio of redemptions to average net assets (R/ANA) (>200% is suspicious) | Ratio of redemptions to sales (R/S) (>95% is suspicious) |
|---|---|---|
| Merrill International Value A | 2,406% | 98% |
| Kinetics Internet | 2,071 % | 101% |
| Van Eck International Gold | 1,094% | 101% |
| Hartford International Opportunity A | 842% | 100% |
| Dreyfus Premier Worldwide Growth | 764% | 101% |
| American Aadvantage International Equity Pln Ahd | 710% | 101% |
| U.S. Global World Precious Minerals | 697% | 98% |
| Diversified Investors International Equity | 636% | 97% |
| Gabelli Global Growth AAA | 580% | 105 % |
It's tempting to hold socially-responsible funds to a higher governance standard than everyone else because, in some sense, they're asking to be held to a higher standard.....But what do we do with a socially-responsible fund, like Pax World High Yield, that fails to meet even the bare minimum standard for fund governance in one vital area?.....Why, we expose and ridicule it, so here goes: In May 2004, Pax World received a phone call from the SEC, inquiring about the high level of purchase and sale activity in the High Yield fund during 2003.....Since this suspicious activity was apparently news to the directors of the fund, they launched an internal investigation of trading activity, and eventually discovered that the fund had been subject to "frequent short-term shareholder trading activity" (i.e., market-timing).....It's nice to know that the directors finally uncovered these nefarious trades by market timers, but here's our question: What were these directors doing between September 2003, when the fund scandals first broke, and May 2004, when they took the call (and got the heads-up) from the SEC?.....Didn't one director -- just one -- pay attention to the ubiquitous scandal news and understand what it might mean for this fund?..... Didn't one director -- just one-- wake up from his nap and think that it might be his job to examine fund trading activity, without waiting for a call from the SEC?.....The data to perform this calculation is readily available in the fund's 2003 annual report, and the mechanics of the calculation (along the lines discussed in the item immediately above) couldn't be easier.....It took FundAlarm about ten minutes online to locate the following data for Pax World High Yield, and about 30 seconds to perform the necessary calculations, as follows:*
| Average net assets (ANA) | $39,538,180 |
| Sales | $224,672,696 |
| Redemptions | $213,749,576 |
| Ratio of redemptions to ANA x 100 (R/ANA) | 540.6% |
| Ratio of redemptions to sales x 100 (R/S) | 95.1% |
 Mario |  Gabelli | If your mutual fund manager also runs hedge funds and private accounts, you may be concerned that he or she is stretched too thin, has divided loyalties, or undisclosed conflicts of interest.....But what if your mutual fund manager is also the chairman and CEO of a publicly-traded company, and receives substantial income for running that company?.....As you might have guessed, this isn't a hypothetical question: Mario Gabelli, the lead manager of six Gabelli mutual funds, is also the chairman and CEO of Lynch Interactive (AMEX symbol=LIC).....During the most recent fiscal year, Lynch Interactive paid Gabelli $1.1 million in salary and bonus, and presumably Gabelli spent some amount of time earning it, which is time that he didn't spend paying attention to his mutual funds (Super Mario's firm, Gabelli Asset Management, also owns about $20 million worth of Lynch Interactive stock, which gives Gabelli another incentive to pay attention to the company)......It would seem that shareholders of Gabelli's funds have the right to know (a) that their manager is moonlighting, and (b) how much time he spends on his extra-fund activities.....Under current securities law, however, Gabelli isn't required to disclose his Lynch activities to fund shareholders and, needless to say, he hasn't provided this information voluntarily. | |
| "Consultant Chides Gabelli On Disclosure," Jessica Toonkel, Fund Action, December 17, 2004 | |||
Starting February 28, every mutual fund will be required to disclose how much each manager has invested in his or her own fund.....Putnam has voluntarily disclosed this information since last fall, and the results so far are revealing.....For example, consider the following table, which shows manager ownership for each of Putnam's five largest funds:
| Putnam fund | "Portfolio leader"* (date started) | "Portfolio member"* (date started) | Dollar range of fund shares owned (thousands of dollars) |
|---|---|---|---|
| Fund for Growth & Income | Hugh Mullin (1996) | $100 - $500 | |
| David King (1993) | $100 - $500 | ||
| Christopher Miller (2000) | $100 - $500 | ||
| Voyager | Brian O'Toole (2002) | "over $100" | |
| David Santos (2003) | "over $100" | ||
| New Opportunities | Kevin Divney (2004) | $0 | |
| Paul Marrkand (2004) | "over $100" | ||
| Richard Weed (2003) | $0 | ||
| International Equity | Joshua Byrne (2003) | $50 - $100 | |
| Simon Davis (2003) | $10 - $50 | ||
| Stephen Oler (2000) | $50 - $100 | ||
| Mark Pollard (2004) | $0 | ||
| George Stairs (2002) | "over $100" | ||
| George Putnam of Boston | Jeanne Mockard (2000) | $10 - $50 | |
| Kevin Cronin (2003) | $50 - $100 | ||
| Jeffrey Knight (2001) | $0 | ||
| Raman Srivastava (2004) | $0 | ||
If we tried to interest you in a mutual fund with an expense ratio of 7.29%, you'd probably tell us to get lost (or at least we hope you would).....Yet, somehow, $121 million has found its way into exactly such a fund, Dreyfus Founders Passport A (FPSAX).....If you look at the fund's prospectus, you'd see an expense ratio of "only" 2.45%, so where does the additional five percent or so of expenses come from?.....The rest of the fund's 7.29% expense ratio is attributable to brokerage costs, which just as surely come out of investors' pockets, but aren't included in the official expense calculation.....You can think of high expenses -- including brokerage costs -- as a lead weight, a headwind, or a deep hole that your fund manager has to dig out of.....Whatever metaphor floats your boat, fund expenses are one of the few investment variables that investors can entirely control.....Here are 11 additional funds, each with an exceptionally high real expense ratio (that is, the official expense ratio, plus brokerage costs):
| Fund | "Official" expense ratio |
"Real" expense ratio (includes brokerage) |
|---|---|---|
| Boston Partners Long/Short Equity Inv (BPLEX) | 2.75% | 6.72% |
| Kelmoore Strategy Eagle A (KSEAX) | 2.25% | 6.00% |
| AXP Global Technology A (AXIAX) | 1.94% | 5.55% |
| Van Wagoner Emerging Growth (VWEGX) | 2.36% | 5.46% |
| Jacob Internet (JAMFX) | 2.85% | 5.22% |
| Kelmoore Strategy A (KSAIX) | 2.00% | 5.00% |
| Driehaus Emerging Markets Growth (DREGX) | 2.35% | 4.75% |
| Eaton Vance Greater India A (ETGIX)( | 3.35% | 4.53% |
| JP Morgan Fleming Intrepid European A (VEUAX) | 1.70% | 4.51% |
| Armada Small Cap Growth A (ASGRX) | 1.48% | 4.29% |
| Kelmoore Strategy Liberty A (KSLAX) | 2.25% | 4.20% |
How would you feel if the host of your party decided to leave, because there was a better party next door? U.S. Trust runs the Excelsior mutual funds, and the employees of U.S. Trust (through their defined benefit pension plan) have been big investors in the Excelsior fund family.....But no more.....The pension plan for U.S. Trust employees is pulling its money out of the Excelsior funds, and the money will be redeployed into separate accounts managed by U.S. Trust, as well as "other investments, including strategies not currently available" through the Excelsior funds.....Since pension trusts don't have any income tax concerns, there can be only two-and-a-half reasons why the pension fund managers have decided to part company with the Excelsior mutual funds: (1) they are disappointed in the performance of the funds, (2) they feel the fees are too high, or (2½) some combination of the two.....Since the pension fund appears to be pulling out all of its money, instead of axing just a few Excelsior funds, our guess is that high fund fees, across the board, are the main reason for the exodus.....(Remember, pension plan trustees have a legal obligation to get the best possible fee deal for their participants, while mutual fund trustees/directors are subject to a much looser standard).....Excelsior says that the pension fund could pull out a "significant portion" of the assets of certain funds (no names provided), but that "total fund operating expenses are not expected to rise as a result of these redemptions".....No word about the capital gains hit to shareholders, if any, as a result of this move.
Most mutual funds probably have at least a couple of stocks each year involved in class action lawsuits, and that raises an interesting question: When it comes time to collect the money that has been set aside for class-action settlements, how effectively do mutual funds represent the interests of their shareholders?.....We'll answer that question in a minute, but first some quick background: When a publicly-traded company loses a class-action lawsuit, the settlement money is typically placed in a court-supervised account.....Owners of company stock during a specified period -- for example, the 18 months during which the CEO cooked the books -- are eligible to file written proofs of claim, and the number of claims filed determines how much each shareholder will receive from the settlement fund.....Details vary from case to case, but one rule is universal: If you don't file a claim, you don't collect a penny from the settlement fund.....Now, to answer our initial question: According to a recently-filed lawsuit, mutual fund companies have generally done a lousy job at filing proofs of claim, which means that fund companies have failed to collect millions of settlement dollars -- perhaps even billions of dollars -- that funds, and ultimately fund shareholders, were entitled to.
Briefly noted:
