| Highlights and Commentary |
| By Roy Weitz |
 | It's time for the annual exercise in staying awake, also known as the annual review of Roy's personal mutual fund portfolio.....As of December 31, 2006, my complete mutual fund holdings were as follows: | 
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| More than 10% by dollar value | ||
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| Roy's fund | Roy's Comments | Would I buy it again today? |
|---|---|---|
| Buffalo Small Cap | A little weak during 2006, but still a strong performer over the past three and five years. I hold this fund in a retirement account with relatively few choices, and this is by far the best small-cap fund that is available through the plan and still open to new investors. | Yes |
| Cohen & Steers Realty Shares | I've owned this fund for a long time. The fund had a weak 2000 and 2001 and, several times during those years, I considered selling it. But I never pulled the trigger, the fund came back fairly strong, and it still has a superb five-, ten-, and even fifteen-year record. | Yes |
| Vanguard Total Stock Market | This fund is what it is: An inexpensive way to get index exposure to "large-, mid-, and small-cap stocks diversified across growth and value styles." I invest in the exchange-traded version of this fund (VTI), instead of the traditional mutual fund version (e.g., VTSMX) because the stock commission that I pay each time I buy the ETF is a lot less than the corresponding mutual fund commission. | Yes |
| Weitz Partners Value | This fund clawed its way back in 2006, after a grim four-year slide. If Wally Weitz didn't have such a great track record, and fine last name, I probably would have bailed out at least a year ago. Even with Wally's track record and fine last name, 2006 was the last chance for this fund, at least in my book. I'm hoping this fund will continue its upward momentum for a while. If it doesn't, I expect to be harsh on it. | No |
| Allianz RCM Global Technology | This fund has gone from shoot-the-lights-out great to mediocre since it merged with Allianz RCM Innovation in Spring, 2005. Coincidence? Perhaps, but I was opposed to the merger at the time, voted against it, wrote a letter to my fund's trustees stating my displeasure, got a meaningless response, and generally thought that my fund's trustees screwed things up. I hold this fund in a retirement account, and there are no decent tech fund choices to replace it with, otherwise I would do so in a minute. If this fund continues to struggle, I'll probably look to replace it with a more diversified fund that has relatively heavy technology exposure. | NO! |
| Bridgeway Ultra-Small Company Market | This fund had a very disappointing 2006, which was preceded by a mediocre 2005. The good thing about this fund is that it's pretty much an index fund, so there's no human involved who might have lost the ability to invest. If I still want to be in the ultra-small-cap portion of the market, there aren't a lot of other choices. | Yes (weakly) |
| FBR Large Cap Financial | This has been my most disappointing fund, and I should sell it. But I hold it in a non-tax-deferred account and I'm reluctant to pay the capital gains tax, since there's no guarantee that I'll be able to make up what I lose in taxes with better performance from another financial fund. (Repeat after me: There are no guarantees.....) Still, there are much better choices among financial-specialty funds, and this fund is hanging on by a thread. | NO! |
| Vanguard 500 Index | I stopped adding to this fund a while ago, because I wanted the broader market exposure offered by Vanguard Total Stock Market. But 500 Index is good enough to continue holding, especially since I'd have to pay a hefty capital gains tax if I sold it. | No (but it's not the fund's fault) |
| Vanguard European Stock Index | Once I made the decision to index my European stock exposure, this fund was (and still is) a no-brainer. The only reason I'd sell this fund is to get broader exposure to other world stock markets. | Yes |
| Vanguard Health Care | The apple of my eye, the jewel in my crown, the maraschino cherry on my hot-fudge sundae. Several years ago, I was asked by a newsletter publisher to name my single favorite fund, and I made the case for Vanguard Health Care (it was still open at the time). Recently, I was asked by a magazine to name five closed funds that would be most appealing if they reopened, and Vanguard Health Care was one of my choices. This fund is good enough to be a core holding, and specialty funds don't get any better than that. The only thing that keeps me from buying more is that manager Ed Owens is likely to retire before I do. | Yes! |
| Wasatch Global Technology | My newest fund, purchased in late 2005. I never even think about selling a fund until I've owned it for three years, so even if this had been a turkey in 2006, it wouldn't be a candidate for sale. In fact, this fund performed well in 2006, and I'm pleased with it so far. | Yes |
David Snowball, new-fund guru and proprietor of the FundAlarm Annex, has agreed to bare his portfolio this month, as well .....The document file that David originally sent me was named "David's stupid portfolio strategy," and I have to say that took me by surprise, since I don't always (indeed, never) associate "David Snowball" with "stupid"......But what David really means by "stupid portfolio" -- well, here's what David means, in his own words:
| By David Snowball: My portfolio is designed to allow me to be stupid. It’s not that I try to be stupid but, being human, the temptation is almost irresistible at times. If you’re really smart, you can achieve your goals by taking a modest amount and investing it brilliantly. My wife suggested that I ought not be banking on that route, so I took the road less traveled. Years ago, I used free software available from Fidelity, Price and Vanguard to determine how much I needed to invest in order to fund my retirement. I used conservative assumptions (long-term inflation near 4% and expected portfolio returns below 8%), averaged the three recommendations and ended up socking away a lot each month.
And I’m fairly confident that I’ll be able to maintain that pace, even if I am repeatedly stupid along the way. It’s a nice feeling. [David's discussion of his portfolio continues here] |
Effective February 27, all of the n/i numeric investors funds will be liquidated, and numeric will be out of the mutual fund business.....Here's how numeric explained its decision, in a recent shareholder letter:
| "Because we are a focused institutional manager with capacity constrained strategies, the dynamics of today's mutual fund business are at odds with our current business model." |
Is anyone in charge?
During six years as CEO of Home Depot, miserable failure Bob Nardelli earned over $60 million, and he recently walked out the door with a $210 million severance package.....At a shareholder meeting last year, some of the largest mutual fund owners of Home Depot stock -- Vanguard and Fidelity in particular -- refused to challenge Nardelli's pay package, and also voted to reelect the directors who had enabled the Nardelli disaster from the beginning.....Now there are calls for Congress to do something about these executive pay windfalls, which means lengthy hearings, expensive lobbying battles, and the risk that any resulting legislation will either overreach or accomplish nothing.....Financial columnist Brett Arends, of thestreet.com, has a better idea, and it's based on the effective, cheap, and venerable principle of public shame:
| The one thing I have learned about mutual fund managers is that they absolutely loathe being embarrassed in public. They'd rather eat cardboard. Which is why if [Congressman Barney Frank, of the House Financial Services Committee] really wants to crack down on these pay deals, he should slap subpoenas on every single fund manager who controlled shares in Home Depot over the past six years and voted to approve Nardelli's pay.
He can throw in those who backed other outrageous pay deals -- like the $200 million that Hank McKinnell got when they kicked him out of Pfizer and the half a billion that Lee Raymond had in his pocket when he walked away from ExxonMobil. Frank can start with the folks at Fidelity, probably the most powerful fund management company in America, and certainly one of the most powerful companies in his home state of Massachusetts. He should drag the managers and the fund trustees down to Washington, D.C., to explain themselves before the cameras. And he should do it again, every year, until they learn to be more careful with their shareholders' money. |
Vanguard is best known for its index funds, but it also offers an extensive lineup of actively-managed funds, most of which are run by outside managers.....Because of its fund mix, Vanguard can often serve as a laboratory for the debate over active vs. index funds.....To make comparisons even easier, several of Vanguard's actively-managed funds have close relatives on the index side.....As we view it, the issue is fairly simple: If an actively-managed Vanguard fund can't outperform a comparable Vanguard index fund, there's little point owning the active fund.....For example, consider Vanguard Equity Income (VEIPX), an actively-managed fund.....Vanguard characterizes Equity Income as a "large value" fund, and when we look among Vanguard's index funds it's easy to find a "large value" peer -- the Value Index fund (VIVAX) .....So, how does actively-managed Equity Income stack up against its passively-managed sibling?.....Not so well, since the following table shows that the index fund has outperformed the active fund over all three measurement periods: | Vanguard fund | Style box* | --- Performance as of 12/31/06 --- | ||
|---|---|---|---|---|
| 12 Mo. | 3 Yrs. | 5 Yrs. | ||
| Equity Income (VEIPX) (actively-managed) | Large value | 20.62 | 12.66 | 8.58 |
| Value Index (VIVAX) (index peer) | Large value | 22.15 | 14.68 | 9.54 |
Putnam's former CEO Lawrence Lasser should be broken and disgraced, but somehow we doubt it.....After failing to prevent the firm's market-timing scandal, Lasser departed Putnam with a $78 million severance package, and last month he put one more legal problem behind him: He settled a long-lingering revenue-sharing case with the SEC for $75,000*.....The amount of this settlement is so pathetic, in inadequate, so insulting to the average investor that the SEC would have done more for the cause of justice by flushing Lasser's legal file down the toilet than by bringing this case to the conclusion that it did.
If your brokerage account features a cash "sweep," and you have no idea how that sweep works, give yourself a little pat on the back: You're exactly the kind of customer that almost every brokerage firm would love to have.....Given a chance, most brokers will sweep your extra cash into a low-interest bank deposit account, and the brokers will then take your cash and earn a higher rate of interest for themselves.....In fact, the spread between what brokers pay on customer sweep money and what brokers earn for themselves now amounts to billions of dollars a year throughout the industry.....At Schwab, for example, the firm's interest income on cash balances, plus interest income on margin loans, is greater than its revenue from trading commissions*.....If you like enriching your broker, please stop reading now and move on to the next item.....If you prefer more money in your account, take a few minutes to find out how your sweep feature is currently set up, and see if any higher-rate alternatives are available.....Brokers are betting you won't bother, and they have billions riding on that bet.....Why not help make it a bad year for them?
Conventional wisdom tells us that actively-managed small cap funds should outperform small-cap index funds, in part because active managers can take advantage of inefficiencies in the free-wheeling small cap marketplace.....But according to the most recent data from Standard & Poor's, this actively-managed small-cap advantage is a myth: Over the past six calendar years (2000 through 2006), only about 34% of all actively-managed small-cap funds have outperformed an appropriate small-cap index benchmark.....Perhaps even more surprising, actively-managed small-cap funds have had significantly less success against the indexes than even actively-managed large-cap funds (overall, about 43% of active large-cap funds have beaten an appropriate large-cap benchmark).
Plucked: A couple of months ago, we wrote about the exorbitant, love-inspired expense ratio of the Chicken Little Growth Fund.....Last month we wrote about the manager's inability to meet its financial commitments to the fund.....This month, we write to inform you that the fund is dead.
If you lose money because your online brokerage account has been hacked, you'll probably be reimbursed -- but there's still no federal law giving you iron-clad protection, and in most cases you're at the mercy of your brokerage firm......Currently, you have a legal right to recover only if your broker has a written policy to reimburse hacking losses (Schwab and E*TRADE are two brokers that do).
The FundAlarm Review of Books
| Title: | The Smartest Investment Book You'll Ever Read | 
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| Author: | Daniel R. Solin | |
| Publisher: | Perigee Trade | |
| Price: | $13.57 (at Amazon.com) |
The Smartest Investment Book You'll Ever Read  a stationary bicycle
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Closed funds open and open funds close, but is it possible for a fund to be open and closed at the same time?.....Yes it is, according to Paul Haaga, who runs the company that manages the American Funds......Case in point is American's Growth Fund of America (GFA), the ever-growing behemoth that now has over $155 billion under management......GFA is larger than any stock fund has ever been, by a lot, and conventional wisdom says that the fund should have closed long ago.....The folks at American contend that the fund still has room to grow, since its ten managers each invest a portion of the fund's assets independently, and each one runs 10 individual portfolios under the GFA banner.....Haaga says that any GFA manager is free to refuse new cash and, when they do, their portion of the fund is effectively closed, and their cash is reallocated to GFA managers with open portfolios*.....That argument sounds pretty slick, but perhaps it's not as clear-cut as it seems: There almost certainly are countervailing pressures on GFA managers, both financial and non-financial, to continue accepting new money.....The balance is probably tipped in favor of manager independence, as Haaga suggests, but the fact is we just don't know for sure, and never will, because this issue goes to the heart of American's compensation structure, which can involve a complex interplay of salary, bonus, profit-sharing participation, and equity ownership.....Growth Fund of America continues to be the fund world's biggest ongoing experiment, and American Funds execs continue to push the limit of the unknown every day that it stays open.
Don't worry, he'd never be influenced by his friendship: Jeff Schwarzchild, who's designated an "independent" director of the Jacob Internet fund, was best man at the wedding of the fund's manager, Ryan Jacob.
Please don't drop in: Ron Baron, who runs the Baron funds, has purchased a 40-acre East Hampton estate for about $100 million.....Baron is building another house down the street, on 11 acres*.....FundAlarm spies tell us that Baron plans to visit the smaller, 11-acre property when he wants to experience "how the little people live."
