Funds Report--The Post: "Biannual Reports Stir Portfolio Concerns"
Great piece, Sandy. Thanks much ;-). di
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washingtonpost.com
>>>By Sandra Sugawara
Washington Post Staff Writer
Sunday , July 9, 2000 ; H01
The past quarter was fraught with peril for mutual fund investors, especially those who stashed their savings in last year's hot growth and technology funds, which generally took a beating.
Many fund managers scrambled to try to protect their investors from the storm by shifting out of Internet companies and into wireless, health care or even cash. But investors were unable to applaud such deftness because they are kept in the dark about their funds' maneuvers. (Their ignorance also prevented the investors from giving the fund manager the raspberry for buying such losers in the first place.)
For the April-to-June period, U.S. diversified equity funds fell 3.15 percent on average, and growth and technology funds took even harder hits. Among the worst performers were Potomac Internet, down 39 percent; Jacob Internet Fund, down 37 percent; and Kinetics Internet, down 33 percent.
The top-performing fund categories were health and biotechnology, which rose 18 percent for the quarter and 39 percent in the first half, and real estate, up 11 percent for the quarter and 13 percent for the year, according to Lipper Inc., a mutual fund research company.
World equity funds dropped an average of 7 percent in the quarter, with the China category dropping 12.45 percent and Japan funds declining 10.92 percent.
Growth funds declined an average of 5.66 percent, a drop that some analysts said was moderate, given the significant fall in tech stock prices and the fact that growth funds were heavily invested in technology at the beginning of the quarter.
"It is possible that fund managers succeeded in avoiding the worst of the damage by selling their tech stock holdings early in the decline," said an analysis by Lipper.
Nationwide Mid Cap Growth Fund took the opposite approach and increased the fund's technology holdings significantly, to 70 percent from 48 percent. That may have seemed like a risky bet during a period of extreme volatility, especially when it was the tech stocks getting whacked.
But the bet paid off. While the average mid-cap growth funds were down 6.26 percent for the quarter, according to Lipper, Nationwide was up 17 percent. And its 44.7 percent return for the first half of 2000 made it one of the top-performing mid-cap growth funds.
Investors who thought they had bought a sleepy, somewhat conservative growth fund, with a return last year of 10 percent, suddenly find they are investors in a potentially turbocharged fund, because of moves by its new manager, Aaron Harris.
Investors are probably grateful for Harris's impressive performance to date, although they won't know until October exactly how he has deployed their savings. Nationwide posts its top 10 holdings quarterly but reveals its full portfolio of investments only twice a year, on April 30 and Oct. 31.
Most mutual funds show their hands biannually, making investing with them an act of faith in the manager. Most of the investors who put $7.5 billion into equity mutual funds during the week ended July 5, for example, didn't know exactly what those funds owned.
There are a few exceptions. OpenFund, a Web-based mutual fund, has been posting its holdings daily for some time. And the Montgomery U.S. Select 20 Portfolio, which has been open for two months, publishes its holdings with a two-week lag, to ensure that it can complete its trades before revealing its positions.
"The advent of the Internet has totally changed the way consumers involve themselves in their investments. They are much more knowledgeable now" and want more information, said Peter Greenley, a spokesman for Montgomery Funds.
In fact, after Microsoft's legal problems prompted the Select 20 manager to dump the stock, the firm sent out e-mails to its investors to inform them of the change once the sales were completed.
Greenley said Montgomery plans to create three more funds this year that will allow investors to see changes in their holdings soon after they occur.
Most other mutual funds reveal portfolio changes only long after the fact. For example, investors put more than $1 billion into Janus Strategic Value since it opened earlier this year and waited months to find out what the portfolio manager had done with their money. Because it is attracting so much money, Janus has come under criticism from analysts and financial professionals for refusing to reveal all its holdings more than twice a year.
During the recent quarter, an additional $7.34 billion flowed into Janus mutual funds, even though seven of the funds are closed and management has been embroiled in a bitter fight. Kansas City Southern Industries Inc., a railroad company that owns Janus, is spinning it off along with its other financial services operations to form a new company called Stilwell Financial. Janus management opposed the spinoff structure, but it is scheduled to be completed on Wednesday.
Many large fund families such as Janus and Fidelity have long refused to tip their hands, arguing that it would allow "front-running." Individuals who knew the funds' intentions would try to trade ahead of them to take advantage of the market impact of the funds' maneuvers, their argument goes, and would make the prices less favorable for the funds.
Tim Schlindwein, a Chicago financial adviser, said he understands those concerns but thinks that monthly portfolio reports, with a short lag period, might be reasonable. He said that, especially in rocky markets like today's, investors need to assess "what kind of risk does a manager take and is it appropriate to the kind of fund he is managing," and is the investor comfortable with that style. Schlindwein said it is hard to make that judgment when investors have to wait six months or more to see the stocks their funds hold.
Harris, the 29-year-old portfolio manager whose stock picks for red-hot Nicholas-Applegate Global Technology Fund produced returns of 493.7 percent last year, was recruited to run Nationwide more aggressively. He took the reins in April and immediately began pushing the fund into stocks such as Globespan Inc., which makes semiconductors for DSL modems, and Centillium Communications Inc., which designs broadband networking systems.
Harris said he is looking for technology companies with a business model that can make money . The problem with many Internet companies such as Amazon.com Inc. is that they can "challenge the existing business structure," he said. "They can get everyone to rethink the way they sell books or real estate or drugs. . . . But that doesn't mean they have a sustainable business."
When his stock picks are revealed in four months, investors will get to see how Harris carries out that philosophy.
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