Here is tomorrow's NY Times article, read it and go back and read the street. com on 4/15/98, great journalism, I wonder why this is coming out right now.? I wonder if these reporters all travel in the same circles. The article sure does point out a lot of new stuff.
>DJ: Mutual Fund: Illiquidity, The Other Portfolio Risk
>(N.Y. Times 06/06 21:22:19)
>
>By GRETCHEN MORGENSON
>c.1998 N.Y. Times News Service
> The bull market in stocks has been long and lovely, but even
>unsophisticated mutual fund investors understand the nature of market risk.
>If the prices of many stocks in a fund's portfolio drop, fund holders will
>lose, too.
> Understanding a fund's exposure to liquidity risk, however, is quite
>another matter. Liquidity risk is the possibility that the price of a stock
>will drop, and therefore may push down the fund's net asset value, when a
>manager tries to sell a large position. Or that the price will climb,
>forcing a manager to pay too much when buying a large chunk.
> Unless investors have examined a fund's holdings in each stock and
>compared
>them with the total shares outstanding in the company, it is tough to
fathom
>such risk for a particular fund.
> Although it is not much of a concern in large-cap stock funds, liquidity
>risk can wreak real havoc in micro-cap funds, which invest in fledgling
>companies with market values of $250 million or less. Positions in such
>companies are much harder to get in and out of without roiling the market.
> How damaging can illiquid stocks be to a portfolio? Plenty, as
>shareholders
>in two Dreyfus small-cap stock funds, Premier Aggressive Growth A, with
$264
>million in assets, and Aggressive Growth, at $77 million, are finding out.
> Indeed, these two funds are textbook examples of the perils of
>illiquidity.
>So far this year, through Thursday shareholders in Premier Aggressive
Growth
>have lost 13.5 percent; those in Aggressive Growth are down 18 percent. As
a
>benchmark, the Wilshire Small-Cap index is up 10.8 percent. Last year,
>Premier Aggressive Growth was down 13 percent; Aggressive Growth lost
almost
>16 percent.
> Aggressive, yes. Growth, no.
> Performance like this may explain the April news that the funds' manager
>since August 1995, Michael Schonberg, was being joined by Paul LaRocco,
late
>of Founders Asset Management in Denver, who was named the primary manager.
>Mellon Bank Corp. owns both the Founders and Dreyfus fund companies.
> For the two-and-a-half years that Schonberg ran the fund alone, he
bought
>speculative technology or biotechnology companies with few shares
>outstanding. He even borrowed money to buy shares.
> LaRocco takes a different tack, favoring bigger-name stocks with $1
>billion
>to $5 billion in market value. In an interview, he said he is still running
>the funds as aggressive-growth vehicles. ''But we will broaden the funds'
>holdings out a little,'' he said. ''Mid-cap stocks are a good place to be
>here. As earnings growth among large-cap stocks slows, investors will move
>down the market-cap range.''
> Dreyfus did not make Schonberg available for an interview last week.
> Even if LaRocco is a brilliant stock-picker, the beleaguered Dreyfus
fund
>holders are not likely to recoup their losses soon. That is because
escaping
>a portfolio of illiquid stocks is like exiting a crowded theater after
>somebody has yelled ''Fire!''
> How illiquid are some of the holdings? Frighteningly so. According to
>Morningstar Inc., the Chicago financial publisher, the median market
>capitalization of the larger of the two funds, Premier Aggressive Growth,
is
>a Lilliputian $157 million. Across the micro-cap fund category, only 20
>percent of funds have a median market capitalization this small or smaller.
> The median market cap of Aggressive Growth is even smaller, at $87
>million.
>Only 10 percent of micro-cap funds in Morningstar's universe have median
>market values that tiny.
> More than 10 percent of Premier Aggressive Growth's assets are in stocks
>that trade at $5 a share or less. In the Aggressive Growth fund, 20 percent
>fall in that range.
> Another measure of both funds' high risk levels can be found in the
>concentration of fund holdings. As of April, Premier Aggressive Growth held
>70 stocks; each of the top six holdings accounted for between 4 percent and
>7 percent of the fund's assets.
> Aggressive Growth was even more concentrated, at 54 stocks. Its No. 1
>holding, a cosmetics and medical technology concern called Chromatics Color
>Science International, accounted for almost 13 percent of the fund's
assets.
>That's staggering, given that a top holding in a fund typically accounts
for
>2 percent to 3 percent of assets.
> Dreyfus is making a big bet on Chromatics Color Science, a company that
>was
>brought public in 1993 by Investors Associates, a brokerage firm that
closed
>last year after a number of state securities regulators revoked its
license.
>Chromatics Color Science closed at $10.75 on Friday , down from $17.25 in
>March. Dreyfus owned 1.5 million shares as of March, more than 10 percent
of
>the shares outstanding.
> The bet on Chromatics is not the only big gamble fund holders have made.
>Almost 30 percent of the assets in Premier Aggressive Growth are stocks of
>obscure companies in which Dreyfus owns more than 5 percent of the shares
>outstanding. In the Aggressive Growth fund, 67 percent of the assets are
>stocks of companies in which Dreyfus owns more than 5 percent of shares.
> For example, in March, Dreyfus owned 23 percent of Atlantic
>Pharmaceuticals, a development-stage biotechnology company that closed at
>$5.75 on Friday, has no sales and lost $14 million since 1994. Dreyfus also
>owned 16.4 percent of Oncormed Inc., another money-losing biotechnology
>concern, that finished the week at $3.125 a share. Then there's Advanced
>Photonix, which says it manufactures ''proprietary solid-state large-area
>avalanche photodiodes. '' Some 14 percent of the stock, now at 87.5 cents a
>share, was owned by Dreyfus as of March.
> This concentration in illiquid stocks is fine when the fund manager is
>buying. As the buying wave rises, so does the stock's price. This in turn
>raises the fund's net asset value, making the bet look smart.
> But when the buying dries up, trouble begins. If the stock does not have
>positive earnings or other good news to support it, the price begins to
>flag. The bigger the position, the harder it is to get out. Which is
>precisely the predicament that LaRocco finds himself in at Dreyfus.
> Jon Hale, an equity fund analyst at Morningstar who follows Dreyfus
>funds,
>said: ''This portfolio is not something you can change that quickly. He
will
>rotate as he can out of most of the micro-cap stuff as the market lets
>him.''
> LaRocco has two choices. He can unload the positions he inherited en
>masse
>and start fresh. Or he can hope that a surge in investor ardor for
micro-cap
>stocks will allow him to sell his positions piecemeal without scorching the
>market. He has already started to sell some. This may explain why Premier
>Aggressive Growth is down 13 percent since early April, when LaRocco took
>over, and Aggressive Growth has lost 15 percent. ''The sooner these funds
>have restructured their portfolios,'' Hale said, ''the better their
>risk-return profile will be.''
> Of course, if the funds sell many stocks at a loss, any gains going
>forward
>under their new manager may be offset. That is the only silver lining to
the
>liquidity cloud hanging over these mutual funds. |
