Mutual Funds - General Discussion

» SteveT - Having the Last Laugh

By JACK WILLOUGHBY

AT 81, MARTY WHITMAN SHOWS NO SIGNS of slowing down. And why should he when he's at the top of his game? He's also got lots of wisdom to impart to B-school students steeped in the shibboleths of modern portfolio theory, which he contradicts with his outsized returns from value investing -- and his generous charitable contributions. Read and learn a few things from the master.

You say investors have been going through an information revolution when it comes to valuing companies. How so?

Now, an outsider who is a buy-and-hold investor trained in fundamental analysis can know an awful lot about an awful lot of companies just by relying on the public record. Graham and Dodd never had the benefit of that and most theoretical academics were oblivious to it. Really, the disclosure situation has become so good today that when we're wrong in our analysis, we have no one to blame but ourselves.

One of the major points where you differ with portfolio theorists is the value of diversification to the long-term investor. What's the problem?

Diversification is only a poor surrogate for knowledge, control and price consciousness. Since we are not control investors, we need a modicum of diversification, but far from that contemplated by portfolio theory and its offshoots.

Isn't it ironic that your former teaching assistant at Yale would revitalize Japan's Long Term Credit Bank after you were wiped out? What was the difference?

He did it the right way -- by negotiating with the government and bringing in new management. I did it the wrong way -- I just bought stock.

A Whitman Sampler

AT 81, MARTY WHITMAN HAS REACHED THE POINT where he can appreciate the ironies of life. These days, he gets to enjoy his time on the tennis court -- but he's scored his biggest points in bankruptcy court.

Whitman's legendary investment wins also have generated vast wealth for himself and his investors. And that's afforded him the luxury of being able to choose to walk to work in a polo shirt. But his shirt doesn't sport the logo of a polo player but of a business school adorned with Whitman's name. The further irony is that the accepted orthodoxy taught at B-schools says that what he has done so well and for so long -- value investing -- is an impossibility.

Not that that bothers the self-effacing Whitman. "See what a multi-million-dollar donation can get you?" he says of the money that seeded the Martin J. Whitman School of Management at Syracuse University. Not bad for the son of Polish immigrants who grew up on the Grand Concourse, then the Park Avenue of The Bronx. Whitman says he got the idea for the bequest after watching his longtime associate, Gene Isenberg, 75, chairman of Nabors Industries, garner similar laurels for himself with the University of Massachusetts.

Whitman's at that stage in life when a man starts thinking of what he leaves behind -- his legacy. Three years ago he sold majority control of Third Avenue Asset Management, with assets of $6.8 billion, to Affiliated Managers Group, based in Prides Crossing, Mass., for an undisclosed price. In so doing he signed a five-year agreement to stay on; his younger associates signed for 10 years.

That doesn't mean Whitman plans to retire anytime soon. "What would I do?" he asks, the same response given by the growing roster of vigorous septuagenarians and octogenarians who remain active in their businesses. Why sell? "I did it to make my grandchildren rich. None of my kids seem to take the same interest in money management as I do. We also had to keep our talent by giving them the proper incentives. My colleagues do all the work. I still pull the trigger on the Third Avenue Value fund."

The flagship of the operation, Third Avenue Value, accounts for $6.3 billion in assets. Whitman himself has almost $78 million in the main fund, with more in the three other funds and hedge-fund accounts. He and his wife, Lois, are active givers to human-rights causes, with Lois often taking an active role with her charities.

Over the years, Whitman has become the paterfamilias of value investing in New York, mentoring bright students from Syracuse and Yale Universities, nudging promising managers, fostering talent within his Third Avenue firm, and giving advice to powerful policymakers -- whether they like it or not. So committed is he to his task of managing the big value fund that the personalized license plate for his Toyota Prius reads "TAVFX," the ticker symbol for the Third Avenue Value Fund.

"He's the first guy I call to get advice outside of my office -- the most unassuming rich person you'd ever meet," says Robert Morgenthau, an equally legendary contemporary who also shows no sign of slowing down. "He's public spirited. Back in the early stages of the BCCI case, he gave us a lot of help pro bono," says the 86-year-old Manhattan District Attorney, a friend and investor who consults Whitman on the phone and for lunch. "He reads balance sheets the way that some of us read the sports section of a newspaper."

Warren Buffett may have popularized and exemplified the teachings of his Columbia University professor Ben Graham, co-founder of the value school of investing along with David Dodd, his co-author of Security Analysis, the bible of value investors to this day. But Whitman is every bit as important for having taken Graham and Dodd a step or two further. Says Stan Garstka, Deputy Dean of the Yale School of Management, and a former director of Danielson Holdings: "A lot of people talk about value investing. Marty is one of the few people who actually does it."

According to Whitman, fundamental analysis has received only lip service from academia, which favors scientific theories, including the Efficient Market Hypothesis embodied in modern portfolio theory.

To Whitman, those notions have little practical value for the long-term investor. Folks may talk about Graham and Dodd, but surprisingly "few people seem to have actually read the early editions of Security Analysis or The Intelligent Investor," Whitman told Columbia Business School back in 1997. He still feels the same way today.

Whitman believes the information revolution has eclipsed large parts of Graham and Dodd's work. The weakness, according to him, comes in the gentlemanly way they handled credit analysis. They do just enough to assure the public company avoids default, concerning themselves primarily with valuing the stream of earnings and revenue thrown off by public companies.

Whitman draws his ideas from the scrum of bankruptcy court, where companies get retooled under the intense pressure of rival creditor interests. "My fundamental credit analysis involves the assumption that a money default will occur, and then gauging how the security will work out either in an out-of-court restructuring or a Chapter 11," says Whitman. This requires intensive research because in workouts, both debt covenants and levels of seniority become crucial to understanding how value can be garnered and traded as the company moves toward resolution.

Whitman concentrates especially hard on the balance sheet of a company, which means de-emphasizing the income statement and contradicting the market's obsessive compulsion with predicting earnings. Explains Gerald Pinkerton, a former Third Avenue employee who now runs a managed-account business called NBC Securities in Birmingham, Ala.: "Most of the companies in which Marty invests have serious short-term problems, and thus have their earnings impaired. The challenge is to properly value the quality of the assets."

According to Whitman, few, if any, major public companies go five years without some major restructuring event that involves resource conversion. It could be a buyback, spinoff, writedown or merger.

Naturally Whitman buys into out-of-favor sectors. The discount he aims for is 50 cents on the private dollar. The purchase price is where he builds in the kind of margin of safety that allows him to sleep easy.

But such a strategy often means buying when the market is selling. When the value of Armonk, N.Y.-based MBIA (ticker: MBI) dropped to the mid- 50s on news it was under investigation by the Securities and Exchange Commission and the New York Attorney General over alleged reinsurance deals done to offset losses, Whitman turned into a buyer. That, despite his running against a rising tide of headline risk, capped by a Barron's article outlining further investigations of impropriety ("MBIA's 'Black Hole'1," Oct. 3).

"Having Marty as an owner puts management in the position of being able to deliver solid results over extended periods of time, without having to fret over normal short-term fluctuations in business conditions or reported earnings," says Jay Brown, chief executive officer of MBIA. "Marty's brutally honest observations are a good reminder to all of us that the truth is obvious if we just keep our eyes and minds open."

When it comes to the question of value, Whitman takes no prisoners. For example, in his latest shareholder report he defends selling a swath of Sears Holdings common (SHLD) because the stock appears to be fully valued. Wrote Whitman: Sears Holdings "has to succeed in a big way in order to justify these prices." Third Avenue had acquired a stake in Sears Holding as the result of his holdings of Kmart debt purchased at deep discounts, which was exchanged for stock after the discounter emerged from bankruptcy. Sears' acquisition of Kmart made for another classic Whitman win.

Whitman buys these value-laden companies with strong business franchises and stronger management, and bets that short-term issues will soon fade and the basic value propositions will eventually shine through. Just don't ask him when. Says Whitman: "When may be important for individual securities. But it isn't for portfolios. And Third Avenue runs portfolios."

Whitman built his expertise from the ground up -- not from the top down, as promoted by many of the theories that now dominate the business-school curricula. These theories assume uninterrupted liquidity and functioning markets for all assets -- a questionable proposition at best, he says.

"The guy is a real stickler for detail, he really does his homework," says Tim Collins, founder of Ripplewood, one of the most successful private-equity investors in the Japanese market, and a former teaching assistant. "Marty has to do his homework because unlike a private-equity investor, he doesn't have the ability to change management if they make a mistake. He's had a profound impact on the attention I pay to details."

Whitman has earned the respect of the business community for both his longevity and willingness to share his knowledge. For 33 years, he has taught an investment seminar at Yale University and, more recently, at Syracuse via teleconference. Morgenthau tells the story of how astonished the Yalies were when this balding guy in a sweatshirt, who was fiddling with the radiators and was assumed to be the janitor, suddenly strode to the podium and started lecturing them about investing.

"He's totally unassuming," says Yale's Garstka. "He spends at least half of the seminar refuting the top-down theories propounded in most business schools."

A lot of Whitman's success comes from voracious reading and scholarship. Says Garstka: "These days, the more disclosure we have, the less people read. Marty can read through reams of material and find the two or three key things that need to be analyzed in detail."

One of the keys to Whitman's success has been an ability to sort out the community of interest, and the conflicts of interest, in any given crisis situation. By knowing these he can find allies in a corporate bankruptcy or workout, while steering away from the hidden shoals.

Many of the big positions in his Third Avenue Value Fund came only after years of patient investing. One of his earliest victories was Nabors Industries (ticker NBR), now the world's largest land-drilling company. Whitman started investing back in the mid-'Eighties when the over-leveraged Anglo Energy emerged from Chapter 11, converting the bank debt into stock of the new workout reborn as Nabors. Whitman correctly surmised that a debt-free Nabors could take advantage of the over-indebted competition by picking up rigs for pennies on the dollar.

Whitman's investment style is more reminiscent of Mark Twain than any modern investment theorist. "Put all your eggs in one basket and watch that basket," Twain advised.

Third Avenue Value, heavy with a few concentrated holdings, exemplifies the Twain philosophy. The fund has 132 issues, with 40% of its assets in the top 10 issues and an annual turnover rate of 8%. By contrast, the average mid-cap blend fund tracked by Morningstar contains 234 holdings, with 31% of its assets concentrated in the top 10 issues, and an average turnover rate of 90%.

HIS METHODS HAVE PRODUCED exemplary returns. Whitman's keystone Third Avenue Value posted a one-year total return of 22.67%, three-year average annual returns of 26.38% and a five-year average return of 11.56%, all through Nov. 3, according to Morningstar, the Chicago-based investment adviser and fund tracker. In each case that's better than almost 90% of the funds in the mid-cap blend category.

An in-house trading operation presents one key advantage. Ever since Whitman took over the closed-end Equity Strategies in 1984, predecessor to the Third Avenue Value fund, he has run a large portion of transactions through his wholly-owned brokerage firm, M. J. Whitman. For example, in the most recent reporting period he ran almost 70% of his agency brokerage through his firm.

Whitman's brokers execute trades in everything from the most liquid stocks to the most illiquid slivers of bank debt of the bankrupt Collins & Aikman, an auto supplier. Though that company's problems appear worse than initially expected, "I think the odds favor Third Avenue becoming the dominant common stockholder" in the reorganization, says Whitman. Previous messy situations with Nabors, Danielson Holding and, as noted, Kmart have brought big gains.

They also execute trades in many foreign jurisdictions, such as Japan, Hong Kong and Europe. Last year, Whitman ranked as one of the top brokerage operations on Wall Street for execution. Says Whitman: "We like to do our own trading because we're constantly dealing with thinly traded stocks that are like Roach Motels -- you can buy them but you can never sell."

The real issue is control. Keen attention to the price he pays for securities is a hallmark of Whitman's style. Buying low increases the odds he can make money whenever he comes to sell.

Value investor James C. Roumell, founder of Roumell Asset Management based in Bethesda, Md., remembers the strict price parameters Whitman gave him for his first order in June 1997, when Roumell was a broker. Recalls Roumell: "He buys at his price and if it gets away, he just goes hunting elsewhere."

The hunt for deep value has led Whitman into foreign markets. Now almost 40% of Third Avenue's assets lie in foreign jurisdictions, mainly subject to English corporate laws, which carry few if any of the stockholder protections present in the American system.

He notes that asset manager Tweedy Brown would not have been able to oust Conrad Black from Hollinger if the activities were done solely in domains subject to the English system. Under pressure from U.S. shareholders, the Toronto-based publishing company forced former top executives Conrad Black and David Radler to step down nearly two years ago amid allegations that they siphoned tens of millions of dollars from the company, often through entities they control in Canada, where they both live.

Whitman's worst mistake so far came when he lost more than $46 million buying 50 million shares of Long Term Credit Bank. The Japanese government caused the losses by allowing Long Term Credit Bank to forgive loans to affiliates, thereby wiping him out.

Whitman took his licks and kept investing, buying a stake in a Brussels-based public venture fund, RHJ International, handled by his former teaching assistant, Collins. RHJ owns a handful of undervalued Japanese electronics and entertainment ventures. Collins, via another private equity fund, Ripplewood, finished what his former mentor failed to accomplish. He took over the Long Term Credit bank, inserted Western-style managers and brought it public as Shinsei Bank, one of 2004's most successful Japanese IPOs.

Unlike most businessmen, Whitman extols the contribution of class-action lawyers, whom he says have kept Wall Street honest by mounting multimillion-dollar lawsuits. This "private police" have done more to protect investors than the SEC, he contends. A long-time friend and expert witness for class-action pioneer Abe Pomerantz, Whitman says he could see the positive intent behind the class action rules -- giving everyone access to the law.

For years prospective clients keep holding out concern over Whitman's advancing age. But Whitman has outlasted many of them already and he intends to be the last value investor standing. Saith the Sage of Syracuse: "Our whole approach is less stressful than anything on Wall Street."

Moreover, Third Avenue is in good hands when Whitman finally steps aside. In recent decades potential investors have sometimes dragged their feet about investing in Third Avenue, concerned about Whitman's age.

Curtis Jensen, 43, became co-chief investment officer some years after distinguishing himself in the Yale seminar. Jensen also manages the Third Avenue Small-Cap Value fund. As Whitman's protégé he's a prime acolyte of the "Buy Right" strategy. "It's that discount that gives us our anchor to windward," providing shelter against raging market storms, he says. Meanwhile, Whitman remains firmly at the helm.

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-- posted by SteveT

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» SteveT - Will Investors be Wild About Harry?

By ERIC J. SAVITZ


NOW WE GET TO SEE HOW GOOD Harry Lange really is.

Fidelity Investments last week announced a wholesale shuffling, putting nine equity-fund managers in new gigs and shifting responsibility for a dozen funds with more than $100 billion in combined assets. The big news: Lange's coronation as the new chief of $52 billion Fidelity Magellan, replacing the "retiring" Bob Stansky, who's taken much of the blame for its weak performance in recent years. (Stansky said he might find other things to do at Fidelity, or maybe not.) Lange comes to Magellan (ticker: FMAGX) after a nine-year run at Fidelity Capital Appreciation (FDCAX), where he had impressive returns.

Lange and Stansky started their previous jobs simultaneously in 1996. Jim Lowell, editor of the Fidelity Investor newsletter, says Lange produced a cumulative return of 141.5% at Capital Appreciation, versus 88.9% for Magellan. Cap Appreciation beat Magellan in the one, three, five and 10 years through Sept. 30. To be fair, Capital Appreciation has just over $7 billion in assets, less than a seventh what Magellan has. But the funds share a benchmark -- the S&P 500. And Lange's investors made a lot more money.

In fact, Stansky has the dubious distinction of being the sole manager in Magellan's storied history to leave with a smaller asset base than the fund had when he arrived. Magellan, once the biggest mutual fund -- earlier in Stansky's stint, it hit $110 billion in assets -- is now far from the largest, American Funds' $117 billion Growth Fund of America (AGTHX). It's not even Fidelity's No. 1 stock fund now, having been passed by Contrafund.

In a conference call Monday, Lange said he'd broaden Magellan's horizons to include more small- and mid-cap stocks. That brought huzzahs from the peanut gallery: Lowell raised his rating on the fund to a Buy from a Sell, and rival newsletter Fidelity Insight boosted its rating to Hold from OK To Sell.

Clearly, Lange has been far more aggressive than Stansky. On Sept. 30, Magellan had 207 stocks in its portfolio, with 25.5% of assets in the top 10, versus 172 stocks, with 27.6% in the top 10, for Capital Appreciation. But that's where the similarities end. About 85% of Magellan's assets are in stocks with market values north of $20 billion -- and 65% of its assets are in $50 billion-plus mega-caps.

Magellan's top holdings are General Electric (GE), Microsoft (MSFT) and Exxon Mobil (XOM) -- the three largest-capitalization U.S. companies. Capital Appreciation has just a quarter of its assets in the $50 billion-plus category, with 40% in stocks valued at $2 billion to $10 billion. (Magellan's weighting in that category is just 4.6%.) Cap Appreciation's top holdings are Genentech (DNA), Nokia (NOK) and Teradyne (TER), the last of which is a semiconductor-equipment outfit with a $2.7 billion cap. The smallest stock in Magellan's top 10: Lowe's (LOW), at $47 billion.

Magellan has virtually no overseas exposure; Cap Appreciation has almost 20% of its assets abroad, including 10.5% in Japan. (Yahoo! Japan is its 10th largest holding.) Magellan favors stocks trading, on average, at 15.5 times one-year forward earnings, versus 18.8 times for Cap Appreciation. But companies in Capital Appreciation's portfolio enjoyed 18.8% one-year sales growth, versus 14.1% for Magellan's. On the other hand, Magellan has a higher average yield -- 1.5% to 0.7% -- and a lower cash-flow multiple -- 11.8 times versus 14.4.

In the conference call, Lange said he has a flexible investment style, and will buy big stocks and small stocks, growth plays and value names.

Lange, a former engineer, was once Fidelity's chief technology analyst. Cap Appreciation had a 38% tech weighting, about double Magellan's. In contrast, Lange's old fund had just a 1.5% weighting in consumer staples, compared with 7.7% for Magellan, and a scant 5.9% in financials, versus 17.7% for Magellan. The sector has a 20% weighting in the S&P 500. In anticipation of a turnover of Magellan's portfolio, some investors last week loaded up on Capital Appreciation's big bets: as of the close Wednesday, eight of its 10 top holdings had climbed from their previous Friday close, with Yahoo! Japan about flat, and Symantec (SYMC) off on weak earnings. Six stocks -- Genentech (DNA), Nokia (NOK), Monster Worldwide (MNST), Univision (UVN), UnitedHealth (UNH) and KLA Tencor (KLAC) -- rose 4.5% to 10.4% in the three days after Fidelity announced the news.

Of course, Lange can't simply invest as he did at Capital Appreciation. For example, on July 31, Lange's old fund owned 6.83% of Teradyne, which accounted for 3% of its assets. It's pretty safe to bet that Magellan won't take a 3% position in Teradyne: That would require a $1.6 billion position, which would be a 61% stake. Lange isn't going to have much trouble trimming Magellan's position in a highly liquid stock like General Electric. (At July 31, Magellan owned $2.3 billion worth of GE; Cap Appreciation, none.) The hard part will be bulking up on smaller stocks. At $52 billion, a 0.5% position in Magellan would be $260 million. That would be at least 5% of any stock with a market value of $5.2 billion or less. With $52 billion to invest, it's a lot harder to maneuver at Magellan than at Capital Appreciation -- which is not to say it can't be done. Will Danoff has steered Fidelity Contrafund (FCNTX) to an average return of 11.8% over the past 10 years. Danoff, in part, relies on much broader diversification: Contrafund owns more than 530 stocks, while trading far more actively. Annual turnover at Magellan has lately been running just 6%, versus 58% at Contrafund, and 72% at Cap Appreciation.

Magellan almost certainly will become much more aggressive. In the call, Lange said he thought the economy would "muddle through all right," and that "the market's very attractive right now," with "lots of stocks to buy." He's going to need all the ideas he can get to reproduce his success at Capital Appreciation at far larger Magellan.

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-- posted by SteveT

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» SteveT - Bill Miller's Race Against the Clock

for jbking


By LAWRENCE C. STRAUSS
LEGG MASON VALUE TRUST, RUN BY LONGTIME manager Bill Miller, has beaten the Standard & Poor's 500 Index in each of the past 14 years. For that streak to continue, the fund needs to make its move soon.

Through Thursday, the total return from the fund (ticker: LMVTX) was 1.82%, trailing the S&P by 1.24 percentage points.

This is a familiar position for Miller and his staff. Trailing the benchmark late in 2004, the fund managed to best it by the very end, notching a 12% return. The S&P gained 10.9%.

Miller, who looks for undervalued stocks in a number of sectors, likes to make concentrated bets and to hold his positions for long stretches. As of Sept. 30, the fund's top 10 holdings accounted for 46.2% of the $18 billion fund. Last year, Sprint Nextel (S) had a nice fourth-quarter run, boosting the fund's returns.

So far in 2005, it's been a mixed bag for Value Trust, with many of its winners offset by shares that have lost ground.

Again through Thursday, the fund's largest holding, Sprint Nextel, was up almost 1% this year. Health insurer UnitedHealth Group (UNH) was up 35%, while Tyco (TYC) was off 26%. Longtime holding Amazon.com (AMZN) was down 5%. Google (GOOG) was up more than 100%, but eBay was off 26%. Another holding, IAC/InterActiveCorp (IACI), was down 11%.

Another impediment to the fund's performance has been its aversion to energy stocks.

Russel Kinnel, director of fund research at Morningstar, notes that if the fund fails to continue its streak, Quaker Strategic Growth (QUAGX) likely would become the fund with longest stretch of calendar years beating the benchmark. That fund, with assets of about $740 million and helmed by Manu Daftary since 1996, has beaten the S&P in every calendar year since 1998, and it's in good shape to continue the run. Late last week, its year-to-date return was 8.14%, 5.08 percentage points ahead of the S&P.

In selecting stocks, Daftary uses a combination of earnings momentum and growth-at-a-reasonable price, according to Morningstar analyst Kerry O'Boyle. Daftary's strategy has worked well. The fund ranks in the top 10% of its Morningstar peer group based on one-, three- and five-year returns. Its biggest holdings include General Dynamics (GD) and Coventry Health Care (CVH).

Another portfolio, AIM Leisure Fund (FLISX), has beaten the S&P 500 in each of the past seven calendar years. But, having lost nearly 4% this year, it has a long way to go to beat the benchmark by Dec. 31. Through Thursday, it trailed the S&P 500 by nearly seven percentage points.

Seventeen funds have beaten the S&P in each of the past six calendar years, according to Morningstar. But the odds that they'll match Value Trust's record are slim.

Booming Sector ETFs

Exchange-traded funds focusing on individual sectors are gaining popularity. "More investors -- both professional and individual -- are becoming increasingly aware of the potential trading strategies associated with sector ETFs," says a recent report by Lipper, the fund-tracking arm of Reuters.

It's not just trading strategies that make these funds attractive. They typically sport lower fees than actively managed sector funds do. Sector exchange-traded funds have an asset-weighted expense ratio of 0.39%, compared with 1.25% for open-end sector funds, according to Lipper.

In 2004, sector ETFs had net inflows of nearly $8 billion, up from $3.4 billion a year earlier, according to Lipper. Among the hottest sector ETFs: iShares MSCI Japan (EWJ), which attracted $1.6 billion in the first nine months of the year. Through the first three quarters of 2005, all sector ETFs took in nearly $6.8 billion, putting them on track to beat last year's haul.

So are sector ETFs a threat to actively managed sector funds? Bob Straus, chief investment officer at ICON Advisers, a Greenwood Village, Colo., fund shop specializing in actively managed sector funds, doesn't think so. He says active management is the way to go for investors seeking outperformance. "We view ETFs more as a complement to an overall investment portfolio, rather than a replacement for actively managed funds," Straus says.

Exchange-traded funds definitely appeal to traders; investors can buy, sell or short ETFs throughout the trading day. "For many investors, they have become the preferred choice for getting sector exposure," says Deborah Fuhr, who covers ETFs globally for Morgan Stanley.

Patrick O'Connor, a senior portfolio manager at Barclay Global Investors' equity index portfolio management group, estimates that about 50% of the new money going into sector ETFs is from retail investors, mainly through financial advisers. But those investors tend to have more of a long-term focus, he says, and a lot of the trading comes from institutional clients.

The Index Trap

Index funds could hardly be simpler: Investors put their money into a basket of stocks, thereby reducing risk, and the fees are usually lower than those charged by an actively managed fund.

But investors aren't always savvy in deciding when to buy or sell these funds, a Morningstar analyst says. "They often purchase investments after periods of strong performance and sell them belatedly after periods of weak performance," notes Sonya Morris.

In examining index funds, Morris looked at "dollar-weighted returns'' -- returns based on how much was in a fund at any specific time. More dollars invested in a fund at a particular time meant a bigger weighting, and vice versa. Looking at returns in this way can head off misreads of a fund's performance.

As of Sept. 30, the official 10-year annual return for the Vanguard 500 Fund (VFIAX ) was 9.42%, but the dollar-weighted return was 6.72%, a difference of 2.70 percentage points a year for 10 years. "That's not chump change," notes Morris. "Over a 10-year period, that amounts to $5,400."

For some funds, the gap between official and dollar-weighted returns even exceeded 2.70 percentage points. JP Morgan Equity Index (HLEIX) had an official 10-year annual return of 9.16%, versus a dollar-weighted performance of 3.46%.

Morris points out that many institutional index funds have a much lower discrepancy between official returns and dollar-weighted numbers, owing to more stable asset bases.

Index funds do make a lot of sense, Morris says. But even with index funds, the timing of the investment plays a crucial role in determining returns.

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-- posted by SteveT

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» SteveT - Why the U.S. Is No Bargain

Interview with Charles de Vaulx
Manager, First Eagle Funds


By SANDRA WARD

FEW INVESTORS CAN LAY CLAIM to the record of consistency and quality that de Vaulx has made his hallmark at the funds he manages for Arnhold & S. Bleichroeder. A long-practiced value discipline, combined with an intensive research process, elevates these funds to a level of superiority not easily found among the scrum of investment choices today. The incomparable Jean-Marie Eveillard, who retired last year, established the model, and now de Vaulx, who worked alongside Eveillard for almost 19 years, is proving to be, well, equally incomparable. His flagship, First Eagle Global, is up about 13% this year; since its start in the 'Seventies, the fund has advanced 15.52% annually, on average. The overseas fund has gained 14.42% this year and delivered average annual returns of about 14.16% since its start about 12 years ago. And on it goes. With around $30 billion in assets spread among different funds and accounts, de Vaulx's challenge is clear. We give you his account of how he's meeting the challenge.

Barron's: One of the few sectors that worked for investors this year, including yourself, was energy. What's your outlook on energy stocks?

De Vaulx: Late this summer, I sold some of our energy holdings. I either sold positions entirely, as was the case with Tenaris [ticker: TS], a Luxembourg-based company, though its origins are in Argentina. Tenaris is one of the biggest manufacturers worldwide of the seamless steel tubes used for exploration and production and pipelines for oil and gas. Tenaris was not leveraged financially and the stock was as cheap as $20 in 2003. Yet it reached $140 in late September, and we got out of our position late in the third quarter. It still is a great company, and I would love to buy it back in the future, but it just got too pricey for us. I also sold a lot of our EnCana [ECA], which is largely a natural-gas company, with interests in Canada and to some extent in the U.S.

What changed there for you?

The valuation. When you look at a chart of EnCana, the stock was below $20 a share in 2003, and it reached almost $58 or so in late September. I sold some of the PetroChina [PTR], which we bought at the same time Warren Buffett was buying those same shares three years ago. But I still like the energy sector. In a lot of exploration and production companies what is intriguing is many of them trade at a significant discount to the spot price of oil and gas and also the futures price. That's the case with Burlington Resources [BR], for instance. The stock is trading at $77. At $77, the price of natural gas at only $7 to $7.50 per mcf [thousand cubic feet] is discounted, and is still quite a bit lower than the actual price and the futures price. I think the discount exists because it hasn't been arbitraged away yet. I wouldn't be surprised to see some E&P companies being acquired by private-equity people, who would then go out and hedge forward and lock in the price of the underlying commodity as far out as possible. Yet we have not seen that, so far.

No. Maybe the market is also telling us that the huge increase in production costs in energy will keep rising. The price of oil rigs and so forth has gone through the roof. That's another reason I sold so much EnCana this summer. One of the beauties of Burlington Resources is they have very low production costs. And right now, two of my analysts are doing work on the energy-service side to see if the drillers are able to increase prices further and whether more exploration money is being allocated to the oil-services companies.

When you sold or pared back energy, did you just raise cash levels?

Yes. Except for some names such as Toyota [TM], which we were lucky to buy in May and June, by and large it is becoming more and more difficult for us to find names overseas, even though foreign markets remain cheaper than the U.S. market. Based on a price-to-cash flow basis, Europe and Asia are around 9½ times, versus 12½ times, roughly, U.S. At 12½ times, the U.S. is not cheap by historical measures. We are very much valuation-driven, as opposed to outlook-driven. Not that the outlook seems very rosy, by the way, but it is more because of valuation. Five years ago, the beauty was we had a bifurcated, two-tier market with very expensive growth stocks and tech stocks on the one hand and quite a few cheap small and mid-cap value stocks on the other. That gap has disappeared, so everything looks quite expensive in the U.S.

Anything else worry you about U.S. stocks?

One of the first things I read in Barron's is the column that shows insider transactions. Typically, there are 20 companies listed with the heaviest insider buying and 20 companies with the heaviest insider selling. In the past 12 months, insider selling has dwarfed insider buying at those 20 companies by a ratio of 20-to-1. When I look at the kinds of companies that are doing insider selling, it is pretty much across the board, and that's not encouraging.

Also, the P/Es most people talk about for companies are typically understated. Most companies do not yet expense stock options and have pension liabilities that are grossly understated. Most U.S. corporations assume their pension plans will have a return of 8½%. When you know that typically pension plans are 60% equities and 40% bonds, an assumption of 8½% is criminal.

Then, within the S&P 500, up to 40% -- if not more -- of its earnings comes from the financial-services sector: banking, insurance, brokerage firms and so forth. Those earnings may very well be peak earnings, because we have had 23 years of declining interest rates helping that sector. The outlook for earnings from the financial-services sector is not a good one. A big chunk of the S&P's earnings may be peaking, and even if 15 times was the real market multiple -- which we think it is not, but is closer to 20 times if earnings were properly accounted for -- then we probably are talking about many sectors that are experiencing peak earnings. Also, up to now, foreigners have been willing to finance America's household consumption by buying U.S. dollar assets: stocks, bonds and Treasury bonds. Other worries would include huge budget deficits and a record-high trade deficit. If the housing bubble is not sustainable, there will be a major correction in real-estate prices over the next three to five years, and, as a result, consumption by Americans will be cut back significantly and hurt the U.S. economy along with some of the export-oriented countries such as China. That's why we are not sanguine about U.S. stocks in particular.

What about certain sectors?

We see more and more sectors -- I'm thinking of big pharma, for instance, and the media and telephony sectors -- that are in such a state of flux that it is hard to assess who will be the ultimate winner five to 10 to 15 years down the road. If anything, there are many sectors where it seems that the profitability level could be less in 10 years than what it is now because of rising competition. That said, we timidly bought a few media-related companies this year.

Brave of you.

We are doing it in a very modest way because we are aware the landscape is changing. Newspaper publishing ain't what it used to be. We don't believe these properties are worth the 12 to 14 times Ebitda [earnings before interest, taxes, depreciation and amortization] they were worth many years ago. It will be very interesting to see who buys Knight Ridder [KRI] and what multiple is paid.

We bought a tiny amount of Dow Jones [DJ] a few months ago. Considering the franchise it has, its low margin of profitability, intuitively, does not make sense. If you compare its margins with all other newspaper companies, it is like night and day. I cannot put my finger on exactly what is wrong with Dow Jones, but something tells me it would be better managed in different hands. One problem with Dow Jones is that it is financial-services related, and so if there were to be a bear market in stocks or bonds in the next three to five years, that would not help. Typically, we are not among those value investors that insist on a catalyst, but in this case we believe that, at some point, some members of the family that controls Dow Jones will lose their patience.

Why did you buy Clear Channel?

It is a small position for us. We are not betting the farm. We are aware that satellite radio is gaining market share, but in the case of Clear Channel [CCU] we believe their outdoor-advertising business is very valuable. That was highlighted a few weeks ago, when the outdoor division was offered to the public. They sold 10% to the public, and it trades at the same multiple we had used to value the division. In the radio business, we applaud the initiatives of a year ago to reduce significantly the amount of advertising per hour, to make the experience of listening to radio more pleasant. This year's earnings are taking a hit because there is so much less advertising because of its "less is more" campaign. We think margins and earnings should start to stabilize. Using a pretty modest multiple for the radio business and adding the value of the outdoor division, we come up with a value for Clear Channel in the high 30s. It is not the bargain of the century. The media name we are the keenest on is Liberty Media [L], and we have been adding to our holdings recently.

You've owned it quite a while.

We have. People have had the impression the stock has done nothing over the past two to three years. Looking at the numbers since the middle of 2002, if you factor in the spin-out of the Liberty Global and Discovery holdings, the stock has gone up more than 30%. It has not been as bad as people think it has. More to the point, the bulk of the value within Liberty Media lies with QVC. And QVC we view, first and foremost, not as a media asset, but as a retailer. It is much bigger than its No. 2 competitor, Home Shopping Network. As a result of being so much bigger, it is a company that has much higher margins than its competitors. If we apply a very modest multiple to QVC, we come up with an intrinsic value for Liberty Media of about $11.50, and the stock is at 7.80. Whatever is happening on the media landscape should not affect QVC as a business. Now some people find Liberty's John Malone to be too creative. You know, recently he announced a deal to create a tracking stock for QVC.

Tracking stocks? I thought they were a thing of the past.

Yes, but he, for tax reasons, has to structure it as a tracking stock. Once the tax issues are resolved, John Malone has made it clear it will be spun out as a regular common stock.

Anything else you can recommend?

Oddly enough, in the Global Fund, I've been able to add to a few U.S. holdings. This summer, I added to Berkshire Hathaway [BRK.A, BRK.B]. I was adding to Costco [COST] as long as the stock traded below $43. I don't want to chase it here. Buying Microsoft [MSFT] at 25 to 26 and having a 1% or 2% position is something we are comfortable with. One angle that intrigues us with Microsoft is they spend billions in research and development, more than 15% of sales. Yet one of the mysteries of disclosure requirements in the U.S. is that the company is under no obligation to explain how the money is spent and on what projects. People always talk about how bad disclosure is overseas. Well, if Microsoft doesn't have to tell much about the 15% of sales it spends on R&D, I'm not sure that is good disclosure, either. Anyway, our sense is that, in the past 10 years, Microsoft has not come up with much in the way of products after spending so much money. We think either they will start coming up with something or, if not, we would not be surprised if half of the R&D budget were cut. That still wouldn't impair Microsoft's current business. Ebidta margins would be quite a bit higher than their current levels. At the current share price, we are paying roughly 13 times Ebitda for the company, and if R&D could be cut or, preferably, if R&D could yield better results, we are paying just slightly over 10 times for the parent business, which is generating more than a billion dollars per month in free cash flow. In the meantime, the company is working for us by using free cash flow to buy back its own shares.

What are your thoughts on gold?

By and large, gold stocks are expensive. And many so-called gold companies aren't pure plays on gold, but have interests in other base metals. In the 'Thirties, the Depression era, gold and gold-mining stocks did well, but base metals did not do well. If there's some sort of major recession in the U.S. and China, or some sort of systemic financial crisis, I am not sure I want to hold gold-mining companies, which have a fair amount of revenue coming from byproducts such as copper, lead and zinc. For our big funds, we have about a 5½% exposure related to gold and gold-related securities, but more than 50% of that exposure is to gold itself or gold-linked notes, which provide leverage to gold. We have gold notes, custom-made notes we bought through HSBC and UBS, that are 1½-to-2 leveraged to the price of gold. We try to be agnostic, and we view gold as insurance and as a hedge against extreme outcomes. In other words, if the sky stays blue, we will not make money, and, in fact, we will lose money with our 5½% position in gold.

What is your favorite investment now?

There is nothing. When I look at the top 10 holdings of the fund, there are pretty good companies, businesses with a scope for some intrinsic value to grow over time, companies that have superb balance sheets so they are not about to go bankrupt, but there is nothing dirt-cheap that we are totally excited about.

We have been buying Johnson & Johnson [JNJ] in the past few months in the U.S. Is it your typical value stock? No. But the stock trades at roughly 12 times operating income for next year and yet it is a company with a superb balance sheet. The medical-devices business is as big, or slightly bigger, than the pharmaceutical business. On the pharmaceutical side, we've tried to look at other names such as Pfizer [PFE] and so forth, but we've found the pipelines were not very inspiring. A lot of these companies' drugs were going off patent in the next few years. In the case of Johnson & Johnson, the pipeline doesn't look that great, but it looks OK. For Johnson & Johnson, we are factoring in the fact that next year the sales and earnings on the pharmaceutical side will be down from this year, but by and large they have fewer drugs going off patent next year. The company has been so much better- managed than so many of the other pharmaceutical companies.

Going forward, the medical-devices part of the company will surpass the pharmaceutical business. On the consumer side, they have wonderful brands. So we aren't talking about a typical value stock trading at eight times operating income. We are talking about 12 times next year's operating income, with a great balance sheet and top-notch management. It's a cautious way to have exposure to the health-care industry.

What's your view on McDonald's and the pressure it faces from hedge-fund manager Bill Ackman, the subject of our cover story last week, to sell its real estate?

Bill Ackman is helping the company and the investing public understand that McDonald's [MCD] is not a restaurant company. It is first and foremost a very powerful brand. They are also landlords of significant real estate. Having said this, we don't believe the plan he suggested to the company makes sense. We think it is financial engineering. The real-estate value Ackman assumes is inflated, we think, because a lot of the rents McDonald's collects from franchisees are in fact royalties or franchise fees in disguise. It is a superior company and deserves to trade at a much higher multiple than the other companies in the sector. What got McDonald's into trouble a few years ago was that the quality of its food and service deteriorated. And that's what the company should focus on, not financial engineering.

Thanks, Charles.

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http://online.barrons.com/article/SB1134...

-- posted by SteveT

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» SteveT - On the Prowl for Growth

Interview with Robert Hagstrom, Manager,
Legg Mason Growth Trust Primary
By CHRISTOPHER C. WILLIAMS


The Hagstrom Way

TWENTY-ONE YEARS AGO, Robert Hagstrom, while training to be broker at Legg Mason Wood Walker, came across the Berkshire Hathaway annual report -- written, he noticed, "by some guy named Warren Buffett." It ignited an obsession with the legendary investor. Now a top growth-fund manager at Legg Mason, Hagstrom has penned three books about Buffett, including the bestselling The Warren Buffett Way. An advocate of serious sleuthing, he also wrote The Detective and the Investor.

Why write books -- does it help you pick stocks?

I wanted to write to master the understanding of Warren Buffett. When you write about something, you become much more intimate with the knowledge; it becomes more indelible in your mind.

You know both Buffett and Legg Mason's own Bill Miller. What's the main thing you've learned from each?

The commonality is that they both think of, and analyze, stocks as businesses, hold a portfolio of businesses (not just stocks) and think of how businesses create value over time. The only difference is that Bill expanded his circle of competency to include New Economy stocks, such as the Internet. Working with Bill helps me apply Buffett's methods to New Economy franchises.

Are you as good as they are?

It's unlikely I'll be as good as they are. If I can be close to what they are, I'll be in the top 10% in the country. Someone once said to me: "You've done your Ph.D. with Buffett and practicals with Miller. If you don't become the best, shame on you."

Are you close?

I think my track record is moving me in that direction.

WALLFLOWERS NO MORE, large-capitalization growth stocks are finally getting some love from investors. After suffering an annualized loss of 4% over the past five years -- below all other equity categories -- big-cap growth funds have sprinted ahead of almost all other equity classes in the past 13 weeks, and may keep up the pace as the economy keeps rolling along.

One of the funds benefiting from this big-cap rebound is Legg Mason Growth Trust Primary (ticker: LMGTX), which has been able to creep into the black for the year through Dec. 6, after spending much of 2005 in the red. With a 3.55% return, the $700 million large-cap growth offering trails the Standard & Poor's 500 index, but fund manager Robert Hagstrom believes investors are on the "cusp of an exciting period" in large-cap stocks that could ignite a resurgence in his 10-year-old offering. "We think we're deeply undervalued and positioned well for 2006," Hagstrom says.

OPTIMISM IS FALLING like rain on the sun-cracked terrain of large-cap growth, as many market observers expect big-cap growth to extend its roll into the next couple of years. After years of punchless performance, growth stocks are now considered cheaper than value, and investors are favoring dynamic-growth outfits as the economy moves deeper into its current expansion.

If this surge in large-caps helps spark such Hagstrom holdings as Google (GOOG), Yahoo! (YHOO) and Electronic Arts (ERTS), Legg Mason Growth could be one of the most attractive values in fundland. Although the fund's recent performance has been lackluster -- Hagstrom's eschewing of the hot energy sector is partly to blame -- the manager has piloted his fund to the No. 1 ranking among large-cap growth funds for the five-year period ended Dec. 6, with an annualized 8.48% return, according to research firm Morningstar. Hagstrom's three- and 10-year returns of 19.08% and 11.79%, respectively, put the manager ahead of 96% of rivals, and Morningstar rates the fund four stars out of five.

Furthermore, Hagstrom is closing '05 with momentum. The manager, who tries to beat the market by 200 basis points, or two percentage points, a year on average, is trailing the S&P index by 238 basis points, after starting the year 1,000 points behind. The recent uptick in Yahoo! and Amazon.com (AMZN) has helped Legg Mason Growth gain traction, as does Hagstrom's investment in motorcycle maker Harley-Davidson (HDI). Hagstrom hopped aboard Harley a few months ago, when earnings concerns dropped the stock to around 46. It now trades at 52, on a more upbeat sales outlook and a fatter-than-expected share-repurchase program.

Such deft stockpicking burnishes Hagstrom's reputation as one of the savviest big-cap managers in the game. "We think those who can weather the erratic nature of this fund will be rewarded over the long haul," says Morningstar analyst Terence Geenty. Indeed, an investment of $10,000 in Legg Mason Growth at inception in April 1995 would have grown to around $34,000.
Table: Legg Mason Growth Trust: Top 10 Holdings

But the fund, which holds 28 stocks, definitely can be volatile, which is typical of concentrated portfolios. Legg Mason Growth zoomed ahead of other large-cap growth stocks with a 63% gain in '03, only to fall behind rivals and the market the following year, with a 7.5% gain. "We go for alpha," or outsized returns compared with risk, Hagstrom says unapologetically.

THE FUND HAS A RELATIVELY HEFTY expense ratio of 1.87%, as do many Legg Mason funds. But Hagstrom holds stocks for an average of three years, making Legg Mason Growth an attractive, tax-efficient offering. That helps to explain why investors have poured almost $100 million into the fund this year, despite its recent struggles.

The positive fund flow is also a strong vote of confidence in the fund's manager, a noted authority on Warren Buffett. He has literally written the book on Buffett -- make that three, including The Warren Buffett Way, a bestseller. Hagstrom relishes the intellectual challenges of managing money, poaching other disciplines -- politics, physics and literature -- for investment ideas.

Intellectual curiosity seems written in his DNA: Hagstrom was born in Nashville 49 years ago to a physician mother and chemical-engineer father. In writing research papers as he earned bachelor's and master's degrees in political science at Pennsylvania's Villanova -- he still lives in the university town today -- he developed skills he's used to pen six books, including three beyond his Buffett books.

Investors who bet with Hagstrom are also getting, by proxy, another legendary investor besides Buffett. Hagstrom works closely with Legg Mason's Bill Miller, who's beaten the market for the past 14 years as manager of the Legg Mason Value Trust Fund.

Hagstrom joined Baltimore-based Legg Mason Wood Walker in 1984 as a broker but left five years later to manage money. He launched his fund in 1995, and started his own firm, Focus Capital Advisory. He rejoined Legg in 1998 when Miller bought his firm and his fund, which became Legg Mason Growth.

Hagstrom shares Miller's intellectual approach to investing, Legg's vast resources and a fondness for some of the same stocks, such as Google and Amazon. "We're both value managers," explains Hagstrom. "I try to buy double-digit growers trading at a discount" to what he estimates the businesses are worth.

Come again? Why is a growth manager -- a breed that typically pays up for rapidly growing companies -- talking about buying stocks on the cheap? "I don't think it's incongruent" for a growth manager to talk about value, Hagstrom says. "Buffett is thought of as a great value manager, but he made his performance off buying great growth companies" such as Coca-Cola in the 'Eighties.

AS BEFITTING A BUFFETT DISCIPLE, Hagstrom invests in a small number of stocks for the long haul, and favors cash-rich companies that dominate their space. But would the Oracle of Omaha approve of the Internet stocks such as Yahoo!, Google and Amazon that eat up one-third of Hagstrom's portfolio?

Hagstrom says Buffett has never owned equities of Internet companies. "Buffett likes to buy certainty at discount, businesses where he could forecast cash flow confidently," says the fund manager. "With Google, Yahoo and eBay, the cone of uncertainty is a lot wider; there are a lot of possible outcomes."

And what's a growth manager to do when, as Hagstrom explains, many of the "certain businesses are fairly priced" and fast growers are trading at a discount? Go where the opportunities are, of course. Many of the dynamic growers Hagstrom covets are found in the Internet sector. Stocks that make it into his portfolio must also sport high returns on capital and dependable managements.

Many investors are balking at the relatively high multiples of Google and other 'Net stocks. But Hagstrom calls Google, Yahoo! and Microsoft (MSFT) "valuation anomalies" -- stocks that look expensive but might be considered undervalued, given the companies' robust growth prospects. He says the three global-search engines will gobble up most of the increasing business on the Web. (Hagstrom doesn't own Microsoft, saying its hot search-engine business can't compensate for overall pedestrian growth at the software giant.) Boosted by stronger-than-expected earnings growth, Google, the world's most popular search engine, has surged 136% over the past year to 404 a share, trading at 47 times analysts' earnings estimates for next year. Yahoo! has gained 8% to 40.11, close to its 52-week high of 43. It commands a price-earnings ratio of 53. But Hagstrom predicts Google can expand its $120 billion market cap by 2.5 times over the next several years, surpassing Microsoft, while Yahoo, boasting a market value of $57 billion, can grow five times.

The fund manager holds a similarly rosy view of giant Web bookseller Amazon, his largest holding, at about 8% of fund's assets. Besides Amazon's wide product selection, vast distribution and free-shipping policy, Hagstrom is sold on the stock's 26% annual free-cash-flow growth and savory return on capital of 44%, twice as sweet as Wal-Mart's (WMT). "It's clear [Amazon] can grow for a long time at a high rate," Hagstrom says. "We can see where it gets to $80 billion easily in our model." At around 49, Amazon is up 28% over the past year and trading close to a 52-week high.

HAGSTROM IS ALSO A BIG FAN of Electronic Arts, the leading maker of interactive games, including smash hit Madden NFL, played religiously by Hagstrom's 12- and 14-year-old sons. The fund manager calls the company, which has a $17 billion market cap, "very well run and financially strong" and believes it's positioned to benefit from the next-generation hardware-console cycle, given its wide product offerings.

Electronic Arts is up 8.66% over the past year to a recent 56.59, above Hagstrom's average cost of 48. The fund manager, who has owned the stock for almost two years, sees considerably more upside and has been adding to his holdings. The shares are still 30% to 40% undervalued, Hagstrom believes. "They will grow earnings better than 15% a year for the next five years."

This year Hagstrom has sold health-insurance giant WellPoint (WLP) and wireless player Vodafone (VOD) at a profit, swapping into Cisco Systems (CSCO), Nike (NKE) and FedEx (FDX), among others. Those stocks and his other holdings are spread across consumer services, financials and hardware -- Hagstrom's top sectors.

Athletic-sportswear titan Nike has perked up lately, helping to boost Legg Mason Growth, but a greater tonic would be a sustained and spirited rally in the overall market and large-caps, in particular.

Hagstrom sees both in the offing. "We think we're close to liftoff in stock prices," he says, citing the pending removal of two headwinds. The manager sees oil prices slipping to $40 a barrel in the next 12 months from nearly $60 now and the Federal Reserve halting rate hikes in the next couple of months. "When they stop raising rates, we'll have a mid-cycle slowdown," says Hagstrom. "That's the time to be in large-cap growth stocks, because they aren't as sensitive to economic cycles as cyclical stocks."

Investors are also gravitating toward large-cap growth because many believe they're cheap relative to value and small stocks. Hagstrom is befuddled that quality names such as Nike and Citigroup (C), another one of his holdings, are trading below the market's multiple.

The stockpicker-author is also unsure about the topic of his next book. But of this he's certain: "I absolutely will be managing this fund for the next 10 years."

The Bottom Line
The fund looks like an excellent bet. It was the No. 1 large-cap growth fund for the five-year period ended Dec. 2, with an annualized 9.16% return

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-- posted by SteveT

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» Kirk - Mutual Fund Bowl 2006

.
Disclaimer: I have a rather large position (4% or more of investment assets) in Fidelity Contra Fund via one of my IRAs.

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Mutual Fund Bowl 2006
By Gregg Greenberg
TheStreet.com Staff Reporter
1/2/2006 9:15 AM EST
URL: http://www.thestreet.com/mutualfundmonda...

This week's Rose Bowl pits a pair of undefeated college football powerhouses against each other, as the top-ranked USC Trojans and the second-ranked University of Texas Longhorns fight to determine the national champion. In honor of this mega-matchup, TheStreet.com has decided to usher in the Mutual Fund Bowl 2006.

Facing off in the inaugural Mutual Fund Bowl are two of the biggest and best-known mutual funds in the country: American Funds Growth Fund of America and the Fidelity Contrafund. And while neither team in this contest boasts a Heisman Trophy winner like Reggie Bush, both funds come complete with their own set of stars, even if they are fund managers searching for returns instead of scraping for yards.

Here's how the teams stack up...
Size Matters

At $124 billion in assets, the Growth Fund of America, or GFA, weighs in as the largest mutual fund in America. That's more than double the size of Contrafund, which currently boasts $58 billion in holdings.

Unlike in football, however, where possessing the larger set of linemen can be the key to victory, bigger does not always mean better in the fund world. Oversized funds often make it difficult for fund managers to establish and exit positions as easily as smaller, more nimble funds can. Bloated funds tend to pose more of a problem in the small-cap arena, where big buyers can quickly drive up share prices.

Both GFA and Contrafund veer toward large-cap companies, which are less affected by individual buying or selling pressure. The average market cap for a stock in the GFA is $30 billion, and in Contrafund $20 billion, which is why Morningstar slots them both in the "Large Growth" category. They may be better described as multi-cap, though, because nearly a quarter of Contrafund's 500-plus holdings, and just over 10% of GFA's 270 stocks are in mid-cap stocks in which a big buyer or seller can still exacerbate price swings.

In terms of concentration, GFA holds 16.6% of its assets in its top 10 holdings, the largest of which is Google (GOOG:Nasdaq) at 2.34%. Contrafund has just under 20% of its assets in its top 10, with the biggest being Canadian energy producer EnCana (ECA:NYSE) at 3.75%.

Edge: GFA. Morningstar analysts criticize both funds for being grossly overweight, but Contrafund's weight problem may be more hazardous to its health if mid-cap stocks lose steam in 2006.
Offense and Defensive Strategies

In football, it's the final score that matters in the end. In mutual funds, the total return also is very important, but the amount of risk the fund took to get that return counts as well.

Heading toward the final whistle of 2005, Contrafund is outperforming GFA by slightly more than two percentage points, 17.47% vs. 15.3%. This ranks Contrafund in the top 3% against its Morningstar peers, as opposed to GFA, which comes in at the top 9%. Both funds are significantly outperforming the S&P 500 index, which is up 6.5% year to date. >

Over the past 10 years, however, GFA is up 12.94% per year, compared with 11.95% for Contrafund. That impressive long-term performance puts GFA in the top 2% of funds in its Morningstar category, whereas Contrafund ranks in the top 4%.

In terms of the risk it took to achieve those returns, Contrafund has a lower standard deviation, 9.19, and a higher Sharpe ratio, 1.74, than GFA, which comes in at 11.38 and 1.16, respectively.

Mutual Fund Bowl 2006
Growth Fund of America vs. Fidelity Contrafund

	Growth Fund of America (AGTHX) 	Fidelity Contrafund (FCNTX)
Assets 	$124 billion 	$58 billion
Style 	Large/Mid-cap Growth 	Large/Mid-cap Growth
Year-to-date Performance 	15.30% 	17.47%
10-Year Annualized Return 	12.94% 	11.95%
Front Load 	5.75% 	None
Expense Ratio 	0.66% 	0.92%
Yield 	0.29% 	0.05%
Minimum Investment 	$250 	$2,500
Manager 	Nine Different Managers 	William Danoff
Average Market Cap 	$30 billion 	$20 billion
Average P/E 	18.9 	19.8
Total Number of Stocks 	270 	518
% Assets In Top 10 Holdings 	16.60% 	19.37%
Annual Turnover 	20% 	64%
Largest Holding 	Google (2.34%) 	EnCana (3.75%)
Morningstar Rating 	Four Stars 	Five Stars
Lipper Leader -- Returns (Top 20% of Category) 	Yes 	Yes

Source: American Funds, Fidelity, Morningstar, Lipper. Data as of Dec. 27.

Standard deviation is a statistical measure of the range of a fund's performance. When a fund has a high standard deviation, its range of performance has been very wide, indicating that there is a greater potential for volatility. A Sharpe ratio measures the fund's historical risk-adjusted performance, and is calculated using standard deviation and excess return. A Sharpe ratio of over 1.0 is considered pretty good, while outstanding funds achieve something over 2.0.

All these ratios are interesting, but how do the funds rank when an investor needs real defense in a bear market? According to Morningstar's bear market decile rankings, a statistic that enables investors to gauge a fund's performance during a bear market compared with its peers, Contrafund ranks in the second-best decile, whereas GFA comes in at the eighth decile.

Offensive Edge: GFA. Better long-term performance.

Defensive Edge: Contrafund. Better in a bear market.
Head Coaches and Costs

Both teams in this contest have a ton of experience on the sidelines. At GFA, nine portfolio managers with an average of 27 years of experience make the decisions. Despite their vast experience, GFA's multimanager arrangement irks Morningstar analyst Paul Herbert because it limits his ability to break out the amounts of money the individual managers are running.

"We might have more confidence in it if we knew more about the amounts of money the individual portfolio managers responsible for picking stocks here were running in total," writes Herbert. "Such information would allow us to verify if their burdens are smaller than those of bosses at other shops."

Meanwhile, Will Danoff has been at the helm of Contrafund since September 1990. Morningstar analyst Chris Traulsen describes him as "the whip-smart manager who excels at getting Fidelity's large analyst staff to think outside the box."

The expense ratio for GFA is 0.66%, lower than Contrafund's 0.92%. Nevertheless, GFA carries a front-end load of 5.75%, which is off-putting to many investors looking to get started.

And how much is it to play with either of these competitors? The minimum investment at GFA is $250, compared with $2,500 at Contrafund.

Coaching Edge: Even. Both have strong leadership and deep analyst benches.

Fee Edge: Contrafund. In the long run, GFA is cheaper, but those loads are a lousy way to welcome new investors.
The Winner

Now that we've handicapped each side's strengths and weaknesses, who will win TheStreet.com's Mutual Fund Bowl 2006?

If large-cap growth stocks finally take the lead in 2006, as they are widely expected to do, then GFA will take the trophy. Will Danoff may find it difficult to maneuver out of his mid-cap names and into larger companies without creating unwanted waves.

On the other hand, if mid-cap stocks shine as brightly in 2006 as they did from 2003 through 2005, then Will Danoff and Contrafund can look forward to a victory.

<img src=http://bigcharts.marketwatch.com/charts/...>

Chart doesn't show dividends reinvested so the funds are considerably better than shown.

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For 2005, "Kirk's Newsletter Portfolio" was Up 13.2% vs. QQQQ up 1.2% vs. DJIA down 0.6% vs. S&P500 Up 4.8%

As of 12/31/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 197% while the S&P500 only up 12%!!! & NASDAQ only up 1%!!! (my portfolio beta is roughly equal to that of QQQQ.)

What should be quite clear is a “buy and forget” market strategy using the DOW, S&P500 or NASDAQ would have under performed holding money funds over the past seven years while my newsletter portfolio nearly tripled every dollar invested.

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-- posted by Kirk

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» Normxxx - Funds That Keep the Streak Alive

Funds That Keep the Streak Alive
http://www.businessweek.com/investor/con...

By Carol Wood, BW | 16 February 2006

S&P's scorecard shows a group of mutual funds that are consistently top performers. It's a distinction relatively few can manage

Standard & Poor's has updated its scorecard measuring the consistency of top mutual-fund performers over three and five consecutive years. The semiannual scorecard also measures performance persistence, corrected for survivorship bias. It shows that most funds have trouble staying at the top of the heap in those time frames.

As of Dec. 31, 2005, only 15.5% of large-cap funds, 10.2% of midcap funds, and 9.8% of small-cap funds maintained a top-quartile ranking over three consecutive 12-month periods. The scorecard data also show that 32.2% of large-cap, 27.3% of midcap, and 25.7% of small-cap funds consistently maintained a top-half ranking over the same time period.

"Very few funds manage to maintain a consistent top-quartile ranking for long periods of time," says Srikant Dash, index strategist at Standard & Poor's. "Our study shows that over five consecutive years, only 1.9% of large-cap funds, 3.1% of small-cap funds, and no midcap funds have maintained a top-quartile ranking."

EXPERIENCED MANAGEMENT. The scorecard also evaluates the characteristics of those few funds that persistently maintain a top-half or top-quartile ranking. Standard & Poor's data show that consistent performers have longer manager tenure at their funds and lower expenses relative to their peers, and have managed to minimize or avoid losses during the bear market relative to their peers.

"When we viewed consecutive 12-month performance or non-overlapping cumulative periods, consistent top performers all had experienced management teams with tenure higher than their peers," says Rosanne Pane, mutual-fund strategist at Standard & Poor's. "Experienced management teams can successfully maneuver their funds through a variety of market environments."

Below is a list of 10 funds in each equity-fund category that showed persistent performance over five consecutive 12-month periods. The complete semiannual scorecard is available at www.standardandpoors.com.

 
LARGE-CAP FUNDS
Fund Name (ticker)	                                         Five-Year Return    Status for
                                                                 (Annualized %) New Investors
Hotchkis & Wiley Large Cap Value Fund/I (HWLIX)        13.1     Open	
Dodge & Cox Stock Fund (DODGX)                         11       Closed
RiverSource Diversified Equity Income Fund/A (INDZX)    9.8     Open
DFA U.S. Large Cap Value Portfolio III (DFUVX)          9.3     Open
American Beacon Large Cap Value/AMR (AAGAX)             9.2     Closed
LWAS/DFA U.S. High Book-to-Market Portfolio (DFBMX)     9.1     Open
Target Portfolio Trust:Large Cap Value (TALVX)          8.6     Open
Oppenheimer Value/A (CGRWX)                             7.8     Open
Cambiar Opportunity Fund (CAMOX)                        7.5     Open
Gabelli Equity Income/AAA (GABEX)                       7.1     Open
 
MIDCAP FUNDS
Fund Name (ticker)	                                         Five-Year Return    Status for
                                                                 (Annualized %) New Investors
Hotchkis & Wiley Mid Cap Value Fund/I (HWMIX)          17.7     Closed
Security: Mid Cap Value Fund/A (SEVAX)                 16.1     Open
Janus Mid Cap Value Fund/Investor (JMCVX)              13.8     Open
Vanguard Selected Value (VASVX)                        13.3     Open
Vanguard Strategic Equity (VSEQX)                      11.8     Open
BlackRock Mid-Cap Value Portfolio/Inv A (BMCAX)        11.5     Open
SEI Institutional Managed Trust Mid-Cap Fund/A (SEMCX) 11.5     Open
Robeco Boston Partners Mid Cap Value/Inst (BPMIX)      11.1     Open
Westcore Mid-Cap Value Fund (WTMCX)                    10.9     Open
Rochdale Mid/Small Value Portfolio (RIMKX)             10.9     Open
 
SMALL-CAP FUNDS
Fund Name (ticker)	                                         Five-Year Return    Status for
                                                                 (Annualized %) New Investors
Hotchkis & Wiley Small Cap Value Fund/I (HWSIX)        25       Closed
Perritt MicroCap Opportunities (PRCGX)                 24.2     Open
RS Partners Fund (RSPFX)                               23.6     Closed
n/i Small Cap Value Fund (NISVX)                       21.1     Closed
Berwyn Fund (BERWX)                                    19.9     Open
DFA U.S. Small Cap Value Portfolio/II (DFAVX)          19.4     Open
DFA U.S. Small Cap Value Portfolio (DFSVX)             19.1     Open
Pacific Capital Small Cap/Y (PSCYX)                    19.1     Open
Robeco Boston Partners Small Cap Value II/Inv (BPSCX)  18.9     Closed
MainStay Funds Small Cap Opportunity/I (MOPIX)         18.8     Open

______________


The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

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» SteveT - The Price of Victory

By ROBIN GOLDWYN BLUMENTHAL

BOB OLSTEIN IS A NUMBERS KIND OF GUY. He has built a great reputation by digging into corporate accounting. His own bottom line: He holds himself strictly accountable to his investors.

Give us some investing principles to live by.

"If you want to succeed in this business, don't be afraid to be wrong some of the time. The only thing that counts out there is paying the right price. If you pay the wrong price for a good company, you may have a bad stock."

What keeps you up at night?

"The biggest fear that you have, that gives you cold sweats, is to ride a stock (like Pier 1, which I recently sold) from 14 to 9 and then sell it when it's at its low for the last four years and worry that the stock is going to come bouncing back."

What are your pet peeves?

Analysts reacting to quarterly-earnings estimates. And style boxes, which are the same as picking physicians by their height. I would love somebody to come up with a rating system on funds where all equity managers are compared head-to-head, regardless of height or style, because equities are one asset class. I believe options expensing is hogwash. It's an overreaction, and double-counting and creates bookkeeping entries which have nothing to do with cash flow. It's already accounted for in dilution of the shares when the options are in the money. Why not expense other possible missed opportunities, such as purchasing inventory at higher prices?

Smitten by the Unloved

CALL HIM THE BAD-NEWS BULL. As chief investment officer of the $1.8 billion Olstein Financial Alert Fund (ticker: OFALX), Bob Olstein has made a career out of digging into the numbers and buying up the stocks everyone loves to hate.

[Olstein]
"All I care about is price, price, price, price and cash, cash, cash," says Olstein. His aim: "to grind out 9% or 10% returns" in a market he sees as fairly valued to slightly undervalued.

The approach has worked nicely. In the 10 years since he started the fund, Olstein has delivered annualized returns of nearly 16%, putting the fund among the top 50 performers in the industry for the 10 years ended Dec. 30.

But Olstein, who had a less-than-stellar year in '05, returning just 2.8%, suspects that the truly big numbers will be increasingly hard to put up. Greatly underpriced stocks are harder to find nowadays, given what Olstein sees as the market's currently fair to slight undervaluation and a rise in the quality of earnings.

"We're going to have to look for what I call the ugly ducklings of the world -- the companies where there are either misperceptions, temporary problems or some negative psychology surrounding an industry -- to grind out 9% or 10% returns" says Olstein. "They're going to be the stars going forward, the 9% or 10% managers."

Generating those returns will require "strict attention to valuations based on free cash flow," says Olstein, who strives to emulate the legendary value investor Marty Whitman of Third Avenue Asset Management.

Olstein cut his teeth as a securities analyst, working with such investing luminaries as Meyer Berman, Larry Rader and Chuck Royce at brokerage Scheinman, Hochstin and Trotta in 1968. Olstein came to prominence in the 1970s as co-founder with Ted O'glove of the Quality of Earnings Report, a kind of "early-warning" system for institutional investors that took financial statements and -- as Olstein puts it -- "adjusted them for economic reality."

As the "watchdogs of Wall Street," the pair predicted the bankruptcy of Penn Central, and alerted investors to problems at Levitz Furniture. After that, he went on to manage portfolios at Salomon Smith Barney and its predecessors, before founding Olstein & Associates, of Purchase, N.Y. In 1984, Olstein wrote an influential piece for Barron's on adjusting ITT's net earnings. The impact: The stock's opening was delayed, and when it finally opened, it fell five points.

Today, the trim 64-year-old looks for companies whose stocks are trading at a 20% to 50% discount to their private-market value, and that can generate attractive free cash flow. The free cash flow yield -- free cash flow per share divided by share price -- has to be at least 100% better than the yield on a five-year Treasury. Olstein searches for companies with enough free cash flow to be able to liquidate their debt within five to seven years. "All I care about is price, price, price and cash, cash, cash," says Olstein, who doesn't focus on P/Es. With excess cash flow, he says, "good things happen: companies can buy back stock, raise the dividend and make acquisitions when others can't."

Among the recent stocks to make the cut: Federated Department Stores (FD), which he began studying as a result of a Barron's article. He started buying it around 67 and it's now 72, but he figures it could be worth at least 90, with earnings power "north of $6.50 a share," up from an estimated $3.45 to $3.70 for this year.

Xerox (XRX) is another unloved name that Olstein has been buying, at an average cost of 13 and change. It is moving away from its old copier machines in favor of color copiers, where it is now a leader. Olstein sees Xerox becoming a major player in outsourcing and in overseeing document reproduction at companies. He thinks the stock is worth 18 to 20 a share, up from a recent 14.72.

Tyco (TYC), the new incarnation of the infamous conglomerate, is the largest of the fund's 68 holdings. Olstein, who doesn't usually speak to management, applauds CEO Ed Breen for looking to separate the company into four parts. "Everybody is worried about whether [Tyco] can make the quarter or not, and whether it's growing or not, but this company is generating $4.5 billion of free cash flow," says Olstein. He says Tyco, which he's been adding to recently, is worth 35 to 40 a share on a sum-of-the-parts valuation, versus its recent price of 25.63.

He's also been adding to his position in Tupperware, (TUP), which fell from 45 to 14 after it made the mistake of selling products directly to Target and cannibalizing its distribution network. Olstein was heartened by Tupperware's purchase of Sara Lee's Asian direct-sales beauty business, and figures the company could achieve earnings power of $2 a share in three to five years, up from $1.49 a share last year. He believes the stock, which has already run up to 21, could hit 30.

Olstein isn't afraid to admit his mistakes. For instance, he acknowledges that he misjudged Pier 1, (PIR), which he started buying two years ago at 16 but kept buying as it fell to 11. "We really believed this company only had a temporary problem," he says, but decided to sell out at 9, because management kept giving the same reason for not getting it right. "The toughest thing in the world is to do is sit there and have your butt handed to you," Olstein says. The shares are now back to 11 and change.

The fund's performance last year -- trailing the Standard & Poor's 500 by about 2% -- was partly the result of the Pier 1 position. More importantly, the fund had a lack of names in energy. But his investors still seem upbeat.

"All I had to do was send him money, and the results were excellent" says Harry Boltin, a radiologist and sometime tennis partner and investor from Olstein's days at Salomon Smith Barney. Back then, he took a shine to Olstein for his honesty and intelligence, and suggested he go out on his own. Boltin recalls having some anxiety during the Crash of '87, when Olstein's portfolio went down 33% in one day. "He was very reassuring, and over the course of the year he was up 60%," says Boltin.

Olstein, once the captain of the DeWitt Clinton High School baseball team in the Bronx, has hit plenty of long balls in his career. JCPenney (JCP), which Olstein picked up at 14 or 15, was a grand slam. The company recently announced a fourth-quarter earnings rise of 65%. The stock, now in the high 50s, is at a seven-year high, and he still holds a stake. Although he doesn't actively look for takeover candidates, Olstein over the years has held 19 names that have been bought out.

One criticism: the fund's expense ratio, which at 2.17% is considerably higher than most. But Olstein points out that he pays industry consultants to help him analyze the various companies, rather than relying on Wall Street analysts, whom he views as very short-term-oriented, accepting of the company line, and even congratulatory. His retort about fees: "If everybody's so worried about fees, why don't they go to the cheapest doctor?"

This doctor's black bag is getting some new tools. He has begun to take a more activist role in investments, airing his views to CEOs via snail-mail letters. And he is developing a more concentrated fund based on higher risk, smaller companies, to run in addition to the main one.

The self-described "mad Jets fan," whose promotional materials sport the green and white colors of both the New York football team and Michigan State, his alma mater, shows no signs of slowing down.

Although the market may have gotten tougher for Olstein, bad news -- the stuff that has pointed him to so many successes so far -- is unlikely to ever go out of style.

The Bottom Line
The $1.8 billion Olstein Financial Alert Fund has posted annualized returns of nearly 16% for the past 10 years. Bob Olstein is sticking to the winning formula.

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URL for this article:
http://online.barrons.com/article/SB1140...

-- posted by SteveT

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» SteveT - Shift Fails to Halt Magellan Outflows

By JACK WILLOUGHBY

HARRY LANGE, THE 53-YEAR-OLD MANAGER recently appointed to run the Magellan Fund, has wasted no time refitting Fidelity's flagship (ticker: FMAGX) for fast water. But will Lange's ministrations gain enough time to allow him to patch the gaping hole in her side?

In a matter of months, the portfolio long scorned by investors as being an expensive mimic of the Standard & Poor's 500 has been completely transfigured into the world's biggest mid-cap growth fund, with a heavy emphasis on Japan and the New Economy.

"The questions is: Can Harry Lange run a $52 billion fund with the same success as he ran the $7 billion Fidelity Capital Appreciation fund? If anyone can pull it off, it will be Harry," declares John Bonnanzio, group editor of Fidelity Insight, an independent newsletter service that recently indicated that it might upgrade the fund from Sell to Hold. "But it's going to be interesting to watch."

The editor says that Magellan already has started to decouple from the S&P bias, favoring smaller-cap bets and increasing its total holdings to 290 from 200. "Basically, he's shifted from what used to be a large-cap blend fund into a mid-cap growth fund," observes Bonnanzio. "If you believe large-cap stocks are set to outperform, you might not like the direction."

Japan remains the source of a number of new holdings. Lange spent his formative years as Fidelity's head of research in Tokyo, where he developed a reputation for technology picks.

The Japanese holdings appear prominently in Magellan's top-10 list for Dec. 31, posted on Fidelity.com. They include Yahoo Japan, Nomura Holdings and Mitsubishi UFJ Financial. It doesn't hurt that the Japanese stock market has been pistol-hot in recent months.

The fund has severely reduced its holding of U.S. manufacturers, retailers and media. It cut its position in General Electric, once Magellan's largest, and cut its stake in Microsoft in the fourth quarter, dropping that company from Magellan's top 10.

In their place is a much more international mix, starting with Nokia, UnitedHealth Group, and Schlumberger, stretching to Google and Genentech.

Some traders were initially concerned about Fidelity's ability to manage such a sudden shift in holdings. But judging from Fidelity's filings, much of the transfer was probably handled within the big mutual-fund family among cousin Fidelity funds, in the process saving customers money.

Unfortunately, there is little to indicate that Lange's heroics will stem outflows from Magellan. According to the latest Securities and Exchange Commission filing covering the period ended Sept. 30, Magellan was losing money at a rate of $9 for every new $1 invested. The fund is closed to new retail investors but open to existing savings plans.

Over the latest reported six months, Magellan lost 620,473 accounts, or about 13% of the 4,656,868 accounts held at spring 2005. According to money-flow tracker AMG, Magellan has continued to bleed, suffering a record $1.9 billion in withdrawals in January alone, the biggest since 1992. This all may turn out to be too severe for Lange's remedies to make a difference.

That's essentially why investment advisers like Annapolis, Md.-based Mike Scarborough urges clients to steer clear of Magellan.

PRIVATE EQUITY HAS FOUND A NEW WAY to blend with asset management. Robert Machinist, a New York private-equity specialist, has snagged contrarian investor Warren Isabelle and his Ironwood Capital Management as a centerpiece for an asset-manager platform designed to complement a New York-based private-equity operation. Ironwood sponsors the ICM/Isabelle Small Cap Value fund (IZZYX).

"Warburg Pincus has the right formula because they also have an asset-managing affiliate. They invest private equity capital over five to 10 years then realize the proceeds," says Machinist, chief investment officer of MB Investment Partners and now CEO of Ironwood, with about $450 million in assets and private accounts featuring small and micro-cap holdings.

"Having an asset-management business provides another way to cement the client relationship by having a place to put those harvested proceeds. That's what we hope to achieve for Centre Partners with this wealth-maintenance platform we're building."

Centre Partners, a middle-market -- that is, $50 million-$100 million -- private-equity firm headquartered at Rockefeller Center, started out as the private equity arm of Lazard Freres and is now led by Lester and Bruce Pollack and David Jaffe. The idea is for private-equity clients to be able to take the money they harvest and transfer it easily to a pool of capital managed by Machinist's growing cadre of portfolio managers.

Machinist for many years was the president and a key partner of Patricof & Co., one of the pioneers of the venture-capital business. "What we're trying to do is provide a platform to allow older money managers to transition and still remain in the business," he says. "We want to especially concentrate on the small- to mid-cap manager with up to $1 billion."

Post merger, Warren Isabelle ("Paring Back, Shifting Focus4," Barron's, May 23, 2005) will continue as chief investment officer of MB Investment Partners. He anticipates no change in the fund's portfolio approach.

E-mail comments to editors@barrons.com

URL for this article:
http://online.barrons.com/article/SB1140...

-- posted by SteveT

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» EdO3 - T.Rowe Price Miscalculation

In early January, 2006, I received an employer match equivalent to 2.7% of my 401K account with T.Rowe Price. I check my account totals weekly on the phone and the match was reflected in the totals until Feb. 28 when it suddenly decreased the same amount. I checked the share balances, and they were also less.

I called the T. Rowe Price service line, and the nice lady was going over my plan, when suddenly she said, "What's this? It looks like they put in some money and they took it out. I'll have to check it out. I'll call you back."

I never got the call back, and I was busy with other things, so I didn't check my account until today, when I found out, lo and behold, the elusive 2.7% had somehow found its way back into my account and the share balances were back up to where they had been since early January. (Since I haven't made a contribution in 2006, this was easy to check.)

I'm wondering if anyone else had any irregularities with T.Rowe Price, and I'm suggesting that everyone check their SHARE balances in each fund to detect if there is any unexplained change.

All the Best!

-- posted by EdO3

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