Smarter Money: The Landis Backlash

The backlash against my criticism of the mutual fund industry is beginning and, as usual, I will present it along with my own view so you can make up your own minds. Yesterday, I got an incredibly well-reasoned letter that pretty much encapsulates all of the mutual fund excuses in one neat package for all to read. Here goes:

"First off, let me say that I own none of the Firsthand funds, so I am not trying to defend a position I currently have. I have been following your constant hammering of Kevin Landis lately and, frankly, I am surprised that someone like yourself who has been around this game for a while and theoretically knows how investments work is attacking Firsthand for the reasons you are.

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"Unlike a hedge fund, with which you are familiar (?), mutual funds by their charter must follow certain investment guidelines. This can and often does include the inability to go short or use much, if any, hedging techniques. Also, the amount of cash most funds can carry is limited. Thus, regardless of what the markets are doing day to day or even year to year, a mutual fund manager (unlike a hedge fund manager) simply must do as well as he/she can within the segment of the market which they are driven by their charter/prospectus to invest in.

"Now whether or not that part of the market is a worthwhile investment sector is up to the individual who elects to put money into a sector-specific fund. And I think most intelligent investors use funds like Firsthand for the part of their portfolio that they want invested in technology only. Not all investors are intelligent, so there are probably quite a few people who had far more money than they should have had in funds like Firsthand or Janus or any other aggressive U.S. growth manager, and got toasted for it.

"That is the fault of not properly diversifying, not a fault of the fund manager. ... I think your insinuation that a smart fund manager should have been able to see this tech crash coming and protect his investors by going to cash or shorting or sending people back their money is ridiculous! That is not their job. That was once your job. But you ran a hedge fund, not a mutual fund. Now, if you have an issue with the way mutual funds operate by their nature, or if you really are trying to make investors feel better by placing the blame for their losses on Landis, you should just come out and say that. But to criticize Landis for trying to manage a tech fund that must be invested to a large degree in a terrible market is just foolish."

Okey-dokey. I don't want to buy into this gentleman's worldview one bit. I like to argue in the form of textual analysis, because the assumptions in this note are specious and create an argument that pins the losses on the shareholder. That's just plain ridiculous on the face of it, but, unlike the letter writer, I don't like to argue in that fashion. It is neither rigorous nor intellectually honest. So, let's take it from the top.

"First off, let me say that I own none of the Firsthand funds, so I am not trying to defend a position I currently have." I don't care if someone has a position in Firsthand funds or not. In fact, I think that's completely irrelevant.

"I have been following your constant hammering of Kevin Landis lately and, frankly, I am surprised that someone like yourself who has been around this game for a while and theoretically knows how investments work is attacking Firsthand for the reasons you are." I don't know how investments work theoretically, I know how they work firsthand -- excuse the pun. What is surprising about criticizing a manager who is down 50%? Are the averages down 50%? Is the Nasdaq down 50%? It's precisely because I have been around for a while, and am not some sidelines guy who has never been in the arena, that I am criticizing Landis. If I hadn't been, I'd probably be believing this rationale the writer provides as it is so circular (the manager can do no wrong, only right) in its reasoning. Because I traded actively for 15 years and was a broker at Goldman Sachs previously, I know how horrible this performance really is.

"Unlike a hedge fund, with which you are familiar (?), mutual funds by their charter must follow certain investment guidelines. This can and often does include the inability to go short or use much if any hedging techniques." Hello? Landis runs these funds. He makes the rules. Many mutual funds hedge. If you are in a volatile sector like this, you should be hedging. I understand Landis has a hedge fund. It would be interesting to see how that fund is doing.

"Also, the amount of cash most funds can carry is limited. Thus, regardless of what the markets are doing day to day or even year to year, a mutual fund manager (unlike a hedge fund manager) simply must do as well as he/she can within the segment of the market which they are driven by their charter/prospectus to invest in."

Again, Landis controls the charter. You can put as much money as you want in noncash instruments that are less dangerous or lethal than what Landis put you in. This kind of argument, which removes the thinking portion of a fund manager's head about an element as critical as risk, is just a pile of horse dung. If you see trouble for shareholders, you do something about it. You don't just stand there and rationalize it by your charter. There are plenty of instruments that would allow a fund to protect itself from hideous losses that fit under the charter.

The "segments" are just artificial, anyway. These funds all own pretty much the same kinds of names. There is no hard-and-fast rule that you must own stocks that are going to go down. These funds have set themselves up in the ultimate failsafe. If they go up, it is their stock picking; if they go down, it is your exposure and you demanded it. I don't know any business in this country that says, "If you win it is mine, and if you lose it is your fault."

Click here for Part 2.