OpenFund Offers Customers a Peek at Fund Manager's Day

In the preternaturally secretive mutual fund world, OpenFund is taking disclosure to new extremes.

The fund, which launched Sept. 1, has pulled back the magician's curtain, offering investors a real-time view of the fund's managers, traders and, most significantly, its portfolio.

OpenFund is posting the details of its trades on its Web site at www.metamarkets.com as soon as they're made and encouraging investors to discuss holdings with the fund's managers throughout the trading day via discussion boards. Investors can even see the firm's traders and portfolio managers at work via a trading room Web-cam.

While some think the behind-the-scenes peek is a good idea, critics wonder if market-timers will crash the party or if the fund's attention-getting disclosure policy will lead investors to overlook its significant risks.

OpenFund was launched by MetaMarkets.com, an investment company and online community founded last year by former Barclays (BCS Quote) fund executives Don Luskin and H. Davis Nadig.

The fund invests in "new economy" companies, defined in its prospectus as companies that "are redefining the way goods and services are provided in the economy." Luskin, who leads the fund's management team, says these are companies, ranging from America Online (AOL Quote) to Home Depot (HD Quote), that have used new technology, organizational structure and/or marketing methods to become industry leaders.

It's a model that he's trying to emulate with MetaMarkets.com. Visitors to the site Tuesday afternoon could view the specifics of each of the 14 trades executed during the trading day, plus a bit of commentary on each. For example, portfolio manager Maurice Werdegar provides details investors won't find in an annual report about a purchase of Microsoft (MSFT Quote), executed at 6:55 a.m. Pacific Time: "We initiated our MSFT position this morning after some bouncing in the first few minutes of the day. Once the trading range settled, we bought 1000 at 96 3/8."

On a 2,100-share purchase of Wal-Mart (WMT Quote) at 1:14 p.m. PT, he writes: "Watched all day as WMT drifted lower. We decided to buy near the close [at 46 5/8] in anticipation of a better opening tomorrow."

"We just think disclosure and portfolio transparency are the right things to do and we've taken them to the extreme," says Luskin. He adds that investor education is also a major motivation. MetaMarkets is sponsoring its own "MetaMarkets" think tank, featuring commentary on "new economy" growth trends from the MIT Media Lab's Nicholas Negroponte and others.

But real-time access to the fund's portfolio has garnered the most attention. The Securities and Exchange Commission requires funds to disclose their portfolio holdings twice a year. Some do it more frequently than that, but none as frequently as OpenFund.

Mary Rhinehart, a Charlotte, N.C., financial planner, thinks the policy may go too far. "It would be nice to see the portfolio more frequently than the SEC requires, but looking at it daily could make you more likely to second-guess the managers and become more of a timer than an investor. It's just human nature to second-guess someone."

"The way it's set up is conducive to market timers. It just sounds like it's being offered because the technology is available, not because it's a real advantage to shareholders," says Syl Marquardt, research director at John Hancock Funds.

By moving quickly in and out of a fund, market timers can drive up trading costs -- costs that must be borne by the fund's long-term shareholders.

But Luskin doesn't believe market-timing will be a problem, "People are free to try. Those games are good on paper, but they're hard to pull off in the real world. And if we do find some people timing, we can just thank them for their business and close our doors to them."

Luskin says similar concerns were raised when 401(k) plans began offering daily account valuations to their participants. "Corporations were worried that their employees would be traumatized by market swings or start daytrading. But neither happened. Transaction levels actually dropped. That's because an informed investor is more confident and long-term."

Investors may want to adopt a long-term approach to OpenFund, as its prospectus outlines an aggressive strategy. The fund is nondiversified, meaning it can establish large positions in relatively few stocks. While this can lead to outsized returns when those stocks prosper, it also can sink a fund far into the red during a market downturn.

Luskin and his management team can also short stocks, a risky strategy that involves selling borrowed stock in hopes of buying it at a lower price later on. With experience as a hedge fund manager, Luskin is comfortable with the strategy, but some believe it may be too aggressive for the average investor.

"I think most people don't have a clue what nondiversified or shorting means," says Rinehart. "They could get excited about the fund's technology, its Web site and buy it without seeing or understanding those risks."

Actually, shareholders cannot yet buy and sell shares on impulse over the Internet. If they want to invest, they'll have to download a prospectus and send in a check via snail mail. But starting next quarter, transactions will be conducted electronically, the fund promises.

Given the fund's plan to cut out all paperwork, its annual expense ratio of 1.45% seems a bit high. But MetaMarkets has come up with a decidedly low-tech way to get around potential sticker shock, promising to absorb all fund expenses through next February.