An Open Book: OpenFund Puts Its Portfolio Online

One mutual fund's managers have chosen to work without the usual veil of secrecy.
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One of my big gripes about mutual funds is a lack of what the industry calls "transparency." That means we can't see what's in the portfolios; they're not transparent. Because funds don't report holdings on a timely basis, we can't put together a decent portfolio that's truly diversified.

How can we, as investors, ensure that we don't have too much in the technology sector, the financial sector or the fill-in-the-blank sector if our funds keep important information secret, or at the very least, several months old? When fund companies are questioned about this issue, they tell us that competition demands restraint.

How interesting, then, to learn of the

(OPENX)

OpenFund, a mutual fund that posts its entire portfolio

online. The fund's managers provide market reports, talk about strategy and answer questions from shareholders online, too.

Such openness doesn't seem to have hurt performance, either. The fund, which started operations on Aug. 31, returned 193.8% through March 10, compared to 6.34% for the

S&P 500

index and 84.3% for the

Nasdaq

.

If successful, it hopefully will prompt other funds to adopt a more "open" strategy about how they invest. Currently, most mutual funds only report what they invest every six months, as required by law. In addition, many funds do not reveal all of their investments, only their top holdings.

Now I know you're thinking that OpenFund is just a gimmick, and only time will tell the tale here. But I think otherwise. These are not a bunch of kids out for Internet pranks. Don Luskin, who runs the fund, is former vice chairman of

Barclays Global Investors

, one of the largest money managers in the world. After a 45-minute conversation with him last week, I understood why he's not afraid to post either his ideas or his stock purchases online. They are mighty impressive.

We talk a lot in our Start Investing community about the Old Economy/New Economy stocks. Not surprisingly, Luskin invests in the New Economy, looking for stocks in four "metathemes" that he believes are not fully understood and appreciated by the market.

Communication Infrastructure

The first he calls infogenesis, or the building of the communication infrastructure of the world, a great engineering project that Luskin compares to building the Hoover Dam, the electric power grid or the U.S. interstate highway system.

Here Luskin looks for blue-chip, or what he calls "new-chip," companies like

Global Crossing

(GBLX)

,

JDS Uniphase

(JDSU)

and

Qualcomm

(QCOM) - Get Report

. "We think there is a place in every portfolio for companies like this that you just tuck away," he says. "When you consider that half the people alive have never made a phone call and when they do it will probably be a wireless call on a phone using CDMA technology, Qualcomm looks cheap." Qualcomm owns the patents on CDMA, or code division multiple access technology.

Although Qualcomm is hardly undiscovered, and one I've written about in the past and still own, Luskin believes most investors don't fully understand the potential. "When people think of cell phones, they think about how they hate to hear them go off in a restaurant," he says. "They're just not getting the picture. One billion people in China are waiting to get plugged into information technology. We will look back in 10 years and say, `Why didn't I see that? It was the next

Microsoft

.' "

Building Loyal Followings

The second theme is corporate tribalism. Luskin says that for many companies, what they do is not so important as how they do it and with whom. They are creating a loyal tribe of users who, once they sign up, will find it very difficult to get out.

Here, Luskin includes a company he loves called

VerticalNet

(VERT)

, which is creating business-to-business portals so companies can do more efficient business on a company-to-company basis. In the 1980s, retailers like

Nordstrom

(JWN) - Get Report

created tribes, he says. "But the Internet has totally changed the scope of the potential for that concept."

Chasing Innovation -- And Genetics

The third theme is innovate or die, a catch-all category designed to recognize the value of sheer innovation. Here he likes companies like

Harris & Harris Group

(HHGP)

and

CMGI

(CMGI)

, which are publicly traded venture-capital companies. "They are pure innovation companies, the birthing place for innovation."

He also likes

Celera Genomics

(CRA)

, which is headed by a "remarkable man who was part of the human genome project directed by the U.S. government to map the human genome." That man left to work with Celera, and Luskin says the company is close to finishing its work. "Their customers will be every university in the world, every genetic-engineering and life-sciences company. They will control that intellectual property."

The fourth theme is biocosm, by which Luskin means turning the science of genetics and the genome into practical technology. "No one has ever turned the science of biology into the technology of biology," he says. "But that will happen over the next 50 years."

Managing a Fund Out in the Open

Luskin discusses the themes on his Web site. Providing portfolio information to shareholders was a no-brainer for Luskin, whose customers at Barclays Global included the pension funds of the federal government,

General Motors

(GM) - Get Report

and

IBM

(IBM) - Get Report

. "Our big institutional clients knew exactly what was in their funds," he says. "It was the opposite of the blind fog mutual funds operate under."

Before the Internet was widely used, it cost too much to communicate holdings on a timely basis to thousands of individual shareholders of a mutual fund. The Internet "collapsed the cost of communicating," Luskin says. He's not surprised, though, that other fund companies aren't posting their portfolios. "The reason

Fidelity

doesn't want to show them is they're wrong more than right," he says. "You make so many decisions every day, and you're lucky if half are right. So fund companies want to operate in splendid isolation."

Nonetheless, the idea of more openness among mutual funds is something desperately needed, and the Internet is a great catalyst for change. All investors -- beginning or otherwise -- would be better served by knowing what exactly is in their portfolios.

Most funds provide only the net asset value each day. Information companies like

Morningstar

must discover and reconstruct everything about the fund from that one tiny statistic. "Our goal is to put Morningstar out of business by showing everything about our fund for everyone to see, " Luskin says.

Luskin argues that putting the portfolio online is also a public service, because it shows that professional money managers are no different from the rest of us. "There's all the same remorse and angst and joy," he says. "We may have better tools and access to more information but it's a very, very tough game."

And, like other games, it can be interesting to watch. "It's not unlike watching football or billiards or anything else," he says.

Follow Mary's Start Investing Portfolio at MoneyCentral.

Mary Rowland is the Start Investing columnist for MSN MoneyCentral. At time of publication, she was long Microsoft, Intel, Cisco, Vanguard Health Care and the Nasdaq 100 Trust, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She welcomes your feedback at

mctsc@microsoft.com.

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