Death Be Not Steady Enough for Tombstone Fund

It was a great April for the so-called death-care industry, but don't break out the black armbands just yet.
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Last month, the

Pauze Tombstone fund finally got a life.

After posting a negative 50.7% return for 1999 through the end of March, the fund returned a positive 19.1% in April. That ranked it among the top 1% of all funds tracked by

Lipper

for the month.

Tombstone's grim goal is to make money in the so-called death-care industry -- funeral homes, casket makers and, of course, tombstones. While death may seem like a sure thing, it has been anything but for this fund. Since its May 1997 inception, the fund is down 50.5%.

Pauze's thinking goes something like this: With baby boomers marching in step toward their graves, the death-care industry should have a steady stream of revenue for years to come. But things haven't quite worked that way just yet. To the chagrin of Gen-Xers everywhere, boomers aren't dropping dead fast enough.

"There's been a decline in the death rate from historical levels as a percentage of the population," says Jordan Horoschak, an analyst with

Standard and Poor's

. He points to advances in health care as one factor fouling the sector's performance. "It's really cast a pretty grim shadow over the death-care industry."

How, er, disappointing.

So why did the Tombstone Fund spring to life in April? It wasn't the rotation into cyclicals. Instead, during the first quarter of 1999, more people had the good grace to die than at the end of 1998, and that boosted the underlying stocks in this fund.

"All of the companies

in the sector reported increases in comparable-store sales growth for March," says Fran Blechman Bernstein, an analyst at

Merrill Lynch

.

Comparable-store sales growth?

"Yeah, just like in retail stores," Bernstein says. "The number of services they performed at their existing properties were all up."

The increase was especially apparent at

Service Corporation International

(SRV) - Get Report

, the Tombstone fund's largest holding, says Linda Bannister, an analyst at

Edward Jones

in St. Louis.

The increased sales allowed the company to beat consensus estimates for the first quarter after it missed estimates in the fourth quarter of 1998, Bannister says.

But that's not necessarily a reason to buy the fund.

Service Corporation accounts for about 50% of Tombstone's $1 million in assets, according to Philip Pauze (pronounced PAH-zay), the fund's manager and president of

Pauze Funds

of Houston. That's an unusually high percentage for just one stock.

What's worse, the fund holds only eight stocks, all of them part of the

Pauze Tombstone Common Stock Index

, which Pauze created to track the death-care industry.

Pauze has 11 years experience managing pension assets for funeral homes and cemeteries and says it is only "logical" that he would launch the first mutual fund based on the death-care industry. But because so few companies in the sector are publicly traded, the fund has few stocks to pick from.

The closer you look at this fund, the stranger it gets. While it is supposed to be an index fund, it actually shifts a large chunk of its assets into Treasury bills four times a year so it can qualify for mutual fund tax status, despite its huge investment in Service Corporation.

As a nondiversified fund, Tombstone can't have more than 25% of its assets in any one stock, according to regulations. Otherwise, it would not be able to distribute its capital gains to shareholders. But a fund only has to meet that requirement when it reports its holdings at the end of each quarter.

"At the end of every quarter, we comply," says Pauze. "For the most part, we track the index over the course of the quarter

and then typically go into Treasury bills."

The fund's prospectus warns that it can have a turnover rate of up to 200%. The constant shifting of assets could translate into a heavy tax bite for shareholders in realized capital gains. Though with the fund's recent performance, investors might not have too much to worry about.

Perhaps because of the frequent shifting of assets, Tombstone has an outrageously high 3.36% annual expense ratio on its A shares and a 4.1% expense ratio on its B shares. The average equity fund, by comparison, has a 1.5% expense ratio, and the average index fund has an expense ratio of just 0.79%, according to Lipper. The fund also levies a 3.75% sales fee, or load.

Pauze concedes that the expenses for the fund "do seem high," though he didn't offer an explanation for them.

Maybe his investors are starting to understand. Assets have shrunk from $4 million in April 1998 to $1 million now. Pauze says a number of his investors have shifted their money back into his firm's fixed-income funds.

Still, Pauze says he sees life in the death sector. While the broader death rate has slowed, the population continues to rise. "One must take a look at the fact that the

death rate is down, but it's on a bigger base of population," Pauze says. "The baby-boom bubble is still moving through the python, as it were, and as a result of that, there will be increasing numbers of deaths in the next 10 to 20 years."

That's great news for Tombstone fund investors, isn't it?