This Saturday piece compiles our Fund Forum Q&As from throughout the week. (They appear every day around noon.) Remember, you can send your question, with your full name, to firstname.lastname@example.org.
Monday's Topic: How Can I Short the Nasdaq 100?
Do you know of any way to short the Nasdaq 100? -- Bradford Evans
Talk about bucking a trend.
This year, the Nasdaq 100 index, made up of the 100 largest nonfinancial companies on the
Nasdaq Stock Market
, is up 7.4%, and last year it soared 85.3%. But a short fund will be inversely correlated to the index's move. If the Nasdaq 100 drops, the fund is supposed to climb and vice versa.
, which offers the only Nasdaq 100 mutual fund I know of --
Rydex OTC -- also provides a way to short the same index. The
Rydex Arktos fund "engages to a significant extent in short sales of securities, futures contracts and options" on the Nasdaq 100, according to the company's description. The fund was launched late last summer. It has lost 7.5% year to date and is down 34.5% in the past 13 weeks, according to
. You can read more about it on the Rydex
, founded by a former Rydex professional, has its own offering: the
Potomac OTC/Short Fund. It comes with a warning that should apply to any short fund. Investing in the fund "involves risks not traditionally associated with investment companies. Investors in the fund may experience substantial losses during sustained periods of rising U.S. equity prices," says the company's
Web site. Indeed, the fund's one-year return is -55.9% -- not for the faint of heart or wallet.
fund, which aims to deliver returns that are twice the inverse performance of the Nasdaq 100. Call it a double-short if you will. You can get more information on the firm's
The funds run by these three firms are popular with investors who frequently trade in and out of mutual funds, trying to time the market. And that ties in to a useful warning about using a fund to short the market.
Typically people don't think the market will go down over the long term. "With a short time horizon, you are a speculator and not an investor," says Robert Levitt with
Levitt Novakoff & Co.
in Boca Raton, Fla.
Tuesday's Topic: Are Fund Companies Getting Their Facts Straight?
I hate it when people can't get their facts straight. (No, I am not implying that I'm infallible.)
The mutual fund reporters at
often call fund company customer-service lines to get details on a specific fund. But lately, we have encountered a frightening amount of misinformation.
For example, yesterday I called the
800 number to double-check some information on the
Potomac OTC/Short fund. I asked about the fund's objective, and the phone rep told me that it was to produce a return that was 125% of the performance of the
, the same as the firm's
OTC Plus fund.
Wait a minute. A fund with the word short in its name is supposed to produce returns that outperform an index? I asked her to check again. A short fund's performance should be inversely correlated to its benchmark, I said. After much fumbling, she agreed.
Sure, I was annoyed by the episode, but moreover I was worried about the other investors who might be receiving misleading information from fund companies.
I called Terry Apple, Potomac's chief investment officer, to ask him about the incident. Like other small fund companies, Potomac outsources its operations and customer service. If the outside customer-service representatives can't answer a question, Apple says they will patch the call through to Potomac and have one of the firm's professionals talk to the investor. Apple says this is the first time he has heard of this happening. "We've got to look into that. That kind of scares me," he says, adding that he wants to eventually move the firm's customer service in-house.
Potomac is by no means the only fund company where this has happened. And I want to hear about similar episodes from you.
Have you ever received incorrect information from your fund company? When you call a firm's 800 line, are you ever fed details that you later find out are not true? Does it happen often?
I want you to be the watchdog. Send your stories to email@example.com and include your full name.
And don't spare any feelings.
Wednesday's Topic: Oakmark's Sanborn Answers TSC Readers' Questions
When I asked readers to send me questions to ask their fund managers, I received a handful of queries for
Oakmark manager Robert Sanborn.
Surprisingly, the questions were more focused on Sanborn's approach than on the fund's lackluster performance. Last year was not kind to those managers residing in the value village, and the Oakmark fund is feeling the pain. The fund has a one-year return of 1%, compared to 32.9% for the
Vanguard Index 500 fund, which tracks the S&P benchmark. Oakmark's five-year average annual return is 16.4%, vs. 24.1% for the giant index fund.
Sanborn & Co. are known for buying undervalued companies that are selling at a 25% to 40% discount to Oakmark's assessment of value. And here's what Sanborn had to say when I put readers' questions to him yesterday.
Expectations of Fair Value
When you identify a cheap stock, before you buy it do you consider what might cause the shares to appreciate? Or do you simply expect any stock to eventually rise to its fair value as you assess it?
"It is more the latter. I think in the market right now most investors are spending their time trying to figure out the direction of a stock as opposed to what it is worth," says Sanborn.
Today's market is showing a strong indifference to valuation, he adds. Many investors are trying to play the guessing game of how will the market treat or react to this or that rather than analyzing a company's fundamentals. "I don't respect most people in business who think that way," he adds.
On Pressuring Management
Value managers, like former Mutual Series manager Michael Price, exert pressure on a company's management to realize shareholder value through mergers and spinoffs and the like. What place does Price's style of activism have in the way you manage Oakmark's investments?
Sanborn responded that he doesn't plan for battle when he buys a company.
"We basically take the view that we only invest with owner-oriented managements," he says. Simply, he probably wouldn't buy the stock if he didn't like a company's management: "We want to avoid a proxy fight. That means a management isn't working with you."
Sanborn, who tends to hold onto stocks for five years or more, will develop strong relationships with the companies in which he invests. But, he says, "We are not bashful with our holdings. We have voted against managements in the past."
Impressions of Mattel
Sanborn has owned the stock for a couple years and still describes it as "deeply undervalued." (The stock is down 41% since the end of 1997.)
Sanborn values Mattel, the world's No. 1 toy maker, at roughly two-thirds the forward price-to-earnings multiple of the S&P, which is about 30. "The company is trading at about 12 times cash flow, whereas similar, high-quality toy companies have been bought for multiples of cash flow in the midteens." He thinks the stock is worth 40, and it closed Tuesday at 21 7/8.
In mid-December the company, blaming a decline in reorders from retailers, said sales would fall $500 million short of expectations for the year and that earnings would be lower than previous forecasts. The surprise announcement shaved 27% off the stock's price in one day. Sanborn feels the market has "grossly overreacted."
Sanborn says he saw this kind of thing happen more than once last year. "A number of our companies have reported the loss of a quarter's worth of sales to a very key customer due to structural changes in a retailer's inventory systems." It happened at
Black & Decker
, another holding, he says.
Mattel's problems are partially attributable to a shift in where toys are being bought, he says.
Toys 'R' Us
, an important Mattel customer, has seen a huge decline in market share as consumers have shifted their toy shopping to discount stores like
, he says.
That led to inventory troubles. "Inventory of Mattel products in Toys 'R' Us stores is down 56% vs. where it was a year ago," he asserts. But the sell-through of Mattel products in those stores is slightly better than expected, he adds. Mattel's year-end woes resulted in a minor adjustment in valuation, he says, but "nothing compared to what the stock did."
Mattel's Learning Co. Acquisition
On the same day Mattel revealed its revenue and earnings shortfall, it announced that it was buying Learning Co., the educational software manufacturer. Mattel CEO Jill Barad "told us a year or two ago that Mattel had to be in the edutainment market," Sanborn says. Mattel's purchase will give the Learning Co. access to all of Mattel's brands, such as Barbie.
Sanborn thinks the price was a little high, and at the end of the day it will be a story of how the union is executed. "I think we will only know five years from now whether its was a good or bad move. The jury is definitely out."
"I do have good feelings about Jill Barad, and I give her the benefit of doubt on that," he says.
Over the course of last year, Sanborn established the fund's position at about the current market price, which is around 42. Nike's stock is up only 7.7% since the end of 1997, in part due to its troubles in Asia. "I think to buy this company, someone would have to pay a 50% to 60% premium to its current stock price," he says. "The stock is easily worth 70 a share."
"It's a top-tier company with huge free cash flow," he says. "The business itself is a cash-flow monster." From 1984 to 1998, the company has grown from a seller of footwear to a global leisure-products and apparel company. That growth was self-funded. Nike is throwing off cash and investing it back in the business and is even buying back its stock, he says.
"I think many people say this is a fashion business," Sanborn says. "There is a fashion component, but it's a mistake to say it's a fashion business."
With true fashion houses like
Polo Ralph Lauren
, "it's hard to reinvigorate those kinds of names." But Nike is different. "To me, the brand at any point in time consists of athletes it associates with," Sanborn says. And a new crop comes along fairly often to freshen up the company's image.
"Nike's size gives it strength but has hurt them lately with the brand becoming so ubiquitous that it loses its cache," he says. "But there is massive, long-term upside." Simply, Sanborn thinks it's a great company in a great industry.
"The leisure industry as a percentage of the world economy will definitely continue to grow," he adds. And Nike has the competitive advantage: "There will be market shifts, but Nike's position is virtually unassailable."
Nike After Jordan
What about Jordan?
"That is nothing," Sanborn says. It was only a matter of time before Jordan retired and Nike knew about it: "I think he will continue to be an asset for them for years to come."
What are you doing to turn around the performance of the fund?
"Nothing exactly," says Sanborn, the fund's largest shareholder. "That is a question I get a lot." He has been through these cycles before and he is simply sticking to his method of identifying undervalued companies.
"Do you want me to buy
?" he asks. "For me to buy to Yahoo!, I am going to have to buy it overvalued and hopefully sell it when it is more overvalued. That has been the winning strategy, but I find that to be a losers' game."
Sanborn has been through these kinds of growth cycles three times, but this most recent one is the most pronounced he has ever seen. In the early 1980s, it happened with the PC stocks, faded names like
. That industry set off growth's outperformance. In the early 1990s, it was biotech.
Sanborn saw the same thing bring those two growth phases to a close. He says you will start to see an increasing flow of low-quality initial public offerings. Entrepreneurs are out there saying, "I gotta get a piece of that action." Generally the valuations get so extreme that the market takes the stocks down. "I frankly think we are close to that period," says Sanborn. "I am more confident that I have ever been when my relative performance is worse than it's ever been."
"Maybe I am losing my mind," he laughs.
Thursday's Topic: Small-Cap Index Funds? Micro-Cap Equity Funds? Answers Are a Click Away
Sometimes, I don't have to go very far to respond to questions that readers send in to Fund Forum. Quite often, the answers can be found within the
For today's column, I decided to take a tour of our site to answer some of these questions.
wrote in to ask, "Are there any index funds that track the small-cap stocks?"
The answer is a booming yes.
Earlier this month,
staff reporter Joe Bousquin wrote a
story about the variety of index funds out there beyond the celebrated
Vanguard 500 Index fund. This story also covers small-cap index funds and is worth a read.
wants to know, "What is the difference between buying Spiders and an
index mutual fund, such as Vanguard Index 500?
Standard & Poor's Depositary Receipts
, trade on the
American Stock Exchange
. I won't go into a detailed explanation of these products because
senior writer Alison Moore did just that in a November
story. (The article is the con side to Moore's and Bousquin's Funds Faceoff on the Vanguard 500 Index. For the full picture, read Bousquin's
wrote in asking, "Do you know how I can find a list of micro-cap equity funds?"
For the answer to this question, you can use our Fund Scoreboards, and here's how you can find them. Starting on the home page, click on "Tools of the Trade" on the top right side of the page. From there click on "Fund Scoreboards," located on the left. Once on that page, you will be able to retrieve lists of the top-performing mutual funds broken down by group and by performance period (13-week, year-to-date, one-year, three-year and five-year). The micro-cap funds can be found under "Equity Fund Groups."
On Tuesday, I asked readers to send me stories about incorrect information they had received from their fund companies. I received several interesting replies, but this one from
wins the trophy:
I used to work for a midsize fund company as a customer service rep. Fund knowledge by the reps was about the last thing on management's mind when it came to operating the in-house call center. Of course, our funds are sold through brokers, so it was generally thought that the customer would know all about the funds that they own (yeah, right!). We also had a problem in getting many of our customers their statements on time AND some were even incorrect. But to take the cake, during our merger with another fund family, we sent out proxies along with confirmation statements in some cases to the wrong address within the same neighborhood. For example, if 10 customers lived on Main Street in Anytown, U.S.A., one customer got his AND all the other nine statements and proxies of his neighbors, including balances. How's that for customer confidence! Boy, THAT was really pleasant to deal with!
Friday's Topic: Know It All About Fixed-Income Investments?
Perhaps you are trying, like smart fixed-income investors, to keep me underemployed so that I do not single-handedly coax inflation out of hiding and drive down the value of your investments.
No? Where, then, are your questions about bonds and bond funds? Surely you have them.
Actually, I think I know what the problem is. Some of our readers are very knowledgeable about bonds. But I suspect many, if not most, are not.
There is no shame in this. Let's face it, bonds are hard, even very hard, to understand. Even if you made it through
Buying Bonds: A Primer, the series we published late last year, it can take a long time to get familiar with the terminology and basic concepts involved in understanding how bonds and income investments work.
At the risk of destroying whatever credibility I currently enjoy in this space, I will tell you that when I started in financial journalism three and a half years ago, I didn't know what a bond was. Not only that, I had never studied anything -- advanced math or economics -- that might have aided my education about bonds. I'd been an English major in college, and I was in deep doo-doo.
I'd gotten myself hired by
The Bond Buyer
, the daily newspaper that covers the municipal-bond market, by virtue of my genuine interest in public finance. But at the beginning, I wasn't covering public finance. I was covering the buy side -- institutional investors (mutual fund managers, mainly) in muni bonds. I had to call them up and find out how they were running their portfolios.
I was in extremely deep doo-doo. I would ask them questions in English. They would answer in English. I would write down what they said. And I would not have the faintest idea what they were talking about. Maybe, over the course of an afternoon, I would find one or two with enough time and patience to start with the basics. Maybe not. In any case, I had to write my story for the next morning, and I would sit at my computer long after I ought to have gone home, sometimes in tears, struggling to understand what I was writing about and thinking, "I'm not stupid, so why can't I understand this?"
Why indeed. Because bonds are very, very hard. I think it took me at least three months to get even a little comfortable with them. Why am I telling you this? To illustrate that I know from personal experience that unless you're comfortable with the complexities of bonds and income investments, it's hard to even know what questions to ask. And to put you at ease about asking questions, no matter how stupid you may think they are.
So let me see if I can get the gears turning with a few suggestions.
Is anyone interested in money-market funds -- specifically, how much of a difference there can be between one and another and what that can mean to you?
On the other end of the risk spectrum, emerging-market bonds are cheap right now. But don't some emerging-markets funds invest only in sovereign debt while others may also invest in corporate bonds? And what about currency risk? How about naming some names?
And by the way, there are three kinds of international bond funds, according to
-- emerging-markets debt funds, international income funds and global income funds. What's the difference, and what are the merits and drawbacks of each?
Munis, anyone? General, state-specific or high-yield? How to decide which type of fund to buy?
What about closed-end funds? How do I decide whether it's better to buy the open- or closed-end version of a certain type of fund? If I'm looking at closed-ends, how do I decide between leveraged and unleveraged?
If I'm going to buy an open-end bond fund from a broker, how do I analyze whether it's best to buy the A, B or C shares?
My fund's prospectus says it can buy repurchase agreements, as well as interest-rate futures and options. What are they, and what purpose do they serve?
Most stocks trade every day, but most bonds don't. So, how's a bond fund's net asset value calculated? Who does it, and are they always right?
Of course, I'm also happy to consider questions on specific funds and transactions. No question is too basic.
TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.