No secrets for `open’ mutual funds
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
In this information age, investors have unprecedented access to instant price quotations and analysts’ reports that can affect the value of their investments.
Investors can trade online and receive a transaction confirmation in seconds. But there’s still one group of investors that is kept completely in the dark about its investments: mutual fund shareholders.
They are the last investors to rely on blind trust.
The investment pros, including Warren Buffett, claim that word of their purchases--or sales--would distort the market before they have a chance to finish building or liquidating a position.
Mutual fund managers make the same claim. So, although funds post their closing prices--or net asset values--every day, investors typically have to wait from three to six months to find out exactly what stocks the fund manager has been buying or selling with their cash.
The funds reveal their positions in quarterly or even semiannual reports. That creates the opportunity for ``window dressing,’’ whereby portfolio managers buy or sell stocks to create the impression that they might have owned a hot stock for a long time or dumped an embarrassing loser much earlier.
But here’s some good news: Just as the Internet has revolutionized many forms of business, it’s now attacking the secrecy of mutual fund managers’ trading decisions.
Two fund companies are now online, posting their transactions daily. The Open Fund places its $30 million portfolio on its Web site at www.OpenFund.com. And at www.StockJungle.com, there are four mutual funds run completely in the public eye.
Using the word ``open’’ to describe these funds is a polite way of expressing their style. The Street calls it ``running naked.’’
Every day, every trade is posted--along with an explanation of why the managers bought or sold. With these Internet funds, the prospectus can be downloaded from the Web site, which also handles most shareholder services. But there’s still a need for paper, as the account forms must be signed and returned. Investors can either mail a check to open the account or wire transfer cash to the custodian bank.
The StockJungle.com Web site adds an even newer twist to the concept of making shareholders knowledgeable about their fund investments. In one of its funds, the Community Intelligence Fund, managers actually take advice from shareholders and others who post comments on their Web site.
Stock Jungle’s three other funds are more traditional. Their S&P 500 Index Fund charges absolutely no fees or expenses. The fund management company is covering all the operating costs as a good public relations ploy. Plus, advertising on the StockJungle.com pages brings in cash to offset the expenses of marketing the fund.
Stock Jungle’s other two funds are the Market Leaders Growth Fund and the Pure Play Internet Fund. Those funds are managed by two experienced professionals, Michael Petrino and Gordon Gustafson. Petrino said: ``The investment performance is still driven by fundamental analysis. That’s how we look for value. And the analysis doesn’t change just because we reveal the outcome of our search.’’
Petrino’s an outgoing guy, and having his decisions second-guessed by investors every day seems to motivate him instead of annoy him.
The Community Intelligence Fund is a truly unusual concept. Not only are all its trades posted online, but the online community also acts as its research analysts. Ultimately Petrino and Gustafson decide which picks proposed by the community will be bought or sold for the fund’s portfolio. But nearly 2,000 people have registered in their Community Intelligence Arena (CIA) on the site in order to submit their favorite stock picks.
More than 5,000 stocks are tracked on a daily basis in their individual portfolios. The companies chosen must have a market cap of no less than $100 million and must be listed on either the Nasdaq, American Stock Exchange or the New York Stock Exchange.
There is a daily $50 prize for the top five stock pickers on the site--and one person has won more than $1,000 in prize money. (Petrino said that even though the portfolios are anonymous, he suspects that some professional stock analysts are posting their picks on the site.)
The fund’s objective is to beat the S&P 500 index--something that 85 percent of equity fund managers have failed to do in the last five years. And the fund is succeeding. The Community Intelligence Fund is up 42 percent so far this year and 60 percent since it was started Nov. 11, 1999.
With slightly more than $2 million in the fund, disclosing its moves certainly won’t have much of an impact on either the market or its performance. Still, its numbers to date might lead you to believe what some investors have long suspected--that in this day of instant information, some ordinary investors might out-manage the pros.
And that’s the Savage Truth.
Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to savage @suntimes.com. Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.