`First interactive mutual fund' must prove it isn't a gimmick

Your Funds

Dollars & Sense

September 26, 1999|By Charles Jaffe

JOHN GUTFRIEND, the former chief executive at Salomon Brothers, once described a good trader as someone ready to bite the backside off a bear. While that might make for interesting television, there is no other reason for anyone to want to see what is happening in the trading room of a mutual fund.

So when the "first interactive mutual fund" promises unprecedented access to portfolio data management and features a "trader cam" with which investors can play voyeur into the trading room, it's difficult to separate the good from the gimmick.

Let's give it a shot.

OpenFund is a new e-fund, not only investing in aggressive stocks that can profit from the "New Economy," but also allowing shareholders to view and participate in the investment process. Since investment strategy is not the focus of the new fund's promotional materials, we can assume that online goodies rather than investment prowess are the fund's big lure.

"If people want to see it as a gimmick, they see it that way, but they can also see if we are doing our job every day because we're letting them see how everything works," says H. Davis Nadig, the fund's Boston-based co-manager.

The fund industry is still trying to figure out how to thrive online, and OpenFund comes at the problem from a new perspective. Instead of starting a fund and putting it on a Web site, OpenFund started with a Web site. Here's a review of OpenFund's main features: Web site, www.openfund.com (Thumbs up)

OpenFund actually designed its documents to be Web-friendly, so that the prospectus has the feel of a designed Web page rather than a lengthy printed document linked to a Web site.

It makes for "paperwork" that is easier to digest.

OpenFund also keeps tabs on the fund's tax status (how much it has racked up in capital gains that could become a tax burden to investors), links to data pages about stocks in its portfolio, and has more manager chat than you could reasonably expect.

Live camera looks into the trading room. (Thumbs way down)

This is a dumb idea; a mutual fund is not a peep show. You could tour 100 trading rooms and not come away a better investor for your experience.

Account paperwork. (Thumb sideways)

OpenFund still requires a signature and printed material to open an account, and it's not the first fund to offer all correspondence by e-mail. Moreover, OpenFund charges customers who actually want statements by mail; unless that translates to lower costs, it's a loss of choice.

Expenses. (Thumbs down)

Low costs are supposed to be a factor in the development of e-funds. But OpenFund's expense ratio is 1.45 percent, average for a stock fund. Management fees drop dramatically if the fund gets enormous -- $750 million -- but OpenFund does not represent the cost savings that might be expected from the Internet.

Real-time portfolio disclosure. (Thumbs down a little bit)

More disclosure is good, but once a fund holds huge stock positions, disclosing moves in real time could hurt shareholders.

"When the world knows a manager has changed his mind and plans to sell, traders will get out before the fund can unload its position," says Bill Fries, manager of the Thornburg Value and Global Value funds. Thornburg posts regular portfolio updates and manager commentaries on its Web site, but stops short of the real-time log of OpenFund. "That could make it harder for the fund to liquidate its holdings at a good price."

Interaction with managers. (Great big thumbs up)

I would not want a fund run entirely on suggestions from a chat room, but swapping messages with management and other shareholders can be enlightening. So, too, is having managers comment on the holdings that drive the fund. Many companies offer commentaries now but could go further.

OpenFund's level of commentary would satisfy any fund junkie, although it may also be a function of the fund being new and pursuing an aggressive, frenetic trading pace.

Performance. (Thumb sideways)

OpenFund is an infant, less than a month old. It has about $6 million in assets.

The Internet may be this fund's communications medium, but the fund still needs to have something good to communicate. To prove it's not just a gimmick and to really make the fund industry take notice, this fund will have to perform.

Charles A. Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston 02107-2378.

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