Sad tale of what can happen when a firm gets desperate

Your Funds

Dollars & Sense

March 31, 2002|By CHARLES JAFFE

THE Lindner Funds have announced new executives.


There is a good chance you've never studied Lindner - particularly if your interest in funds is less than a decade old - but the news is interesting, if only as the latest chapter in the destruction of what was one of the industry's venerable firms.

Lindner's saga is a cautionary tale for people who like "boutique firms" - mall investment companies that often spring up around one really smart guy - particularly when management changes. It's also a case study in what a fund firm looks like when it becomes desperate.

Kurt Lindner started his firm near St. Louis in 1954, and developed a reputation as a savvy value investor who ran low-cost, no-load funds. To keep costs down, he disdained advertising and even toll-free phone lines for shareholders, neither of which the firm adopted until after he sold controlling interest in the early 1990s.

"What is important is your record," was how he described his philosophy of gathering assets in a 1993 interview. A stellar record proved him right, helping his firm grow from $90 million in assets in 1982 to $3.5 billion in assets by the time of his death in January 1995. Longtime Lindner associate Eric Ryback and a partner bought the firm from Lindner in 1993.

The timeline speeds up after Lindner's death. Here are some of the lowlights:

March 1996: Ryback, who has turned over some day-to-day fund-management responsibilities to others, tells Dow Jones News Service he is using a slightly modified version of Lindner's "secret formula." But he has turned bearish and directed the funds to dramatically increase cash positions in anticipation of a market correction. The move is several years too early, and sends the funds into an extended funk.

March 1999: With value and bearish investments getting hammered, the company hires a pension-consulting firm to overhaul its management practices. Several managers leave. Investors are reported to be pulling $6 million a day from the funds.

April 1999: Lindner lays off four fund managers, putting all stock and bond funds under an investment committee that includes Ryback. That committee oversees a team of Boston fund managers hired to run the money.

Ryback tells the St. Louis Post-Dispatch that the firm will shed the stock-picking formula it used in the past. In short, the last vestige of Kurt Lindner's management style is gone; assets under management have withered to $1.5 billion.

June 1999: The firm runs its first-ever ads. It also renames three funds and drastically changes another, all "to better reflect investment strategy."

April 2000: The firm names individual portfolio managers to head its fund teams, saying the move "begins Lindner's next phase of development."

(Seven months later, co-managers will be named for each of these funds.)

August 2001: Shareholders approve changes in investment objectives for two funds - surrendering value for growth - as well as more name changes for most funds. They also liquidate one small fund and appoint a new sub-adviser to run money at two others. Investors also approve a fee increase. (Five months later, Lindner Growth & Income fund also gets a new sub-adviser.)

March 2002: Three new executives are charged with turning the company around (yet again). Assets are down to about $500 million.

The amazing thing isn't the string of mistakes showing a fund firm flailing around desperately trying not to drown, it's that investors still have so much money in the hands of these bunglers.

Over the past decade, Lindner Large-Cap Growth and Lindner Growth & Income both trail 98 percent of their peers, according to Morningstar. Kurt Lindner, who wanted his eponymous funds to be low-cost, value-oriented, and able to attract money through performance and not advertising, must be spinning in his grave.

Says fund industry consultant Burton Greenwald: "How many times do you have to get beaten on the head by all these moves to see that whatever these guys are doing, it ain't working? Shareholders should have figured this out and said `Not with my money.'"

The key for an investor in any fund company that is having problems is to look at the integrity of the investment process and the depth of the talent pool. Smaller firms are more likely to struggle after departures and retirements simply because they don't have a lot of trained replacements on the bench waiting to get into the game.

Once a firm starts changing its stripes and stops investing the way that made it successful, investors should get antsy and wonder if the company will ever be back in sync with the market.

No one should put up with years of changes and promises that can't be backed up by performance.

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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