When market heats up again, be wary of new fund offerings

Your Funds

Dollars & Sense

March 02, 2003|By CHARLES JAFFE

MOST FINANCIAL services companies don't issue a press release when they shut down a mutual fund. They want failed offerings to sink beneath the waves without making a ripple.

But if fund investors are going to come out of the bear market smarter and wiser, they need to heed the lessons that fund companies send when they bury the weak offspring at sea.

Consider, for example, the lessons to be learned from the Amerindo funds.

In a filing made last month to the Securities and Exchange Commission, Amerindo announced its intention to fold its Internet B2B fund and Health & Biotechnology offering into Amerindo Technology.

It's the kind of activity that is happening nearly every day in the fund business, as investment firms scale back and "right size." The funds being killed off tend to be small, unloved losers, meriting little more than a brief in any business news report.

But if you were an investor in a fund that is being shuttered, the experience is annoying at the least and painful at its worst. To see why, consider Amerindo, a company built on the tech-savvy reputation of its manager, Alberto Vilar. Amerindo Technology, the flagship of the firm, took huge risks in the late 1990s, but was richly rewarded for them. The fund's best year was 1999, when it rose nearly 250 percent.

Flush from that success, the firm did what so many fund families have done: It branched out, relying on the implicit sales pitch that occurs whenever a hot fund spawns a sister: "If you like what we did with one fund, you'll love what we do with the next."

But an experienced manager like Vilar should have known better. The Internet, as an industry, barely had enough stocks to support specialty funds (which is why so many Net funds would invest in any company that had a Web site); the thinner business-to-business market of Amerindo's second fund was a lock to offer extreme volatility, and it could not hope for the huge run of the late 1990s to continue.

Amerindo's health and biotech fund appeared to some outsiders to be a manager overreaching, reading his press clippings and believing that his genius could extend to a market that is tangential to his primary area of investment expertise.

The result was two lousy funds. Amerindo Internet B2B lost 57 percent in 2001 and 35 percent in 2002; it never accrued much in assets - it currently has $4 million - which accounts for a high expense ratio of 2.23 percent.

Shareholders can take some solace in the fact that they invested in the fund to get tech exposure, and they'll still have it once they own Amerindo Technology.

Amerindo Health & Biotech dropped 27 percent in 2001 and lost nearly 60 percent in 2002. It currently has $3 million in assets, and those shareholders will wind up with a fund that has nothing to do with health issues once the merger goes through.

The real lesson for shareholders comes from the explanation for the closings. Amerindo officials were careful to point out that they still believe in the health care and e-commerce sectors, and that they expect better days ahead for those kinds of stocks.

They noted that combining the funds allows the firm to cut costs, and to pass that savings to consumers.

Personally, I find the cost claim dubious. Amerindo Technology carries a 2.25 percent expense ratio, higher than Amerindo Health and just a bit below the B2B fund. It is hard to believe that a $7 million increase in assets - a lot less money than the fund has lost in the past few years - will bring costs down by any great measure. It's hardly like Amerindo Technology will soon be cheap, with an expense ratio below the industry average of roughly 1.4 percent on stock funds.

And if Amerindo believes in the future for its niche markets, pulling the plug now makes no sense. Unless, of course, management wants to bury a lousy track record that will take years to overcome.

Nope, Amerindo simply wanted to grab the brass ring of big assets during the bull market - using the money of new investors to take that shot - and is pulling the plug because it got a steel circle instead.

Therein lies the lesson investors need to learn from most funds being shuttered. Virtually every necessary flavor of mutual fund has already been created.

So when the market heats up again - and it will - remember this: It pays to be at least as anxious about a new offering as you are excited to get in on the ground floor. You know what's in it for the fund family to start something new - the chance to suck up assets that would have gone elsewhere - but ask what's in it for you. It could be a quiet closing and a big disappointment.

Charles A. Jaffe is senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, Mass. 02025-0070.

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