Liquidation of struggling Oakmark Small Cap Fund is a rare declaration of defeat

The Insider

Your Money

August 15, 2004|By BILL BARNHART

THIS MONTH'S big story in mutual fund investing has received scant attention.

Harris Associates announced that it would liquidate the $350 million Oakmark Small Cap Fund because of its poor investment performance.

"That was man bites dog," said attorney Wayne W. Whalen, a board member of the Mutual Fund Directors Forum and chairman of Van Kampen Funds.

Investors can appreciate the candor implied in the move, but there might be a darker message.

After turning in an above-average performance in the late 1990s and in 2001, the fund's performance dropped to the bottom of the pile among small-cap value funds.

Typically, funds with consistently poor results are merged into other funds managed by the same organization.

The instinct of fund managers is usually to retain the assets and the fees they generate.

Managers might seek to restate the fund's objective. They might hire a sub-adviser who might be luckier. In the worst case, they might sell their management contract.

But simply declaring defeat and returning money to shareholders is almost unheard of.

In a statement, John R. Raitt, chief executive of Harris Associates LP, emphasized the firm's commitment to "delivering superior investment performance.

"We haven't been able to accomplish this goal in the Small Cap Fund and ... have concluded that it is in the best interests of fund shareholders to liquidate the fund," Raitt said.

"That's one of the most honest statements that I have ever heard out of the mutual fund industry," said Professor John C. Coffee Jr. of Columbia University Law School, an authority on securities laws.

"It's the right move," said mutual fund critic Roy Weitz of Fund- Alarm.com. "They definitely are to be commended."

A larger question looms. Oakmark funds are highly regarded for their bottom-up approach to picking good stocks at compelling prices.

If they can't pick small-cap stocks for long-term investors, who can?

Small-cap stocks soared last year. Investors bought nearly every name and bet on an economic recovery to lift all boats.

This year, the market's tide has turned, but speculation in small-caps remains big business among hedge funds and other short-term investors.

Edward Studzinski, co-manager of the Oakmark Small Cap Fund, told me that hedge funds seeking rapid-fire gains are bidding up small-cap stocks in the hope of a self-fulfilling strategy.

"You have to watch out that you're not creating your own performance," he said. Oakmark was unwilling to play that game, he said.

"It's a fascinating comment that deserves some study," said Weitz. "Their feeling is that the small-cap market is fundamentally changing. They seem to be saying the market is distorted.

"It may be self-serving, but it sounds plausible. If that's true, mutual fund investors need to readjust their approach to the world, because small-cap may not be the place to be."

Coffee was less sympathetic to the notion that small-caps have become a minefield. To complain that you've lost your edge because more people are competing is a weak excuse, he said.

"That's the measure of a more efficient market, that there are more people searching for bargains," he said. Besides, "if only they were looking for bargains, to whom would they sell?"

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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