Star money manager isn't always in step

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October 30, 2005|By CHARLES JAFFE | CHARLES JAFFE,MARKETWATCH

Dancing with the Stars was a big television hit this summer, pairing celebrities with professional hoofers to see who could win the hearts of America.

The concept is not dissimilar from investing in mutual funds, where an individual pairs up with professional money managers hopeful of dancing a profitable jig.

But as viewers of the television show have learned, not all stars are created equal; some have rhythm and others have two left feet.

This month, manager David Winters opened his new fund - the Wintergreen Fund - and while you may never have heard of Winters, few in the investment world would think of him as anything but a celebrity.

For five years, Winters was chief investment officer for Franklin Resources' Mutual Series funds. He learned the investment ropes at Heine Securities Corp., working with two famed value investors, Max Heine and Michael Price, and taking over Mutual Series when Price left.

From the time Winters started managing Mutual Discovery in February 2000 until he left in April, the fund earned a 9.5 percent annualized return, compared with an annualized loss of 0.7 percent for his average peer, according to Morningstar Inc.

That makes the Wintergreen fund mighty interesting.

Not only can you dance with a star, but you get in on the ground floor; studies have shown that new issues tend to have some pop, in part because the manager benefits from the flexibility of running a small asset pool.

A good investment decision on a star's new fund requires going beneath the surface.

For proof, look back to some one-time hotties who broke away to hang out their shingle, names like Ryan Jacob, Garrett Van Wagoner, Tom Marsico, Elizabeth Bramwell and Donald Yacktman.

Their history is mixed.

Jacob, who left the Kinetics Internet fund to start Jacob Internet, got off to a horrible start, finishing dead last in his peer group in his first full year in 2000. He was nearly that bad in his second year. While Jacob has now put together three straight years in the top 5 percent of the category, investors who rushed to join him at the start got nothing but misery.

After leaving Govett Smaller Companies fund, Van Wagoner got off to a hot start in multiple funds, peaking as the industry's top performer in 1999. Since then, however, he's been awful. Van Wagoner Emerging Growth, his longest-surviving fund, is one of the worst funds of the 21st century, nearly dead last among all issues.

By comparison, Marisco starred at Janus before starting his eponymous funds in 1998. While his growth-oriented style suffered during the bear market, he has been consistently top shelf with Marisco Growth and Marsico Focus when the market is on the rise.

The old guard of stars to go solo is Bramwell, who swapped Gabelli Growth for Bramwell Growth in 1994, and Yacktman, who quit Selected American Shares to start the Yacktman Fund in 1992. Both have been above-average over the long haul, with periods of knockout numbers and other stretches that could induce vomiting.

Stars tend to do that. They become big names thanks to a run as a world-beater; starting their own firm is a chance to capitalize on what they have done well.

That, in part, is what makes Wintergreen a tough call. Winters' style is to buy distressed companies, value stocks, issues he can get active in to improve and much more. He earned his star during market conditions that weren't conducive to being a star and with a style that pretty much ignores market conditions.

"The approach Winters employs is not risky in the way a lot of those other star managers were," says Stephen M. Savage, editor of the No-Load Fund Analyst newsletter. "Guys like Jacob or Van Wagoner were in the right place at the right time. With Winters, he's been right at the wrong times. ... It makes you wonder how well he might do in good conditions."

Still, Savage won't recommend Wintergreen, because the fund carries a total expense ratio of nearly 2 percent, the price an investor pays for getting in at the start when the costs can't be spread over a lot of assets. Expenses will come down, but not until assets grow significantly.

For some, Winters' new fund - it has no ticker symbol yet, but information is available at www.wintergreenfund.com - must prove itself and cut those costs before it's worth a tango.

Says Jerry Tweddell of Tweddell Investment Management in Sonora, Calif.: "A new diversified fund may give you some extra bang for your buck in the first six months, maybe even for 18 months, so weigh the higher cost against that. ... No matter who the star manager is, they have to prove to you - and fairly quickly - that they can do it on their own."

jaffe@marketwatch.com

Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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