Fund Managers

Treasury Secretary Henry M. Paulson Jr. warned yesterday against "unintended consequences" of efforts to tax hedge funds and buyout firms. At a conference organized by The Wall Street Journal in New York, he also said Congress shouldn't punish Blackstone Group LP with higher taxes because it became a publicly traded partnership. Senate legislation would force Blackstone to pay taxes at corporate rates of 35 percent instead of as a partnership, with a burden as low as 15 percent. Paulson said other industries use the partnership model, noting real estate and construction.

Legg Mason has long bet on its fund managers the way its fund managers bet on stocks: Do your homework and put big stakes on a few promising ponies. It worked beautifully for years, but now Legg's dependence on high-profile talent such as Bill Miller may be backfiring. The firm's recent, mediocre money management has gotten extra attention because it's being delivered by former stars. No, the headline effect isn't wholly responsible for the billions withdrawn from Legg funds last quarter; poor performance can repel money all by itself.

One theory about last season's home run derby staged by Mark McGwire of the St. Louis Cardinals and Sammy Sosa of the Chicago Cubs was that the final total would have been even greater had both men focused from April on maximizing four-baggers.Armchair analysts worry that batting averages and game scores will fall this year because too many players will be trying to beat McGwire's 70-homer record -- and striking out.Investors in mutual funds face a similar risk amid the hoopla about the Dow Jones industrial average at 10,000 and the unprecedented four straight years of more than 20 percent returns by the Standard & Poor's 500 index.

Though its history has been brief, Hartford Advisers Fund is quickly making a name for itself.This fund is subadvised by Wellington Management.Rand Alexander, who has been with Wellington since 1990, runs the equity portion of the portfolio and has built a solid risk/reward profile at another offering, Hartford Stock.Paul Kaplan runs the fixed-income side. He has also established an enviable record, most notably at Vanguard Wellington. Both of the managers set the fund's asset allocation.

Growth Fund of America moves in fits and starts.This fund is one of the few domestic-focused offerings from the estimable American Funds stable that emphasizes capital appreciation. It puts nearly 75 percent of its assets in technology and services -- mainly media companies -- whereas most of its siblings avoid sector concentrations.The fund's managers follow a growth-at-a-reasonable-price strategy, often taking positions in fallen growth stocks such as Cendant. A market darling in 1997, the stock was hammered last year after revelations of accounting irregularities.

T. Rowe Price Associates Inc.'s stock jumped nearly 6 percent and volume soared yesterday after an announcement that the Baltimore-based money manager was being added to the Standard & Poor's 500 index.Price's stock rose $1.7812 a share to close at $31.875, and volume ballooned as 18.97 million shares were traded. At one point during the day, Price's stock was up nearly 16 percent."That is a big move for us, even with our volatile stock," said James S. Riepe, vice chairman of Price, the country's seventh-largest publicly traded money manager.

Mutual funds hoping to build investor loyalty often have used the stick, but seldom the carrot.Redemption fees and other penalties to discourage fund switching and short-term investing are common. But rarely does a fund sponsor go beyond boilerplate shareholder reports and try to make fund investors feel as though they are a part of the investment process.A peek at a typical prospectus or semiannual report is a singularly uninviting experience. Most fund World Wide Web sites are not much better.

Vanguard Asset Allocation Fund is one of the best, but it works very hard for its high status.This isn't one of those hybrid funds that stand pat with set asset allocations. Many of those vehicles that heavily overweight stocks have been phenomenally successful in recent years. This fund, on the other hand, has exerted quite a lot of effort for its excellent returns.Day-to-day manager Thomas Loeb has undeniably been helped along by the fund's S&P 500 indexed stock portfolio and its Lehman Brothers Long-Term Treasury index bond stake.

Mutual fund investors imagine that their fund managers busy themselves acquiring stocks or bonds to post the best possible investment results.Increasingly, however, successful fund managers working for large fund organizations must acquire poorly performing mutual funds within the same fund family. The results of these transactions, which pit one group of shareholders against another, are unlikely to be posted.Last year, 178 classes of equity fund shares were merged into other funds, 37 percent more than in 1997, according to fund researcher Lipper Inc. Industry analysts expect the pace of fund mergers within and across fund companies to increase this year and in the years ahead as consolidation reduces the surfeit of equity funds.

MUTUAL FUND managers should hang their heads in shame.Last year, only 17 percent of them beat the Standard & Poor's 500 stock index, which tracks the performance of 500 large-company stocks. Worse, less than 5 percent of the fund managers beat the index over the past five years that ended in August 1998, according to a recent study by Morningstar FundInvestor, a publication owned by the Chicago-based mutual fund ratings company.No matter if the managers invested in small-company stocks, real estate investment trusts, bonds or gold, they were whipped when stacked up against the S&P 500.That's why investors have been pouring billions into index funds, specifically the ones that mirror the S&P 500. Last year, they pumped $46 billion into index funds, up nearly 40 percent from the $33 billion they put into these funds in the previous year, and nearly double what they invested in 1996.

Hedge-fund selling is a huge culprit in this fall's stock market decline, and everybody wants to know when it'll be over. Reports are mixed. "The bad news is in for hedge fund managers," reports Pensions & Investments. "Come Dec. 31, many could lose up to one-quarter of their assets if investors indeed take back all that they've requested." Investment strategist Ed Yardeni is optimistic. "I don't know," he says in a letter to clients who ask when the hedge-fund hemorrhage will end. "But I suspect the bulk of their selling is over, and that redemption gates have been closed when possible."

It's a star-studded cast in mutual funds - and also a shocking flop on this year's complex investing stage. With the financial crisis playing out in ways many professionals failed to predict, and oil also surprising, some of the best and brightest of the fund business have turned into the biggest losers of the year. They include exalted names such as Bill Miller of Baltimore-based Legg Mason Value fund, Martin Whitman of Third Avenue Value fund, David Dreman of DWS Dreman High Return, Wally Weitz of Weitz Value, Mason Hawkins and Staley Cates of the Longleaf Partners team, Christopher Davis and Kenneth Feinberg of Davis New York Venture, and the team that manages American Funds Amcap fund.

Baltimore-based T. Rowe Price Group's plain vanilla approach to investing led it to a $162.2 million quarterly profit, while its flashier crosstown peer, Legg Mason Inc., reported a $31.3 million loss as its star fund managers continued to struggle in a bear market, the companies reported yesterday. Price's profit for the second quarter that ended June 30 matched the $162.2 million it earned in the year-earlier period despite a volatile market that left most major financial firms staggering.

In times like these, investors would like to take some comfort that they are investing like the pros. Indeed, it's comforting to know that the guy running your mutual fund has his money - and his family's cash - mixed into the same pool as yours. Alas, all too often, it's not, and the fund managers don't have enough belief in what they are doing to actually live by it. That's the conclusion to be drawn from a new Morningstar Inc. study that looked at how much managers invest in their own funds.

WASHINGTON -- With an eye toward shoring up shaky financial markets, Treasury Department officials unveiled a plan yesterday to provide greater transparency and management of risk in hedge funds. However, the Bush administration's "best practices" proposal is voluntary, and fewer than two dozen of the more than 8,000 registered hedge funds signed onto the plan. Hedge funds are large pools of investment capital owned by the wealthy. They are largely unregulated. The plan, presented by Treasury Secretary Henry M. Paulson Jr., does not introduce new regulations.

The Securities and Exchange Commission is updating rules governing the way mutual funds value their holdings, a reflection of how fund firms have struggled to determine the value of mortgage-backed investments amid the subprime-lending crisis. Regulators are reacting to an explosion in derivatives and mortgage-backed bonds that don't always trade on exchanges, Douglas Scheidt, an associate director in the SEC's investment management division, said yesterday. The guidelines, to be proposed this quarter, will set out steps to value assets when trading prices aren't available.

Legg Mason has long bet on its fund managers the way its fund managers bet on stocks: Do your homework and put big stakes on a few promising ponies. It worked beautifully for years, but now Legg's dependence on high-profile talent such as Bill Miller may be backfiring. The firm's recent, mediocre money management has gotten extra attention because it's being delivered by former stars. No, the headline effect isn't wholly responsible for the billions withdrawn from Legg funds last quarter; poor performance can repel money all by itself.

FEMA learns lessons and responds faster The Sun's editorial suggesting that the Federal Emergency Management Agency has not applied the lessons learned from Hurricane Katrina is simply wrong ("Lessons unlearned," Aug. 29). FEMA's response to Hurricane Dean, as well as to the numerous tornadoes, storms and floods that have struck the nation this year, demonstrates that we have made significant reforms in our business processes and culture. And these reforms are working. After each disaster, senior FEMA leaders were in contact with our partners in state and local government.

Top private-equity and hedge-fund managers made more money in 10 minutes than the average U.S. worker made all of last year, according to a new study from two research groups. The 20 highest-paid fund managers made an average of $657.5 million, or 22,255 times the U.S. average annual salary of $29,500, said the study, released yesterday by Institute for Policy Studies and United for a Fair Economy. The study was based on data from the Labor Department and Forbes magazine. "The fact that these pay levels for fund managers are so out-of-sight is going to drive up pay at publicly traded companies," said Sarah Anderson, director of the global economy program at the Institute for Policy Studies and a co-author of the study.

In major stock market sell-offs, investors often can look at what held up during the storm and figure what sectors will be the leaders as the stock market recovers in the future. Frequently, times of upheaval are turning points in the market. What worked leading up to a market peak turns out to be yesterday's news. And new stocks emerge from the downturn to be the market's winners going forward. But this time may be different. Some areas that have held up relatively well may prove not to be the leaders when the market rebounds.