We are
THE BLUE MONEY REPORT.

Providing Crisp Commentary about the World of Money and Investing.
If you are interested in providing your readers with our syndicated column, you can request it here

The Blue Money Report
"...contributors will only give money to challengers when they have a realistic chance of winning, and incumbents only spend a lot when they have a chance of losing"
~ Steven Levitt

Welcome to the Blue Money Report

Today's Commentary: 09.12.03
The $7 Trillion Question: Who is minding your Mutual Fund?
As the Spitzer investigation unfolds, it may bring long overdue attention to your portfolio and what you think about it. There is no doubt in my mind that you took all of the proper steps in the purchasing process. You looked over the prospectus with great care, searching for tell-tale signs of how well the fund did against their peers, how good the manager has been for the fund, the expenses, and even more seasoned investors probably looked at the internals of the portfolio holdings.

And what did it get you? Were you among the millions of investors who woke up last week to find your fund family wasn't as straight up with you as you thought? Are you sure of what you mutual fund is doing?

The following 5 steps might help with the pain if you were caught looking the other way. Or it might help you catch the problem before it becomes worse. Let's first take a look at what got you into the fund in the first place.

If you were like too many other fund investors I've had the privilege of meeting through the years, you are still attracted to the bright light. If a fund or a fund sector has done well, the important word is "has", many folks are drawn by the hope of achieving the same enviable results with the same enviable numbers. When a fund is hot, it can be very hot. But even non-investors realize that shining moments fade. Funds do cool off. But they do not need to go cold either.

Funds at the top seldom stay there long.

But you buy in anyway even knowing that all of the info you garnered to make that decision is already old news. In a recent column for the BlueMoney Report, I explained that mutual funds were once known as Investment Trusts. But do we really trust them? And what happens when along comes Eliot Spitzer pointing fingers at the very fund families whose trust we blindly assumed was ours. Should we sell because we were hurt by our mistreatment? Should we sell if the returns we thought would happen for us, those past returns that they make no promises about fail to materialize?

How do you know when to sell your stake in a mutual fund and if you have a good reason to sell?

Five Steps Before You Sell
Step one in determining your selling strategy is to take a look at your buying strategy. Re-examining your motives for your original purchase is good place to start. Did you buy into that fund because you were young and could assume a high level of risk, older and sought balance, or were you anxious to make up for lost time? If you bought the fund after extensive research you should not be looking at selling if the fund has lagged the new top dog. Instead, allow the fund to settle into the top 5-10% of its peer group. If it is a large cap fund, compare its performance to other large cap funds. This is often better than using the fund's best comparison numbers.

Step two in your selling strategy is determined by the markets themselves. Rarely does a market or the sectors within the market stay down for prolonged periods of time. Recently we have seen a rally in the markets that has been across the board. Declines generally act in much the same manner, broadly taking the markets down. If you have a broad exposure to the markets and are avoiding sector funds in favor of funds that might specialize in company size rather than type, a move downward should be considered a buying opportunity. If you are dollar cost averaging, down markets can be very profitable over a long period of time. If your fund has changed course on you though, this is more than adequate reason to sell without waiting.

After examining why you bought the fund and whether your investment is broad based, the next step, Step three deals with the wait. How long do you wait for a fund whose value is seriously below what you paid for it to sell it? If you have a horizon of more than ten years, and provided the fund and its fundamental objectives haven't changed, you have not provided sound reasons for taking the loss and moving on. Shorter horizons should have you re-examining the first two steps more closely. If you had planned on adding to the fund after you bought it, then these down times will be good times... eventually. If you paid into the fund with a sizable lump sum, and your horizon is long, you might as well wait.

Step four is much more topical. Suppose the news tells you about a certain New York State Attorney General who has uncovered some underhanded doings at your mutual fund. Suppose you assumed that the playing field was even. Do you sell on this news? Two fund families were named in the original complaint both of which I have investments with and have for quite some time. Janus has, to their credit, told shareholders the will make full restitution although that amount has yet to be determined. This appeases me but doesn't solve the underlying problem of why fund families would betray the very folks that invest in their skills. Might be greed, I suppose.

Step five assumes that you have created a diversified portfolio of funds, a method of investing that protects your overall investment much better than betting it all on one idea. This is something we should all have learned well from the relatively recent market debacle. If you have, selling becomes based on fundamentals and management. It is really true that managers make the difference. Management teams are less volatile when only one member exits. Outside management firms are even less problematic. If the fund manager leaves, it is vitally important that you give the new head of the fund some time to develop their strategy. Then decide if what they are doing is right for you.

There will always be lists of what to do and what not to do in the financial world. The best indicator is your comfort level. It is difficult to determine but not impossible.

Today's Commentary: 09.09.03
Triangulation: Spitzer, the SEC, and Your Money
I am sure that quite a few of you have no idea who Donald Davidson was. He recently passed at age 86 and took with him his incredible vision inward as well as his diligent prying and poking into the nature of truth. He was an very influential philosopher who was prone to essays, much like yours truly, which made it easy to become prolific.

I was first hooked on his work with a paper he wrote in 1963. Simply titled "Actions, Reasons, and Causes", this emerging thinker suggested that reasons for actions may also be the reason for the cause. Dr. Davidson's paper were admittedly difficult to read, but as he continued to work he disproved a good many of his peer group, from Ludwig Wittgenstein to Descartes. Descartes was famous for his view that a person could know the world through mere thought. Davidson suggested that communication was a far better method to learning what was kind of world was all around.

Which brings me to the phrase he coined and my making off with it as title for this piece. Triangulation as Dr. Davidson would have us believe is nothing more than a view of the universe from ourselves, folks much like ourselves, and of course all other non-folks. This he suggested was the birthplace of thought and language. Triangulation for my purposes has to do with that mess that Eliot Spitzer stirred up last week.

For those of you who paid no attention to what happened, it would probably be worth your while to ante up and listen now. Mr. Spitzer, who has taken some cheap shots about his motives, has done what the Security and Exchange Commission failed to do and he did it with great aplomb - which too often can appear to be self-aggrandizing. He avoided saying that the S.E.C. was lax or that he was just that good. Instead he let the aspiration of a shot at the governor's job bubble under the surface while he took the mutual fund companies, once long ago in a past life known as investment trusts, and called them on one highly illegal but not surprising faux pas and one quasi-legal infraction. The later slap in the shareholder's face was just not a very nice gesture from a business whose suggestive title leads one to believe that everyone from the smallest investor to the largest receives the same treatment.

Now Mr. Spitzer's suggestion that what these funds did was akin to having been able to place a bet "on a horse after the horses have crossed the finishing line" fell short of what actually happened. These aberrant mutual funds, sometimes at the ignorance of the manager, would allow an outside hedge fund, in this case Canary Capital Partners to by fund shares after the close of business for everyone else based on news they received. They knew how the next trading day was going to go for whatever sector they were playing. So I believe Mr. Spitzer should have said, "tomorrow's results of a horse raced today".

But you need more than a piece of news to make the kind of returns CCP netted for its shareholders. You needed a willing accomplice who would open up their trading desks, even go so far as to set one up in their office, have a large family of funds spread across many sectors and investment styles, managers who were willing to look the other other way because assets determine pay, and a partner to lend you the money to play.

Canary found just such a rube in Bank of America and Bank One. Buying mutual fund shares after the 4 p.m. close is a violation of state and federal laws. But the ability to look the other way becomes so much easier when there is a large amount of money on the table. Alan Abelson, columnist for Barron's suggested that the only difference between the mutual fund boys and the Cosa Nostra was a wardrobe of much flashier attire.

Some of the mutual fund players called on the carpet by the intrepid New York State Attorney General were Janus and Strong. These two families, of which I own funds in, have struggled mightily to keep shareholders from the loftier days past. Managers have left, CEO have bailed and restructuring and realigning have made both of these families willing targets to turn a buck. Unfortunately, this can only be done at shareholder expense. In a minute I will give you some hints on what to look for as a way of warning.

When a fund allows this to happen, huge amounts of cash are available to the fund manager but for an unstable amount of time. They never really can be sure when this fat investor may turn and run. It can make the running of the fund much more difficult. One fund actually offered a restriction that wanted the same amount of investor money in the account on the last day of the month as was present on the first day. In between, all hell breaks loose as market timing, the legal infraction against shareholders as these investment groups move in and out and in the process creating increased turn over in the fund, which, not surprisngly increases costs but generates fees on top of fees.

This would be no problem if the practice were free of fees for individuals as well. U.S. Rep. Thomas Tancredo, R-Colorado even went so far as to address this very problem to Harvey Pitt, who was still at the helm of the S.E.C. after he got burnt on redemption fees. The practice so wide spread and common place that some throwers of stones should be careful. John Bogle, the grandfather of the indexed mutual fund waved a crooked finger at the industry's lack of fiduciary duty. The investigation has only hinted that Vanguard might be involved.

So to complete the triangulation, the reason creates the action creates the cause, we need to look at how we invest.

Mutual funds are still an incredibly valuable tool in an investors plan. Many of the funds we send money to still engage in other under handed practices such as using soft money and offering incentives to brokers to charging fees on index funds above .50% and billing their shareholders 12-1b fees after the fund has closed to new investors. To name but a few of the ways mutual funds are attempting to lose our trust, as blind as it is. But they can't kid us about why they dropped that old name. We fully understand.

We can't always rely on Mr. Spitzer to plow the fertile valley of Wall Street, although he has done an admirable job. We can't rely on the S.E.C. to help much either. If any of you watched as NASA was dissected by the report on the shuttle accident in February as they described the agency as multi-layered and directionless, they could have been talking about the S.E.C. They mean well and they try hard, but there are too many places in those corridors for good intentions to get lost. So it is up to us to do the job when no one is looking.

If your mutual fund is turning their portfolio in excess of 10% portfolio turnover per month, something is amiss. That is a 30% turnover in the course of a quarter and unless you are chasing returns through high risk, this is might be the first hint that things are excessive. The fees generated by this activity begin to eat away at your return much faster. When your prospectus arrives, this is the kind of information that you should be checking.

Something else to consider is whether your fund is being fairly valued. Fairly valued is a concept that is just beginning to catch hold in the mutual fund industry. Much the way women tend to drift towards the Saturn automobile's no-haggle pricing, investors will take to this concept should it ever become popular with mutual funds. Some do use systems, many of them developed in-house, but have met with shareholder resistance. Some sort of universal model of how this should be done is brewing at the S.E.C., right? These are the very changes that would make long term investing in funds a little more safer even if it meant adopting the same system used by Exchange Traded Funds.

It would be a shame if the industry lost some those who believed innocently that "the reasons (to make money) explains the actions (to increase hedge fund returns and those of the parent company of the mutual fund) just inasmuch as they are the causes (poor monitoring by the S.E.C., the industry itself, and the investor) of those actions". That Eliot will keep popping up as long as we fail to police our investments and ourselves. Investing is more than ritual. It is involvement.