Show jWiftffintariiipiii BUSINESS The Salt Lake Tribune THE WASHINGTON Start-U- p Funds Not A Bargain Joe a from Orlando has been running a stock portfolio for himself his siblings cousins and a few friends for several years now beating the heck out of the market Now despite zero investment management training he wants to do it for you with My little pseudo-fun- d my familys money is beating the market which most funds havent Joe said recently So Ive been thinking I could open a fund and get paid for doing this Joe is not alone Nearly every investor in the booming 90s seems to think they can run a mutual fund Technically speaking they can That alone should make investors wary of new fund offerings The process of creating a fund provides more reason for concern Whats New? More than 15 percent of the nearly 10000 funds in the database of Upper Analytical Services opened for business since the start of 1997 Some are new offerings from established firms but most come from small managers If someone is determined enough you cant stop them from opening a bad fund or a fund based on a dumb idea" says Robert Wadsworth of The Wadsworth Group a Phoenix-base- d firm that helps money managers launch new funds You just hope that no one you like actually buys those funds Dominating the ranks of new fund managers are investment advisers who for the most part run private accounts for clients These advisers want to service small-dolla- r customers and increase the value of their investment firm So they create a fund and use a sales pitch like this: You cant afford my private services so get my best ideas buying my new fund Plenty of terrific funds almost all of the ones named for their manager have started that way So have plenty of busts A thumbnail description of - what it takes to start your own fund shows why that is To start a fund you must cre- -' ate and incorporate a legal enti-t- y set up your bylaws and es- tablish with the " Securities yourself & Exchange Commission You need a board of directors auditors accountants a 'transfer agent to service share- holders a custodian to hold the funds securities and someone to answer the phones Out of Pocket: From scratch that could run you all before $150000 or more the $100000 in assets needed to buy the funds first securities and open for business A cheaperbetter option is fund buying a ready-mad- e from consultants They handle the paperwork you get a turn- key fund ready for new inves- tors and a bill of $25000 to $75000 Now that you have a fund you need assets $5 mil- lion to $10 million to have a prayer of covering annual costs That doesnt even include a sal-ary for yourself and your staff ' In short new funds need to have a few things to be worthwhile: a good story deep pock- ets a manager likely to stay put i and a cap on expenses - Deep pockets keep the fund alive during the lean years if the fund folds and your money is returned to you a piece of your gains goes to taxes A manager who will stick around to make the story come I true also is crucial Avoid any adviser whose new fund builds the sales value of their practice at the expense of your savings And expenses are critical J too because they eat away at 'returns and hurt the funds chances for success Most new e ex-- t 'funds have penses be sure the fund caps l how high those costs can go Look too to see if the fund 1 manager plans to recapture start-u- p losses with higher costs ! down the road You could be buying extra expenses POST Some of America s best money managers are people you have never heard of They run small mutual funds and get little attention or they handle the portfolios of rich folks and pension funds and stay out of the public eye Robert Torray is a good example After managing the investments of a handful of large companies he was persuaded by friends in 1990 to start a mutual fund A year ago it had only $116 million in assets but it now has more than$l billion and is ranked in the top five in terms of performance over the past five years according to Value Line The Tweedy Browne Co a venerable Wall Street firm with a formidable track record of selecting stocks for wealthy clients started a mutual fund (American Value) that has returned an annual average of 32 percent during the past three years matching the Stank dard & Poors Index at lower risk The fund ranked No 1 overall by Value Line has grown to $600 million m assets but its still tiny by todays standards with Fidelity Contrafund at $30 billion and Growth Fund of America at $12 billion Ill get to some of the best of the smaller funds a little later But my point is that in the 500-Stoc- money-manageme- business bigger doesnt mean better While he was an investment banker at Goldman Sachs & Co Mark Hurley proved this proposition with some extensive research It surprised me he says now how many good small by orders of magnitude managers there were Hurley who had done stints at Merrill Lynch and the US Treasury Department decided to put this idea to the test At the start of this year he launched a new family of funds called Undiscovered dexs 169 percent But before you rush out to buy the Undiscovered Managers funds recognize that theres a slight drawback: minimum initial investment is $250000 Still Hurley sells wholesale to 401(k) plans and financial advisers who pool smaller investors Even if you cant buy these funds you can learn from them They have these common traits: Concentrated portfolios The managers generally own 25 to 40 stocks at a time compared with 100 for the average mutual fund (Fidelity Emerging Growth has 304) James Kaplan of JL Kaplan Associates in Boston told me that the UM Small-Ca- p Value Fund has 33 stocks in its portfolio Hes baffled how managers can keep track of many more titan that Research shows that to reduce risk through diversification you need no more than eight or 10 stocks as long as they are in different sectors Beyond 50 stocks the process becomes IB Long-ter- perspective While the average mutual-funmanager keeps a stock for just a year Hurleys managers are fanatics For example Waite says his general client portfolio contains 27 stocks eight of which he has owned for nine years or more Turnover is 13 percent annually meaning the average stock is held for seven to eight years Last year Waite & Associates bought only three stocks: US Bancorp Bell Atlantic Corp and Avery Dennison Corp which makes office products This low turnover also makes the funds highly tax efficient Unlike the big mutual funds they arent continually generating capitad ld liabilities for their l-gains shareholders Bl Value orientation The Hur columnist at The Boston can be reached by e-mail at jaffeglobecom or at Globe He I The Boston Globe Box 2373 Boston MA 02107-237- ifi"iml Money Scoreboard 131 Bank Rate Monitors survey of the 10 largest banks and S&Ls in the 10 largest metro areas Mortgages are conventional 'oans at 80 percent Car loans are tor S9000 20 percent down new car Personal loans are tor S3000 unsecured loan loan-to-val- ley managers are bargain hunters They shy away from stocks that seem expensive even if the rest of the market loves them For example Kaplan will buy a stock only if its (PE) ratio is lower than the reciprocal of the yield on AA corporate bonds Right now thats a PE of 15 compared with 26 for the S&P Among Kaplans recent purchases is Trico Marine Services Inc which services drilling rigs in the Gulf of Mexico and the North Sea The stock fell from $43 to $16 in less than four months in part because of concern about oil prices creating quite a bargain But Mister Market seems to have gone overboard: Kaplans research shows the company could melt its boats down and sell them for scrap for $25 a share Based on earnings estimates for this year the stock trades at a PE of just 7 Another of Kaplan s value stocks is Group One Automotive Inc which like Trico was formed by an entrepreneur who has rolled up or consolidated smaller companies in a fragmentin this case auto ed market dealers Group One trades at a PE of 9 Waite who owns large-cap- s takes a similar approach but he says As long as it does well well continue to hold a value stock if it turns into a growth stock as long as that growth keeps up An example is General Electric Co which he has owned for nine years He bought it at a discount to the market (based on PE) of about 15 percent Now at a market premium of 33 percent hes still a holder H Strict sell criteria All of the managers have rules on when to unload Kaplan sells if a stocks PE ratio hits 150 percent of that bond reciprocal th f Others Mortgages priee-to-eamin- Bafik deposit rates Bank Rate Monitors weekly survey ot the 10 largest banks and S&Ls in the 10 largest metro areas 3 Money Market Deposit Accounts Source Money Fund Report Gannett H But the main factor that all the funds have in common is size Theyre small and Hurley vows to keep them that way The funds will be closed to new investors when they get too big the criteria vary but the average is about $500 million Large funds Hurley believes (and research confirms) often have a hard time maneuvering For one thing their purchases push up prices (and sales push them down) so they start adding stocks to their portfolios to diminish the effects The culture changes and managers dont seem to perform as well For that reason you should consider the undiscovered-manager- s philosophy on your own Look for funds with less than $300 million in assets since they will only get bigger Remarkably enough theyre out there 1T Statewide 9 i is Q Now you can call from the Salt Lake City home service area to anywhere in the state of Utah without paying charges And heres more good news: long-distan- (ieMr40 CMfl'i) You can take advantage of great rate plans like 30 minutes for just $1699 a month There are no annual contracts required so you can switch plans whenever you want Us To jmf If Your a Your calls will sound ihlii Ss Broker 100 vyt I l c 4 4 I Lfcjlr Act now and get a $50 of Sprint PCS Phones Piruihvi Him i 200 S5() 500 S25 dearer because its digital a There are no activation fees 1 Bitlv r e Z Compare ffl Toll-Fre- Calling l vided their clients (including Boeing Corp) with annual returns during the past five years that have beaten the S&P by 3 percentage points The UM REIT Fund managed by William Schaff of Bay Isle Financial Corp in San Francisco with clients such as Chrysler Corp has returned 194 percent a year on average since 1993 well ahead of the Wilshire REIT in- - 3 Introducing mail-i- n rebate on a selection 1000 SK) wwwsprintpcscom 3c 3 Sprint PCS" V emim f imtnHtuim in oh hr rrfv in ohm nnlcr on an-- m in Ml Vj UnniHmn Sunn U!At7 i i hi m m In mm Sminimn um Scottsdale Securities Inc 2880 S Main Si 117 Sail Lake City UT 84115 Member S1PC Call Sprint PCS Center Sprint PCS Center 852 West Hill Field Road Layton 6556 South Stare Street Salt Lake Gty 0 0 Sprint PCS Center Otem For business accounts call 569-440- 0 The Sprint Store At Sprint PCS Express Center 1587 South State Street RadioShack Trolley Square Downtown 0 7 I 4666122 or 800-619'SA- (L) Call for a Free Copy of YOUR GUIDE TO COMMISSION SAVINGS" Tuuchtone & Internet Trading wwwdiscounibrokercom Over 70 Offices Nationwide CIRCUIT CITY FUTURE SHOP OFFICE DEPOT TOTALLY WIRELESS FRED MEYER GADGETS OFFICE MAX ZCMI Offer may be combined wsrh Sprint residential discount or contest S 6 99 per Month rare plan include $0 mmum per month and eaoh promotion and may not he used in conjunction with certain other promotion additional minute i 5 40 and remures a phone compatible with the Sprint PCS Network Firt incoming Minute Free Home Rate USA)U LSAt" Prepaid plan and Weekend or Option are not available on the SI 6 99 raw Voicemail i not included out may be purchased ior an additional S4 99 per month Offer subject to credit approval See Contumrr s Buying Ciuide lor complete rules and reitriction Rebate Oiler valid on Spnnc PCS Phone'1 by rim or Certificate available at retail outlets Oflnc Sprint PCS Phone purchased on or before March I 1998 and activated with Sprint PCS Service by March IS 1998 condition ol Rebate Ofler stated on Rebate Mail-inot available with phone hnanting or the Sprint PC S Employee Plan or Third Party Employee Plans Offers valid tor new activation in the Denver and Salt Lake City metropolitan areas All offer available for a limited time and subject m withdrawal without notice 01998 Sorint Spectrum L P All right reserved Spnnt Sprint PCS Sptmt Personal Communication Sen ice ard the diamond logo are trademark of Sprint Communication Company L P used under licen 8 wjbhi i1 "ii"riti ""n Managers There are seven funds run by six management firms each with an extraordinary track record of picking winners for private clients Ive got six Bob Torrays Hurley says That of course remains to be seen Hurley admits the question that his new company has to answer is the Shakespearian one Is the past prologue? If it is investors will do well Consider the Undiscovered Managers (UM) Special Small-Ca- p Fund which is run fcy Abbott Keller and David Steirman of Kestrel Investment Management Corp of San Mateo Calif whose clients include International Paper and Stetson University During the past three years the fund has produced an incredible annual return for those clients of 335 percent compared with 223 percent for the Russell 2000 index which tracks small stocks Les Waite and Diana Calhoun of Los Angeles who manage the UM Core Equity Fund have pro- above-averag- mutual-fund- s r E3 1 Charles A Jaffa is m Sunday March 15 1993 Bigger Isnt Always Better In World of Mutual Funds BY JAMES K CLASSMAN iMiiVCr hfitfi 4B) a9k iHiiiiHiwUlii wlul |