An Investment Opinion
A Foolishly Managed Mutual Fund
Don't get me wrong -- the managed mutual fund industry as a whole is not primarily constructed to maximize returns to shareholders, and that is a statement as to which reasonable minds simply cannot differ. Managed equity mutual funds on average deliver somewhere between 2.5 and 3.0% less per year than the stock market does, which over time means a lot. When you buy shares of managed mutual funds, you're buying something with an expected return of about halfway between stocks and bonds -- but all the risks of stocks. Here's one very good article by John Bogle spelling out the results of mutual funds.
The differential between the returns of mutual funds and the market in general makes perfect mathematical sense. Mutual funds more or less are the stock market. When you consider the fact that there is now over $4 trillion in domestic equity mutual funds, that's an amount of money which on a performance basis, before costs, over time has to match the market. In fact, studies show that mutual fund managers aren't in any way bad at picking stocks -- they are absolutely totally average. Once you factor in the costs charged by the funds, the costs involved in the spreads and commissions of trading stocks, and the costs of leaving money in cash and trying to time the market, the total differential between mutual funds and the Wilshire 5000 is a perfect match. Again, and as always, refer to John Bogle's writings for the comprehensive analysis.
Despite the plethora of vapid newsstand magazine covers devoted to "The Top Ten Mutual Funds For Market Timers Who Wish to Chase Past Performance" or some other such stupidity, "buy an index fund" is pretty close to the state-of-the-art advice when it comes to picking a mutual fund. But painting every single mutual fund as either Wise or unFoolish is perhaps a bit too broad. After all, if we accept the notion that anything that genuinely passes the three stage test of "Educate, Amuse, Enrich" qualifies as Foolish, then there is, at the very least, one mutual fund that more than adequately qualifies in this writer's mind. (As an aside, for the 2001 version of the Fool's page-a-day calendar I have a day entitled "The Top Five Rejected Mottoes for The Motley Fool." The #1 answer is "Educate, Amuse, Kill" -- but there is still some internal editorial strife on whether that is an appropriate joke or not. Fearing I won't get that one into the calendar, I use it today.)
Returning to the subject, let's take a look at what a pretty Foolish managed mutual fund would look like, and why the exception proves the rule. Let's take a look specifically at IPS Millennium Fund, a Knoxville, Tennessee no-load technology oriented fund run by Robert Loest.
Taking the Foolish motto's directives in order (and in order of importance), the first component is education, and IPS Millennium Fund satisfies. Perhaps it is the fact that the portfolio manager, Mr. Loest, is a former professor of biology that explains the level of education available on the IPS Funds site. Whatever the reason, there is a clear statement of the fund's philosophy and world view as well as a useful virtual bookstore and a Cool Links area. The cool investment links, unfortunately, do not include our site, but, then again, maybe Mr. Loest considers us to be on the wrong side of the tracks when it comes to mutual funds. Whatever -- I learned quite a bit by skipping around the site, and though I think a bit more could be provided regarding the Complex Adaptive Systems methodology that forms the framework of the fund (along with EVA), there's enough that one familiar with those concepts can know what he's investing in.
Regarding amusement, it is the Risk Disclosure: Human Language Version that first brought the fund to my attention and is well worth a read for anybody that needs a laugh. Here's an example:
"We buy scary stuff. You know, Internet stocks, small companies. These things go up and down like pogo sticks on steroids. We aren't a sector tech fund, we are a growth & income fund, but right now the Internet is where we think most of the value is. While we try to moderate the consequent volatility by buying electric utility companies, Real Estate Investment Trusts, banks and other widows-and-orphans stuff with big dividend yields, it doesn't always work. Even if we buy a lot of them. Sometimes we get killed anyway when Internet and other tech stocks take a particularly big hit. The "we" is actually a euphemism for you, got it?"
Hey, with stuff like that, what's not to like.
Of course, to many what's most attention grabbing about the fund is whether it enriches, which it certainly has. The fund has beaten the market four years running and is ahead on the race this year as well. Annualized returns since inception are 46.01%. Perhaps the Rule Breaker Portfolio should keep the immortal words of Satchel Paige in mind -- "Don't look back, someone might be gaining on you."
Especially helpful to investors is the fact that Mr. Loest provides near daily entries of his activities, so that fund shareholders are not clueless about what they own. This diary, combined with a monthly updated list of the exact holdings of the fund, provides shareholders with an excellent way to determine whether they like the direction of the fund or not. The top holdings as of the end of January included JDS Uniphase (Nasdaq: JDSU), SanDisk Corporation (Nasdaq: SNDK), Vitria Technology (Nasdaq: VITR), RealNetworks (Nasdaq: RNWK), Cisco (Nasdaq: CSCO), EMC Corporation (NYSE: EMC), Yahoo! (Nasdaq: YHOO), and an interesting selection of utility companies which, as noted above, provide a bit of stability to a company that contains a lot of pretty "scary stuff."
Is everything about the fund perfect? Of course not. The expense ratio is 1.4%, which while below the industry average, is not attractive. It's a small fund still (though it's picking up a lot of attention these days and the cash inflows that come with that), so I'd hope that the expense ratio comes down below 1% in due time. With the excellent performance of the fund, I don't imagine that shareholders are complaining about the expense ratio today, but still, that's a cost that could be lower.
If there are more funds out there like IPS Millennium, and its younger sister, IPS New Frontier Fund (just as smart and good looking), we may need to revisit whether there are truly Foolish mutual funds out there. By all means, let us know about any that measure up to the "Educate, Amuse, Enrich" criteria, and whether you'd like to see a broader treatment of managed mutual funds than what we've got up right now.