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Fund Spy

Morningstar Fund Spy

Some Patterns in the Madness
Mutual-fund observers often criticize investors for chasing short-term performance.

Indeed, many people invest in funds that boast huge recent returns without considering how volatile the funds can be or if their long-term prospects are as juicy as their year-to-date gains. It happened in 1993 with emerging-markets funds, and as I noted recently, it's happening this year with small-cap Japan funds. Both Fidelity Japan Small Companies FJSCX and Warburg Pincus Japan Small Company WPJPX posted returns in excess of 180% through October, and have attracted buckets of new assets.

But investors aren't pouring money into every fund with boffo returns. For example, Lexington Troika Dialog Russia LETRX had a year-to-date return of 50% through October; it was up much more than that at the end of June. Few people took the bait. The fund's asset base, which began 1999 at $19 million, grew to only $52 million by mid-year, and much of that meager gain was from stock appreciation, not inflows. By October's end the fund's coffers held a mere $34 million.

That's a far cry from the $200 million Lexington Troika had in September 1997. Even performance chasers, it seems, have decided to strike Russia from the list of viable investment options.

Maybe the fact that Lexington isn't widely known also played a role. But you can't say that about T. Rowe Price. Its International Discovery PRIDX began 1999 with nearly $193 million in assets, and it had only $381 million at the end of October. What's wrong with that, you say? The portfolio had posted a 70% gain over that period. And even with no inflows at all, the fund would've grown to about $330 million. So it took in only $50 million in new money. Why so little? Maybe because it wasn't at the absolute top of the foreign-fund charts, like the two Japan small-company funds.

Bottom line: Investors don't chase performance indiscriminately. They hesitate if a fund invests in the shakiest of regions or if it only has a 70% return. But if a fund can boast triple-digit gains AND one of the top two slots in the total-return charts, then it had better hire more people to answer the phones.

He Forgot to Mention the Locusts
Thinking of buying an emerging-markets fund? In a recent press release, here's how manager James Squire of closed-end Asia Pacific Fund APB summed up the third quarter: "September saw a month of natural and human disasters for Asia. Events included a hurricane hitting Hong Kong, volcanic activity in the Philippines, an earthquake striking central Taiwan, and social unrest spreading in Indonesia from East Timor to Jakarta."

He then said that Asian currencies had weakened and several prospective stock deals had been pulled off the table. A brief sentence on the fund's sector weightings concluded the message.

In an era when so many public statements are slick and sugar coated, Squire's candor is refreshing. But it's also perplexing. After all, despite facing trials of Biblical proportions, Squire's fund lost only 4% in the third quarter. Conditions in most Asian markets are more encouraging than they've been in years.

So please, Mr. Squire, cheer up! Emerging-markets investing has enough naysayers without its own managers turning into prophets of doom when the horizon is relatively bright.

Go Team! Beat that Sports Metaphor!
In my previous column I poked fun at managers who haul out that tired sports cliché about only trying to hit singles and doubles, not home runs. In a recent full-page ad in InvestmentNews, PIMCO, as the sportscasters might say, takes it to the next level--and strikes out.

Flanked by old-fashioned baseball cards of the players in question, the ad's headline blares, "For every Babe Ruth in your lineup, you need a few Ty Cobbs." The point (as far as I can tell) is that while Babe Ruth slugged a lot of home runs, he didn't do much else--so you need the mutual-fund equivalent of legendary singles-hitter Ty Cobb to fill in the gaps.

The analogy isn't a very apt one, though. In reality, Babe Ruth hit plenty of singles and doubles himself. His career batting average was an astounding .342. He also could pitch, as he demonstrated to stunning effect his first few years in the league. What's more, even when Ruth was setting home-run records, he didn't strike out all that much. If you actually had a team of Ruths, you wouldn't need any Cobbs.

Oh, well. At least PIMCO didn't claim that its investment philosophy mirrors the playing style of the Utah Jazz. Value boutique Royce & Associates came up with that gem a few years ago. I'm still wondering which Royce manager was supposed to be Karl Malone.

Stat du jour
#2 out of 86: PIMCO Total Return Institutional's PTTRX 10-year rank in the intermediate-term bond category.
$23.3 billion: Its current asset base.