MutualFund Firms Give Mixed Reviews to Timing System

The Fabians don’t recommend individual stocks. Instead, their market timing system uses no-load mutual funds, which makes it practical for small investors to move between stock funds and money funds with a simple phone call to their fund company. Hence the name of the Fabian newsletter: Telephone Switch.

But mutual fund firms generally don’t like market timers. “I would be very, very skeptical” of anyone who claims to beat buy-and-hold investing over the long haul, says Jeremy Duffield, senior vice president at the Vanguard Group in Valley Forge, Pa.

Vanguard and Fidelity Investments are all but openly hostile to timers. They argue that excessive trading can wreak havoc with portfolio management. A rash of timer liquidations, for example, can force a fund manager to sell stocks even though there’s no change in their fundamentals.

That, in turn, can hurt the returns of shareholders who stay put in the fund. Likewise, excessive trading in a fund runs up high transaction costs, which end up being borne by all shareholders.

To keep timers at bay, many no-load fund companies now restrict the number of round-trip exchanges that shareholders can make between stock and money funds to two or three per year.

The Fabians say because their timing system rarely exceeds two round trips a year, they can still use most fund families. And some funds, such as the Janus Funds and the Founders Funds, both in Denver, welcome Fabian investors.

“We don’t agree with what they do,” says Jack Thompson, executive vice president at Janus. But within the confines of long-term switch calls, “our hope is that we’d have these assets more often than not” in Janus stock funds, he says.

The five funds that make up the Fabian fund index: Janus Fund, Founders Special, Columbia Special, Financial Industrial Income and Scudder Capital Growth.