Benham Group Founder Offers Tips for Investors
Later this spring, Twentieth Century Cos. of Kansas City is scheduled to complete its acquisition of Benham Management International in a deal that will create the fifth-largest no-commission fund group with about $39 billion in assets.
The merger is a logical one, combining as it does Twentieth Century’s expertise in stock funds with Benham’s acumen in bond and money market portfolios.
The transaction requires the approval of Benham shareholders in a May 31 vote and regulatory approval after that. Assuming it does go through, James Benham, one of the industry’s more colorful and outspoken personalities, won’t find himself at the helm of a fund company for the first time since the early 1970s. Benham will become a large shareholder and vice chairman of the new firm.
Benham founded his firm and one of the first money-market mutual funds in 1972, after working several years as a Merrill Lynch broker and, before that, as a bank examiner. (Away from his desk, Benham is an accomplished trumpet and fluegelhorn player; he marched with Michigan State’s band in the 1956 Rose Bowl.)
For nearly the first 20 years, his fund group stuck entirely with bond and money market investments while Benham himself warned shareholders of dire economic problems that, for the most part, didn’t materialize. The Benham Group, now headquartered in Mountain View, Calif., even had a gold fund before introducing its first mainstream stock portfolio, in 1990.
Some of those fears remain but Benham says he has grown more optimistic about the American economy and stock market. Here’s what he had to say on several topics of interest to mutual fund investors during a recent interview.
* On consolidation in the fund industry:
The main catalyst driving the Twentieth Century-Benham merger is the stock fund strength of the one firm and the bond investing focus of the other. But also figuring into the equation, Benham says, is his firm’s lack of assets in the increasingly critical market for company sponsored 401(k) retirement programs.
In addition, Benham says that his firm, with $11 billion in assets, is simply too small to afford first-rate operational fixtures such as electronic imaging, a paperless system that allows fund companies to photograph and electronically store every account application, letter or check that investors send in. Twentieth Century already has invested $30 million in such a system.
“The little guys don’t have the ability to do imaging and 401(k) business,” Benham says.
* On bond funds:
The very existence of bond funds was called into question by critics following a dismal performance in 1994. Unlike individual bonds, funds don’t mature on a specific date, so investors have no assurance that they will ever get their principal back.
Benham thinks such reasoning misses the point. Investors should focus on the “income stream” a fund pays out rather than the principal repayment uncertainty, he says.
Because funds constantly are buying new bonds as old ones mature, their yields will track current interest rates. Individual bonds can’t do this. Once you lock in a yield, that’s what you get for the life of the bond.
Over many years, Benham says, the income earned will outweigh the eventual principal repayment if you consider the corrosive impact of inflation.
* On money market funds:
Benham says he wasn’t surprised that one money market mutual fund “broke a buck” or suffered a loss in 1994, a year of sharply rising interest rates and greater derivative use.
But he thinks the worst is over for the simple reason that rates have been on the upswing for more than 13 months. That’s significant because money funds aren’t allowed to own IOUs maturing in more than 13 months. So presumably most of the bad holdings have been flushed out by now, he says.
* On international bond funds:
These products also have taken some heat lately following poor returns last year, but Benham believes they continue to make sense as a way for Americans to diversify out of dollar denominated investments.
“Our currency is being questioned now because of the red ink coming out of Washington and the red ink coming from the trade deficit,” he says. “At some point, foreign investors will force responsibility on our government or our bond market will dry up.”
Given the dollar’s chronic weakness, investors in foreign bond funds should welcome the currency fluctuations rather than fear them, he says. Other vehicles for diversifying out of the dollar include mutual funds that own foreign stocks and those that own gold. Investors should consider any or all of these types of funds for up to 25% of their assets, he suggests.
* On stock funds:
Benham admits to having greater confidence in the stock market than he used to. He senses Americans are becoming more willing to add stocks and stock funds to their portfolios, motivated in part by fear that they could outlive their assets in retirement if they don’t accept greater risks.
“Stocks are the primary place to grow your wealth because stocks can raise dividends while bonds can’t,” he says. “This is part of the reason for us to combine with Twentieth Century.”
