New Funds That Came Up With a Different Focus
Just when you think there’s no more room for new fund categories, somebody comes up with something different.
Not all of these innovations are successful--mutual funds that focused on such things as funeral companies, the sports business and various social causes proved to be duds, for example.
But certain groundbreaking ideas have generated plenty of enthusiasm from investors. Here’s a look at several novel funds that could be destined for success:
* Guinness Flight Wired Index: Given the popularity of index funds and of technology stocks, it’s surprising that more mutual funds haven’t tried to combine the two elements, as this portfolio from London-based Guinness Flight does.
The fund aims to replicate the performance of the Wired index, a grouping of 40 stocks chosen by the editors of Wired magazine. These companies are building a new type of economy, the publication says, and the group includes not only technology firms but a “broad range of enterprises that are using technology, networks and information to reshape the world.”
Only about half the fund’s holdings are in the technology or telecommunications areas, says James Atkinson, who heads Guinness Flight’s American division in Pasadena. The remainder, he says, are companies that have made heavy use of computerization to reshape their businesses, such as Federal Express, Reuters and Charles Schwab, the fund’s No. 2 holding behind America Online.
The fund made its debut in mid-December and already has $85 million in assets. “The excitement level around this fund is something I’ve never seen before,” Atkinson said. “People see a connection between our fund and the many changes happening in the world around them.”
Investors can buy into Guinness Flight Wired Index ([800] 915-6565) for a minimum of $2,500, or $1,000 for an individual retirement account. A 1% redemption charge applies on shares sold within one month of purchase. The fund’s current expense ratio of 1.2% a year is high by index fund standards but will decline as the fund attracts more assets, Atkinson says. Guinness Flight Wired Index gained a sizzling 38% from its inception Dec. 15 through March 31. (The Wired index itself was started in June and was up 82% from June 1 to March 31.)
* State Street Research Athletes: There’s nothing unusual about this fund’s investment approach, which focuses on large growth stocks, but its marketing technique is unique.
The fund caters to professional athletes, entertainers, their family members and people connected to those two industries, such as referees, coaches and movie producers.
Mind you, star athletes and household-name actors aren’t the people this fund is trying to entice. For tax management reasons, multimillionaires typically are better off with a customized portfolio of individual stocks and bonds, says Gardner Jackson, who manages the Athletes fund. But young athletes, especially those in the first year or two of a contract, may not have enough wealth to diversify properly using individual securities. “We want to start these young players on a savings mode early,” he said.
Hockey players account for perhaps three-quarters of the shareholder base--a testament to the marketing efforts of State Street Senior Vice President and former Boston Bruins standout Derek Sanderson. He squandered the fortune from his playing days and now is on a crusade to make sure other athletes don’t do the same.
State Street Research Athletes ([800] 882-0052) recently celebrated its first birthday with a gain of 29.4% over the 12 months through March 31. Assets have reached $18 million.
Athletes, entertainers and other qualified shareholders face a $25,000 minimum investment and a maximum sales charge of 5.75%.
* Focused Foreign Funds: Several mutual fund companies over the last few years have introduced concentrated portfolios of domestic stocks. The assumption behind them is that impressive performance would result if managers were forced to make relatively large bets on a fairly small number of stocks in which they have the greatest conviction.
More recently, the concentrated-portfolio idea has spread to foreign stocks. In particular, the mutual fund arm of Frankfurt, Germany-based Deutsche Bank unveiled three focused funds holding just 50 stocks each. These are known as the company’s Top 50 World, Top 50 Asia and Top 50 Europe. (It also introduced a Top 50 U.S. fund.)
The funds invest in financially strong, market-leading companies with visionary managements and other favorable traits. Two of the three foreign funds (and the U.S. fund) have outperformed their respective yardsticks since inception despite high expenses of as much as 2.35% a year. The only laggard has been Top 50 Europe. All four funds ([888] 433-8872) carry a maximum 5.5% sales load.
A new lower-cost rival is the no-load Acorn Foreign 40 fund ([800] 922-6769), which leaped 8.9% during the first quarter of 1999. It plans to hold between 40 and 60 stocks spread among at least three international markets.
* Bankers Trust Quantitative Equity: As index funds have become popular in recent years, financial companies have had a strong incentive to beat key market benchmarks such as the Standard & Poor’s 500. That’s no easy task, of course, but this new portfolio has an intriguing angle for attempting to do so.
BT Quantitative Equity is an “enhanced” index fund that combines core holdings in the S&P; 500 stocks with merger-related arbitrage activity. The idea is to invest in companies that have already identified themselves as targets of mergers, acquisitions and other corporate reorganizations. That might not seem the stuff of which huge profits are made, but merger arbitrage is a lucrative area, says Peter Graham, head of product development for BT Mutual Funds in New York. Existing stockholders frequently sell out before a deal has been consummated, and they do so at prices modestly below the tender amount. People sell either because they fear a deal might fall through or because they are happy to have reaped a big gain already.
“We buy a target company’s common shares after the merger announcement has been made, and we’ll hold until the deal closes,” Graham said. “We’re looking to capture the spread.”
Bankers Trust has managed index funds for 20 years, and it has employed the enhanced strategy for the last decade on a non-mutual-fund portfolio. The company says the approach beat the S&P; 500 by an average of 2.4 percentage points a year over that span. The approach had better produce superior results, because the BT fund will carry fairly lofty expenses--by index fund standards--of 0.9% a year.
If successful, BT Quantitative Equity could spawn a new genre of enhanced index funds with a merger-arbitrage slant. Currently, though, the fund ([800] 730-1313) is available only to retail investors who buy through a financial planner, broker or other intermediary. The minimum stake is $10,000.
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Russ Wiles can be reached at russ.wiles@pni.com.
