Even the market cooperated in boosting spirits (it was up over 2% on the week).  Only the young footballers from North Central College weren’t in a cooperative mood, and the 6-2 Cardinals delivered what the local paper described as “a thorough beating” on Augie’s Vikings, 31-15.  The Vikings – with four Division III national championships, 21 conference championships and the fourth largest collection of Academic All-Americans in NCAA history – were understandably upset.  Their coach acknowledged the loss, but reminded folks to learn from the short term rather than to obsess about it.

Which brings me to Zach Liggett and the Utopia funds. 

I wrote a modestly skeptical profile of the Utopia Core (UTCRX) fund in July, then after a long conversation with co-manager Zack Liggett, I wrote a substantially more positive profile in August.  My bottom line was this:

Mr. Liggett came across as very bright, articulate and thoughtful. Their separate accounts have accumulated a substantial long-term record for consistently outperforming a wide array of benchmarks. The funds have been impressive in 2007: they’ve posted peer-beating returns … And all of the funds gained 3-4% during the July turbulence, when the broad market declined 3% and even many of the "hedged" mutual funds I follow lost money.

These folks seem to be producing a really useful, first-rate product. I’m hopeful that they’ll be able to communicate their strengths and strategies somewhat more effectively to their new audience of mutual fund investors. Beyond that limitation, they seem to offer a compelling set of low-cost choices for a wide range of investors who are interested in "keeping it" as well as "making it."

I was so taken by my own prose (well, okay, by Zach’s sensible intelligence) that I invested in the fund in September.  The fund has made a modest gain since then – about a half percent – while providing pretty solid performance on days in which the market drops.  The Utopia funds are all “absolute return” vehicles; that is, their goal is to post real (i.e., inflation adjusted) positive returns regardless of what the market does.  Ideally, the funds will let their investors gain ground even when you allow for modest annual withdrawals (financial advisers often suggest that retirees might plan on withdrawing something like 4% each year) and inflation.  That translates to returns closer to 7% than 107%.

Zach Liggett, The Fund Manager’s Corner

I’m Zach Liggett, co-manager of the Utopia Growth, Utopia Core, Utopia Core Conservative, and Utopia Yield Income Funds.  The Utopia Funds are designed for long-term investors seeking positive total returns in all market environments.  Our team takes an “investing without borders” investment philosophy and a multi-pronged investment process to generate these returns and protect our Funds against the risk of permanent capital loss.  I’ve been with the Utopia Funds since their inception and with the advisor to the Utopia Funds (FIM Group) since 2003.  Before joining FIM Group, I spent several years in Japan

Question One:  If an 18-year old asked you about a career in money management, what advice would you give?

There is obviously no single path to a career in money management, but here are some things to consider: 

1)     Start early on your CFA.  Not only does progress towards the CFA look good from the perspective of potential employers, it also will save you pain down the road when you have to juggle work, family, and other commitments.  

2)     Learn a foreign language or two and while in school or after graduating, live and study abroad.  Perspectives gained from time abroad will serve you later on when trying to analyze the actors and action of the global markets. And heck, the way things are going with the greenback and valuations of US financial institutions, you might need those language skills to communicate with your future boss!  

3)     Supplement your academic work with the “real-life work” of legendary managers like Marty Whitman at Third Avenue funds who writes great reports that even seasoned managers can learn from.  I still make time each quarter to read updates from Third Avenue and a select group of other managers I respect.

4)     Invest your own money and learn from your mistakes.  If you don’t have money to invest, try some of the fantasy stock market contests online. There is nothing better for your education than screwing up with your own money.  It also makes for good interview conversation.   

5)     Join a local investing club.  You might pick up some ideas, but more importantly, you will learn how others (successful and unsuccessful) think about investing.  

In short, my advice reflects what I would look for in a young person looking to someday find a role with our team.  A candidate working towards a CFA with language skills and an understanding of investing concepts as practiced by the legends (not just as taught in the textbooks) and a war story or two to share is one that would likely screen well with our team.

Question Two:  If you weren’t running a mutual fund, what would you be doing? And why?

Educating young people on economics and financial matters would be at the top of my list.  I spent a year after college teaching English in Japan and had a blast.  It’s quite something to see kids absorb new ideas and get excited about learning.  Teaching our next generation at an early age how markets work and the benefits of saving and investing seems like a good endeavor and something that would pay broad dividends for our country down the road.  I would love to see our public schools better incorporate economic and investing lessons at the elementary school level and would enjoy being part of the educating process.

Investing in Africa and the Middle East looked awfully smart in October.

At least until you compared it to the alternatives.  I noted, last month, the launch of T. Rowe Price Africa and Middle East (TRAMX) fund.  The fund had a great month of October, returning over 11% while the US market added barely 1% amidst wild gyrations and diversified international funds such as Price’s new Overseas Stock (TROSX) fund tacked on 3% or so.  Which looks really outstanding, until you check out the world’s other emerging regions:

In the face of substantial annual losses at the beginning of the decade, I bought a lot of Price’s Emerging Markets fund (whose manager also runs the new Africa and Middle East offering).  In the face of annual returns north of 40%, I’ve twice lightened my holdings since then.  And I can’t, for the life of me, figure out whether that’s prudence, cowardice or both.  While I’m tempted by the new Price fund’s prospects, some combination of those same factors have so far succeeded in keeping me away.

From the Department of “Did They Even Talk With the Marketing Department?”

Here’s a marketing idea for the ages: highlight your poverty.  The newly-launched Minimum Return Fund will ^“seek capital growth while seeking to preserve initial invested capital and provide a minimum return during the Guarantee Period.”  I guess it’s better than The Barely Adequate Fund or The Lightly-Disguised Bad Idea Fund, but not by a lot.

On the upside, the fund does have a certain bracing honesty since the “guaranteed” return is pretty minimal.

Actually, the guaranteed real return illustrated in the prospectus is slightly less than minimal – it’s negative.  The fund promises a “Guaranteed Amount [which] is 150% of the NAV at the commencement of the Guarantee Period, less all fees, expenses and hedging costs of the Fund . . . and distributions paid. . . .”  Here’s their illustration for a $10,000 investment in the low-cost “A” class shares purchased at $10.00 (minus a 5% load) and held for the required ten years:

The pretty modest guarantee turns negative when you then adjust for inflation.  Assuming 3% inflation per year, you’d need $13,439.16 at the end of the period to break even.  And if you invest in “C” shares?  Good news: no front-load means you start with $15,000 as your guarantee.  Bad news: your investment would be subject to $6,675 in fees, operating expenses and hedging costs, leaving you with a guaranteed . . . uh, $8325?  And all of this assumes no taxable distributions for a decade.  (For math fans and other skeptics, the prospectus is available at www.sec.gov/Archives/edgar/data/1141819/000089418907002910/mnmmrtrntpm_485a.htm)

And from the Department of Elusive Cultural References: Investing with Satan.

I have to admit, I’m not immediately drawn to investing in The Vice Fund (VICEX) despite its undeniable economic allure.  I understand that targeting human weakness and tribal hostility is consistently profitable, but I don’t want to explain to my seven-year-old that dad needs to make money from the suffering of others.  (The fund’s managers and Board of Directors might also have seven-year-olds, since collectively they have not invested a single dollar in the fund, per the 6/30/07 Statement of Additional Information.)  In a similar vein, I’ve earlier picked on the Black Pearl funds for aligning themselves with a ship of cursed zombies.   And I’ve suggested that, just maybe, Chicken Little wasn’t the most reassuring name for a fund.  But I’ve somehow missed the Fallen Angel funds.

Launched a year ago by newsletter writer Gabriel Wisdom (well, there’s a cool name – an angel and the invocation of prudent knowledge all in one), Fallen Angel Value (FAVLX) and Fallen Angel Income (FAINX) are based on Mr. Wisdom’s newsletter picks.  Despite advertised returns on the newsletter picks of 50% a year from 2003-06, both funds have spent their short lives in the basement – Morningstar places their YTD performance (as of Halloween) in the 90% and 98^th percentiles within their respective peer groups. That’s not a crippling problem since the time period is so short.

But “Fallen Angel”? The “inside investing” meaning of the term is a former blue chip corporation now reduced to issuing junk bonds to raise money.  The “rest of the world” meaning is, well, Satan and his allies.  As in:

You know, “cast out of heaven for (unsuccessfully) opposing God.”  Guys who showed up on earth and began having . . . uh, intimate relations with the locals, for which action The Big Guy (or Gal) consigned them to “everlasting chains under darkness unto the judgment of the great day” (Jude 1:6).  Perchance “everlasting chains” isn’t an image you’d want to shackle your manager with?

Speaking of deities and falling, perhaps things aren’t going as well in the land of “pagan-deity-themed funds” as the ads suggest?

Janus’s ad in the November 2007 SmartMoney offers a reassuring image of you and your Janus manager working together to avoid a deadly fall from the heights:

You know “they’re both in it together” because “According to Morningstar,* Janus portfolio managers invest more in their own funds than anyone else in the industry.”   A great claim, give or take that pesky asterisk: “Morningstar FundInvestor, June 2006, data through May 31, 2006.”  But since then, Janus has seen a stream of manager departures which might leave their investors feeling a little more like:

Among the Janus fund manager departures in the past couple years:

1.       David Corkins (Janus Fund and clones), arguably their best manager, left without a word of explanation from either party.

2.       Ed Keeley (institutional separate accounts), who fled Founders Asset Management in 2000 after they were purchased by Mellon/Dreyfus, resigned in May and filed a suit against Janus in state court two months later. His suit alleges that Janus cut portfolio manager pay in violation of compensation contracts. Janus disagrees (at least about the “violation” part).

3.       Doug Kirkpatrick, (Janus International Equity Portfolio, an institutional fund), left in June to move to New Zealand.

4.       Mike Lu (Janus Global Technology) left as a result of “a mutual decision.”

5.       Tom Malley (Janus Global Life Sciences) left to pursue philanthropic ventures

6.       Jeanine Morroni  (Janus Government Money Market) and

7.       Sharon Pichler (Janus Federal Tax-Exempt Money Market) left at the same time but no one cares enough about money market managers to say why.

8.       Karen Reidy (Janus Balanced Core Equity) decided to "explor[e] ways to contribute to Janus' business in a more strategic capacity."

9.       Blaine Rollins (Janus Fund) "decided it was the right time to retire."

10.  Scott Schoelzel (Janus Twenty and clones) left “to pursue other opportunities.”

11.  Brad Slingerlend (Janus Global Technology) also left “to pursue other opportunities.”

12.  Ron Speaker (Janus Flexible Income), who was fined and briefly suspended from money management by the SEC in 1997, left “to pursue new personal and business opportunities.”

13.  Claire Young (Janus Olympus) decided to focus on her family "and on the philanthropic endeavors that I am most passionate about."

The manager departures were accompanied by the departure of three highly-placed executives.  John Zimmerman, Executive Vice President and Managing Director of Institutional Asset Management who helped create their quant-driven INTECH subsidiary, resigned in August to form his own company.  In March, Dave Martin, president and chief financial officer, resigned to become chief financial officer at Dimensional Fund Advisors and General Counsel John Bluher resigned in March but was going to hang out as a consultant for a while.

Some speculate that the departures are linked to the arrival of Gary Black, who arrived in 2004 and became CEO in 2006. Black wanted to bring “a dose of discipline” to the investment side and to link pay (a Morningstar stock analyst estimated in 2003 that Janus managers were averaging $4 million/year) to “competitive performance.”  This also appears to mark the departure of all Janus’s female fund managers.

(Information on the resignations came from James Paton, “Youth grab reins at Janus: Exodus of veterans creates opportunity but apt to stir doubts,” Rocky Mountain News, October 20, 2007 and a bunch of Janus press releases and SEC filings.)

“Slow and Steady wins the race” . . . but don’t embarrass us in the meantime.

The Ariel Mutual Funds continue to celebrate Aesop’s wisdom and moral teaching, “slow and steady wins the race.” Ariel’s ads invite you to consider “the no-load Ariel Mutual Funds,” and they list the Ariel Fund (ARGFX, 12.24% annually over the last five) and the Ariel Appreciation Fund (CAAPX, 12.33%).   It’s understandable that they don’t mention the fact that those returns place the funds in the 89^th and 94^th percentiles, respectively, for their Morningstar peer groups or that they’ve trailed their peer groups in four of the last five and five of the last five years.  It’s a tiny bit odd that Ariel runs three mutual funds, but doesn’t mention one of them.  That’s the $43 million Ariel Focus (ARFFX) fund, which I wrote about shortly after its launch.  Focus finished in the 97^th percentile during its first full year of operation and was in the 90^th percentile through the first three quarters of 2007.  Its absolute returns modestly trail both of its siblings.  Apparently that’s enough to keep the fund sort of tucked away from polite company, rather like the storied “crazy aunt in the attic.”

Long ago kids, spurred on by the whole Peanuts gang, went tricking-or-treating for UNICEF.  That is, they used Halloween as an excuse to remind folks to contribute to a good cause.  Since we’re on the subject, I thought I’d enlist the help of my son Will in trick-or-treating for FundAlarm:

FundAlarm remains dependent, as ever, on the financial support of its readers.  If you’ve made it this far down the page, you’re definitely one of the 4,000 or so folks who read the Annex in a typical month.  The Discussion Board saw its 200,000th post this month and is accumulating new links, lead, insights and arguments at the rate of 1,000 per week.  And Roy’s careful tracking of Alarming Funds and manager changes helps folks dodge nasty surprises. All of which will work if you help support FundAlarm, either through a direct contribution or by using our Amazon link when you buy books and other merchandise.  The options are neatly laid out here. Will, the very serious pumpkin, thanks you for your support.

I’d like to offer special thanks to a colleague in Communication Studies, Dr. Wendy Hilton-Morrow.  Wendy took time out of an incredibly busy day to track down the 200 or so typos that I typically inflict on poor Roy.  If my prose appears to be more-or-less coherent this month, it’s due to her diligence.  And, so, thanks!

As ever,

David