Fund name
: Spectra Technology (SPETX)Objective: The fund seeks capital appreciation by investing in "companies of any market cap that are principally engaged in the technology sector." They list computers, semiconductors, electronics, communications, health care and biotech as sub-sectors. The manager invests in "growth stocks of companies characterized by high unit volume growth or positive life cycle change." About 10% of its assets are invested overseas. The fund can use leverage but the prospectus does not mention shorting.
Adviser: Fred Alger Management, Inc. Alger has been around since 1964 and manages about $9 billion in mutual fund assets and $2.3 billion in "other assets." They run an expanding series of no-load funds (the five Spectra funds: Spectra, Alchemy, Green, International Opportunities and Tech), about a dozen load-bearing in-house funds (e.g., Balanced, Capital Appreciation, China, Health Science) and serve as sub-adviser to a number of outside funds.
Manager: Dan Chung. Mr. Chung is Alger’s CEO and CIO. He has been with Alger since 1994, has managed this fund since its inception and also manages Alchemy and International Opportunities. Chances are he’s reasonably bright: he graduated from Stanford, got a law degree at Harvard, clerked for Supreme Court Justice Anthony Kennedy, then earned an advanced law degree (L.L.M. or "Master of Laws") from New York University. In his spare time he qualified as a CFA.
Management’s Stake in the Fund: None, I’m sorry to report. The SAI for the predecessor fund, SM&R Alger Technology, notes that none of the Alger managers own any shares of the funds they advise. The Spectra SAI also discloses fund manager ownership in the Spectra funds, but the disclosure is not reassuring: "Mr. Kelly’s beneficial interest in shares of the Spectra Fund, as of the date of this Statement of Additional Information, exceeds $100,000. No other portfolio manager owns shares of the Fund he manages." As of the last Spectra SAI (March 07, revised October 07), none of the firm’s seven directors owned any shares of Alchemy, Green, International or Tech. Two of the seven had a stake in the firm's five-star, flagship growth fund, Spectra (SPECX). On the other hand, both the managers’ base salary and their annual bonuses are performance driven.
Opening date: December 10, 2007. The load-bearing predecessor launched in September of 2000.
Minimum investment: $1,000 for regular and $500 for various sorts of IRA accounts.
Expense ratio: 1.40% on assets of $0.5 million. The actual expense ratio is 1.68% before waivers (that seems ludicrously low, since it implies the fund’s operating expenses are only $8,400/year – but that’s what Spectra’s reps tell me). The waiver is in effect until October 2008. There is a 2% redemption fee on shares held less than 30 days.
As of 12/06/07, Morningstar’s profile of the fund misreported a 5% sales load.
Comments:
By all accounts, launching a new mutual fund is an enormously costly, time-consuming and painstaking task. In addition to the predictable challenges (for example, figuring out why the world needs a new mutual fund and hiring a manager), the fund's advisor has to register the fund with the SEC, then register it with state regulators in every state where they'd like to sell the fund, negotiate distribution arrangements with fund supermarkets, and so on. The cost can run into the hundreds of thousands of dollars, and new funds are often ignored until they've earned three- or five-year track records. One way around this hassle is to adopt an existing fund; that is, a management company can locate and buy a struggling small fund that has already jumped through all of the regulatory hoops. The advisor can then rename the old fund and put their own management team in place. As long as the old and new funds have the same investment strategy (for example, the board is willing to certify that both funds are domestic small-value offerings), the new fund can skip all of the regulatory hassle.
Spectra Technology represents just such a rebranding operation. From September 2000 until December 2007, Dan Chung served as the manager for a fund called SM&R Alger Technology. SM&R (the common abbreviation for a company called Securities Management and Research, a wholly-owned subsidiary of American National Insurance Company of League City, Texas, wanted to offer mutual funds to its clients but didn't have the in-house expertise to do so. As a result, they hired Alger -- and, in particular, Mr. Chung -- to manage a number of mutual funds for them. One of those funds was SM&R Alger Technology. The fund was successful as an investment vehicle -- it posted top-flight returns, which I'll discuss below -- but failed to attract a viable level of assets. Alger was already looking to expand their no-load line of Spectra funds and they already managed this fund. As a result, it made all of the sense in the world for them to rebrand SM&R Technology as Spectra Technology, thereby skipping the regulatory hassles and bringing the old fund's fine track record along with it.
The move will greatly benefit the fund's current and prospective shareholders since Alger has removed the fund's 5.00% front load and dropped its expense ratio from 1.94% to 1.40%, while preserving its strong management and low minimum investment.
Let me admit, up front, that I don’t have warm and fuzzies when it comes to this fund. In the January 2008 cover essay, I discussed briefly some of the ethical challenges that Alger has had to overcome. The Spectra Technology prospectus devotes two pages, single-spaced, to a review of the resolution of federal and state, civil and administrative actions against Alger. Beyond that, I made a bunch of attempts to speak with the media relations group at Alger over the past several months. Each time I’ve called, I’ve been shunted into a voicemail system and I’ve never heard anything back. E-mail has not been noticeably more productive. (I did have a very pleasant chat with a phone rep just after Christmas, though that was just to check some financial info.) Likewise, the fact that pretty much no one at Alger (save Mr. Kelly, Spectra’s very successful manager) invests in their products is not an endorsement. Finally, unlike Roy, I haven’t found a spot for a dedicated technology fund in my portfolio.
All that having been said, for folks who do like technology funds, there’s a lot to be said for this one. I’ll highlight three arguments for the fund:
|
Return |
Rank among all tech funds |
|
|
Week |
8.0% |
Top 1% |
|
Month |
11.0 |
Top 1% |
|
Quarter |
8.1 |
Top 5% |
|
Year |
28.8 |
Top 12% |
|
Three years |
17.2 |
Top 3% |
|
Five years |
22.0 |
Top 11% |
The fund led its peer group in five of its seven years of existence. In those years, it had a disastrous loss in 2002 (down 50%, which still trailed its peers by only 7%) and broke even in 2004 while its peers made about 4%.
While there are a lot of tech ETFs available, it’s also the case that Spectra Tech has pretty regularly crushed its tech benchmark index – NYSE Arca Tech 100. More directly, none of the tech ETFs that Morningstar tracks can match either Spectra’s one-, three- or five-year returns.
Please do remember that high returns come with high cost. Spectra has above average volatility, even by the standards of tech funds. It has posted double digit losses in eight quarters since the start of 2001. Its portfolio is pretty compact (fewer than 50 names) and its turnover is high (between 120 – 290% so far).
Bottom Line: Being slightly nuts, I’m still more intrigued by the Matthews Asian Technology fund (MATFX) than by Spectra. That said, folks looking for a dedicated, domestic tech fund have few options with better credentials than Spectra Technology.
Fund website: http://www.spectrafunds.com/. There is no fund fact sheet just yet, but the phone rep I spoke with expects one by early January 2008.