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Fund Spy

Morningstar Fund Spy

We Know What You Want
The response of Alliance Capital Management, the advisor to Austria Fund OST, to a defeat at the fund's January shareholder meeting won't be cited in any textbooks on democracy. At the meeting, dissident fund shareholders succeeded in electing their own candidates to replace four incumbent directors. One of those bounced off Austria Fund's board was Dave Williams--Alliance's chairman.

The Alliance forces didn't like that one bit. So in March, Austria Fund's board (which still contained a majority of pro-Alliance directors) expanded its size--and appointed three of the defeated directors to fill the new slots. Williams was returned to the board and named its president and chairman. Shareholders won't get to vote on these reinstated directors until the next annual meeting, which will probably be in 2000.

Alliance says this unusual step was the right thing to do. It argues that the dissident shareholders sold many of their shares soon after the election, so the fund board that resulted from the vote didn't reflect the wishes of current shareholders. Also, Alliance says, the fund will benefit from the "experience, perspective, and expertise" of Williams and the other defeated directors. That sounds like a fancy way of saying, "The election was just for show."

Is It Smoky in Here?
The May issue of Worth has an interesting article on the resurgence of socially responsible funds. It notes that while many have performed well in recent years, this outperformance might just be a lucky break. After all, the funds tend to favor the types of stocks that have been hot for quite some time--software and pharmaceuticals, for example--rather than, say, oil and oil-service companies, which have been in the dumps until recently.

The article goes adrift, however, when it tries to determine if this trend will continue. To do so, it attempts to address a key tenet of some socially responsible funds--that they have an inherent advantage because "clean" or "responsible" companies will inevitably outperform other firms. Since there's contrasting evidence on this question, the article has difficulty reaching a conclusion.

Thus, you shouldn't buy a socially screened fund because of some vague sense that it'll have better returns than conventional investments. You should only invest in one if, because of your moral, ethical, or religious beliefs, you're more comfortable knowing that your money won't be invested in tobacco or nuclear power or whatever.

Well, that's not entirely true. There's another reason to consider them. If your core funds, or even more critically, your individual stock portfolio, are heavily weighted in tobacco or oil--which is not unlikely if you're a value investor--then owning a socially responsible fund with a solid pedigree can be a smart way to diversify.

I'm not kidding. Clipper Fund CFIMX, for example, has 13% of its assets combined in Philip Morris MO and another tobacco firm, UST Inc. UST. Same for Kemper-Dreman High-Return Equity KDHAX. Yacktman Fund YACKX has 10% in Philip Morris alone. If you have a lot of money in one of those funds, you could have more riding on tobacco's future than you thought--particularly if you've also got a Philip Morris stock certificate stashed in your cupboard. If this sounds like you, looking to the socially responsible group when considering your next fund--regardless of your political or social views--isn't a crazy idea.

Investing for the Long Term
Templeton Foreign TEMFX and Oakmark International OAKIX were two of the most-maligned foreign funds of 1998. The criticism became so incessant that Mark Holowesko, manager of Templeton Foreign, prepared a long explanation and defense of the fund's poor returns to send out to the hordes of testy shareholders and inquisitive reporters demanding to know, "What's wrong?"

Although Holowesko conceded some mistakes, the real answer was, "Nothing's wrong." When big, expensive stocks in Europe are so strong they're leaving everything else behind, funds that have thrived by going against the crowd are inevitably going to suffer. But Holowesko and Oakmark's David Herro promised that things would turn around, and they have. Oakmark International's 13.8% first-quarter return ranked third among 318 foreign funds. Templeton Foreign's 6.2% gain was 31st.

Stat du Jour: $289 million and $1.25 billion: The assets of Munder NetNet MNNAX at the end of 1998 and three months later, respectively.