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Morningstar Fund Spy

Pick a Name, Any Name
Scudder Kemper won a legal victory this week when a U.S. District Court judge agreed that Scudder New Europe NEF, a closed-end fund advised by that firm, could bundle several issues into one question to be voted upon by shareholders at the annual meeting. An activist shareholder had argued that issues such as whether to open-end the fund and whether to impose a redemption fee should be voted on separately.

Unfortunately, the court case didn't address another questionable aspect of Scudder Kemper's plan. The firm wants to merge NEF, a nine-year-old fund that owns an excellent record, with an open-end fund, Kemper Europe KEFAX, which has only been around for three unimpressive years. Of course, the firm wants NEF's shiny track record to be the surviving one. But that's easier said than done. If the firm merges NEF into Kemper Europe, then Kemper Europe, with its weak record, would be the surviving entity. That's no good for Scudder Kemper. How about open-ending NEF separately, and then merging Kemper Europe into it? The official survivor would be NEF, with its great record. But this option would also fall short. Remember, NEF is named Scudder New Europe. Going this route would leave the firm with two Europe funds bearing the Scudder label--the other is Scudder Greater Europe Growth SCGEX--but none with the broker-friendly Kemper nameplate.

The firm's thinkers came up with a masterful solution. They'll open-end NEF separately. It will "acquire" Kemper Europe, so the surviving fund will be NEF, with its spiffy record. Then, this fund will change its name . . . to Kemper Europe. Presto! Scudder Kemper can again offer brokers a fund called Kemper Europe, but this Kemper Europe will magically have a much longer and much better track record to its name.

Recently, the SEC rejected an illogical Stein Roe merger proposal whose obvious purpose was to bury a lousy fund's track record. It's hard to see why the Scudder Kemper plan is acceptable if Stein Roe's wasn't.

Big Salaries? Good for Them
A survey released this week by the Association for Investment Management and Research (AIMR) and Russell Reynolds Associates attracted some media attention because it provided hard evidence for what many of us suspect: Mutual-fund portfolio managers make a lot of money. One example taken directly from the study: The median total compensation for a manager of a domestic-equity mutual fund with 10 to 20 years of experience is $430,000. Some make well more than $1 million. And on average, domestic-equity managers are making 10% more than in 1998, even though most lagged the S&P 500 last year.

The media slant was that the huge, rising salaries are undeserved, particularly because the year-to-year increase seems to prove that managers weren't penalized for underperformance. One young woman interviewed on CNBC said she resents her fund's manager getting so much money if he's not helping her reach her goal of retiring before age 62.

You might expect me to be outraged, too, given how often Morningstar harps on fund expenses. But I'm not. The amount of a manager's salary--even the manager of a fund that I own--is not very important to me. The fund's expense ratio is what counts. If it's low, and it declines steadily as assets grow, I'm content on that score. If the fund company pays the fund manager $1 million because that's the going rate, well, that's capitalism. Of course, $1 million is "too much" in some vague sense. Lawyers and second basemen also make too much. But no one wants the government setting salary levels, and that's the only alternative.

And remember, not all lousy managers get nice raises. Some of them get fired, or "reassigned" to positions elsewhere in the firm. Either way, the fund's shareholders are no longer stuck paying their salaries.

Yes, it would be nice if you could know how your fund manager's performance is being measured--whether on the fund's asset growth, pure returns, or risk-adjusted returns, for example--so you, as a shareholder-owner, would know if the manager's interests are aligned with or in conflict with your own. But worrying about how much that manager makes simply isn't worth the effort.

Stat du Jour
$20, $67.11, and $45.63. China.com's initial offering price; its price at the end of its first day of trading, July 13; and its closing price on July 21, respectively. Apparently even an uninteresting Web site is interesting to investors.