Fund Times: The Heirs to Bill Miller's Streak

Morningstar analyst Greg Carlson recently wrote about the probable demise of  Legg Mason Value (LMVTX) manager Bill Miller's lengthy streak of S&P 500-topping calendar-year returns, but that isn't the only remarkable run that's in jeopardy this year.  Quaker Strategic Growth , managed by Manu Daftary, has beaten the same domestic large-cap index in eight straight calendar years, second only to Miller's 15 straight years at Legg Mason Value.

As analyst Kerry O'Boyle pointed out in his  recent review of Quaker, however, few similarities exist between these two funds beyond their streaks. Daftary often delves into mid- and small-cap fare, and he trades frequently. In addition, the fund levies a 1.99% expense ratio. That's a hefty price to pay for a large-growth fund. The fund's streak is likely coming to an end, however, because Daftary was bearish on the market in 2006 and held a sizable cash stake as well as a small position in shorts. As a result, the fund is almost as far behind the index as Miller is this year.

If 2006 were to end tomorrow, the longest-running streak among large-blend funds would belong to two category members: Goldman Sachs Growth Strategy (GGSAX) and Manning & Napier Pro-Blend Maximum Term (EXHAX). Each fund has outperformed the S&P 500 each calendar year since 1999 and is ahead of the benchmark for the year to date. They're both team-managed--Manning & Napier's fund has several managers, many of whom have been with the fund since 1995, and the Goldman fund features two managers who started in 1998 and another who started in 2001. These funds managed to overcome the fickle market headwinds that cause different sectors to underperform the S&P 500 in any given year, a difficult task for diversified offerings to achieve consistently.

A handful of other funds also started streaks against the S&P 500 in 1999 that have a good chance of continuing through the end of 2006. Among them are Analyst Pick  Schneider Small Cap Value  and  American Funds Fundamental Investors (ANCFX). The Schneider fund benefited from several years of small-cap stocks' strong performance. Fundamental Investors also got help from the value-led market but competed nicely during the growth-led market of 1999, too.

Vanguard Introduces a New Value Fund for Institutional Investors
Vanguard plans to launch Vanguard Structured Large-Cap Value as part of its structured equity lineup. The fund will only be offered to institutional investors who can make a $5 million minimum initial investment. The expense ratio on institutional shares will start at 0.25%. According to Vanguard, the company's Quantitative Equity Group will manage the fund and use analytical tools to identify the most attractive stocks from its benchmark, the Russell 1000 Value Index.

Benchmark and Manager Changes Likely at Two Fidelity Offerings
Fidelity Funds recently announced plans to change the benchmarks of two of its funds,  Fidelity Trend (FTRNX) and  Fidelity Discovery (FDSVX), pending shareholder approval in December 2006 and January 2007, respectively. Fidelity plans to make Trend, a large-blend offering currently benchmarked to the S&P 500 Index, into a growth-oriented fund that will track the Russell 1000 Growth Index. Likewise, Discovery, which is also benchmarked to the S&P 500, will change its bogy to the Russell 3000 Growth Index. That will, in effect, transform Discovery into an all-cap growth portfolio with the flexibility to buy smaller stocks. That's a significant departure from the fund's current look--right now it focuses mainly on large-growth companies with an average market capitalization of more than $40 billion.

Fidelity usually gains approval for changes at its own funds with relative ease, and it has indicated that each of these offerings will get new managers in 2007. Also worth noting is that Fidelity adjusts management fees up or down for some funds based on performance against their benchmarks.

Barclays Files to Introduce Several New Exchange-Traded Notes
This week, Barclays announced plans to extend its iPath ETN lineup. ETNs trade similarly to exchange-traded funds but are actually debtlike instruments that promise to deliver the returns of an index after 30 years. (Click here to learn more.) Among the proposed new ETNs are several that track commodities indexes--such as AIG's Energy Total Return and Industrial Metals Total Return subindexes--as well as one that tracks the MSCI India Total Return Index.

Pioneer Small Cap Value Loses Two Managers and Two Analysts
 Pioneer Small Cap Value  managers David Adams and John McPherson resigned on Oct. 31, 2006. In addition, two analysts who worked closely with Adams and McPherson are also leaving the company.

Adams and McPherson's departure is a real loss for shareholders of this small-blend offering. Since Adams became manager in May 2002, the fund delivered an annualized return of 11.2%, which bested its typical rival's 10.5% return. Pioneer has replaced Adams and McPherson with two less proven managers: Peter Wiley, who has a short record as manager of  Pioneer Growth Opportunities , and Scott Zilora, a senior analyst and the only remaining member of Pioneer's small-cap equity team.

J.P. Morgan Involved in SEC Investigation of Bisys Kickbacks
The SEC's recently announced investigation of  Bisys'  relationships with 27 fund families includes  J.P. Morgan Chase & Co.  (JPM). The mega-bank announced last week it was contacted by the SEC regarding the former Bank One's administrative relationship with Bisys. (Bank One merged with J.P. Morgan in 2004.) Morningstar's Russ Kinnel weighed in on the alleged scandal, first reported by The Wall Street Journal, in this recent article. Bank One's One Group Funds used Bisys services up through October 2000, at which point Bank One terminated the relationship and moved back-office fund operations in-house. The SEC's investigation is ongoing, and it has yet to formally release the names of the 27 fund families included, but J.P. Morgan issued its own separate news release stating it had received a letter from the commission.

Tocqueville Merges Three Funds, Makes Distributions for Each
On Oct. 31, 2006, Tocqueville Asset Management completed a merger of three of its funds:  Tocqueville Fund (TOCQX),  Tocqueville Alexis , and Tocqueville Genesis . Tocqueville is keeping its self-titled fund, which gained about $85 million in combined assets from its siblings. This fund's newer, larger asset base--now roughly $400 million--should provide economies of scale for manager Robert Kleinschmidt, as well as a lower expense ratio of 1.25% for investors. In addition, shareholders shouldn't worry about a strategy change, as Kleinschmidt plans to stay the course and adjust his new portfolio holdings with the help of Alexis' former manager, Colin Ferenbach.

Prior to the merger, Tocqueville completed late-October distributions for each of the three funds, including Tocqueville Genesis' fairly significant short-term capital gain distribution of $1.30 per share, or about 13% of its shares' net asset value before the distribution. That's not too surprising, however, given the fund's fast-trading strategy and its exposure to small-cap stocks; investors of Tocqueville Genesis were already likely to receive a short-term distribution in December.

Disclosure: Morningstar licenses its indexes to certain ETF providers, including Barclays Global Investors (BGI) and First Trust, for use in exchange-traded funds. These ETFs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs that are based on Morningstar indexes.