by Maggie Mahar
34. Jean-Marie Eveillard, interview with the author.
35. “Manager’s Forum: Wall Street, California, Global Conqueror SoGen International’s Helmsman Scans the World,” The Los Angeles Times, 12 November 1996, D4. Eveillard explained why he had taken a 7 percent position in gold: “It’s a matter of perceiving that the downside risk is modest on two counts: No. 1, the price has already been cut in half in nominal terms over 15 years, so presumably most of the damage has already been done. No. 2, there continues to be very strong jewelry demand coming from developing countries, particularly Asia. So it’s the idea of owning a depressed asset where the downside risk is modest, but acknowledging that I have no insight whatsoever into the timing and the extent of a move upwards.” Here Eveillard made it clear that he was not a market timer in the sense of being a short-term investor who tries to pick the top and bottom of a stock or a market, but that, like many value investors, he paid attention to longer cycles and refused to buy when prices became too high.
Investing in gold in ’96, Eveillard was “early,” but over time the bet would pay off. In August 1993 he opened a gold fund, SGGDX; as of May 31, 2003, the fund boasted a five-year average annual return (without adjusting for load) of 15.61 percent; since inception, the fund had returned 5.32 percent.
36. “Manager’s Forum.”
37. Jean-Marie Eveillard, interview with the author.
38. Clyde McGregor, interview with the author.
Of course, some investors did take their profits. But mutual fund investors did not begin selling in large numbers until September of 2001—and even then, net redemptions equaled only 1.65 percent of total assets in U.S. Focused Equity Funds. Even in July of 2002, net outflows stood at just 2.4 percent of total assets—still significantly less than in October of 1987, when mutual fund investors withdrew 3.6 percent of assets. See page 462 in Appendix (chart of equity flows).
39. Jean-Marie Eveillard, interview with the author.
40. “Manager’s Forum.”
41. Jean-Marie Eveillard, interview with the author.
CHAPTER 13
1. Clyde McGregor, interview with the author. See also Maggie Mahar, “Total Return,” Bloomberg Personal Finance, January/February 2002.
2. A. Michael Lipper, interview with the author. For Lipper’s 1987 remarks see Julie Rohrer, “So You Want to Start a Mutual Fund,” Institutional Investor, March 1987.
3. Interview with the author.
4. Interview with the author.
5. Interview with the author.
6. Don Phillips, interview with the author.
7. A. Michael Lipper, interview with the author.
8. Don Phillips, interview with the author. See also Mark Hulbert, “Same Yardstick Different Races,” The New York Times, 7 January 2001. Hulbert pointed out that under Morningstar’s system, younger funds are more likely to receive five stars, and noted that Morningstar had commented publicly on the problem.
9. Interview with the author.
10. Mark Headley, interview with the author.
11. Interview with the author.
12. As The Wall Street Journal reported in 2002, a study of 742 fund mergers from October 1994 through December 1997 published in the Journal of Finance suggested that inheriting a floundering fund can be costly for the acquirer’s shareholders in part because “tax laws dictate the inheritor hold onto a large chunk of the loser’s positions…. This is because shareholders of the acquired fund wind up with an equal investment in the successful fund, and don’t owe taxes on the transaction. To maintain that tax-free status the acquiring fund’s manager usually has to hold at least a third of the securities acquired for a minimum of one year.” Ian McDonald, “Less Is Less: The Dark Side of the Urge to Merge Funds,” The Wall Street Journal, 10 July 2002.
According to the study, the acquiring fund tended to suffer: “After topping its category average by more than two percentage points the year before the merger the average acquirer falls to just about even with its peers a year after the merger.”
13. Ken Brown, “The Best and Worst Mutual Funds” (A Special Report), Smart Money, 1 February 1999, 93.
14. A. Michael Lipper, interview with the author.
15. See Rich Blake, “How High Can Costs Go? (Payments for Mutual Fund Placements Are Getting Securities and Exchange Commission Scrutiny),” Institutional Investor, 1 May 2002, 56.
16. Robert McGough and Karen Damato, “Buying Pressure: Despite Rising Doubts, Mutual-Fund Officials Pour Cash into Stocks—Pushed by Their Investors, They Pay Steep Prices and Take On More Risk—Just a Drunken Frat Party?” The Wall Street Journal, 30 December 1996, A1.
17. George Kelly, interview with the author.
18. McGough and Damato note the low cash levels at the end of 1996. See Chapter 5 (“Black Monday”) for a description of Fidelity Magellan’s forced sales during the October 1987 crash.
See chart, prepared by Gail Dudack, chief market strategist at SunGard Institutional Brokerage, in the Appendix (p. 461) showing how the cash level in equity mutual funds declined throughout the bull market cycle. “Portfolio managers believed that it was mandatory to stay fully invested,” said Dudack. “The client was making the asset allocation decision. As a result there is no safety cushion if investors decide to liquidate equity funds.”
19. Robert McGough and Karen Damato, “Buying Pressure.”
20. Interview with the author.
21. welling@weeden, 4, no. 14 (28 June 2002).
22. Andrew Bary, “Fund of Information: Who Needs Peter Lynch? Upstart Magellan Manager Scores Big,” Barron’s, 21 June 1993, 3. In his story, Bary quoted Rekenthaler.
At the end of the decade, William Green quoted Vinik on “growth at a reasonable price” in “Investing/Hall of Fame/Master Class: The Champ Retires Undefeated—Jeff Vinik Is Closing His Hedge Fund after Four Stellar Years,” Money, 1 December 2000, 67.
23. James S. Hirsch, “Magellan’s Cut in Stocks Held Hurts Results,” The Wall Street Journal, 12 February 1996, C1; Edward Wyatt, “Mutual Funds: Who’s Out to Topple Jeff Vinik? The Knives Are Out for Jeffrey N. Vinik,” The New York Times, 5 May 1996.
24. Robert McGough, “Fund Track: Fidelity’s Vinik Backs Bonds and Cyclicals,” The Wall Street Journal, 15 May 1996, C25; Edward Wyatt, “Market Place: Magellan Shifted from Technology in November,” The New York Times, 12 January 1996. See also James S. Hirsch, “Magellan’s Cut in Stocks Held Hurts Results,” The Wall Street Journal, 12 February 1996, C1.
25. David Whitford and Joseph Nocera, with additional reporting by Nelson D. Schwartz; and Reporter Associates Maria Atanasov, Amy R. Kover, and Jeanne C. Lee, “Has Fidelity Lost It?” Fortune, 9 June 1997.
26. Edward Wyatt, “Mutual Funds: Who’s Out to Topple Jeff Vinik?”
27. Gail Dudack, interview with the author.
28. Richard Russell’s Dow Theory Letter, 4 December 1996.
29. Gene Marcial, “Technicians Keep Predicting a Market Drop,” Business Week, 30 May 1983; Jane Bryant Quinn, “Interest Rates Real Villain in Market Dive,” Pittsburgh Post Gazette, 18 April 1994.
30. Steve Bailey and Steven Syre, “Fidelity’s Balance Is Off on 1 Asset—Truth,” The Boston Globe, 14 January 1996, 45. In a November 6 interview with U.S. News & World Report, Vinik had said that “Micron is a stock whose valuations are reasonable and the fundamentals are still outstanding.” (Jack Egan, “News You Can Use, 1996 Investment Outlook” (addendum), U.S. News & World Report, 116.) In a September semiannual report that reached investors in November, Vinik said tech stocks were “relatively cheap.”
31. Edward Wyatt, “Mutual Funds: Who’s Out to Topple Jeff Vinik?”
32. Andrew Bary, “Trading Points,” Barron’s, 27 May 1996, MW11. ( Barron’s did not take a position as to whether Wall Street was right about both Vinik and bonds, but it noted that “for individuals, Magellan’s lackluster performance this year only reinforces the notion that stocks are the sole solid investment for the long haul.�
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While calling Vinik’s portfolio a burnt-out case, Forbes did acknowledge his courage: “I give Jeff Vinik high marks for implementing his cogent strategy of capital conservation in a frothy market,” wrote Martin Sosnoff. “The Last Days of Jeff Vinik,” Forbes, 1 July 1996, 99.
33. James J. Cramer, “How the Mutual Funds Run America,” New York, 2 October 1996, 34.
34. Gail Dudack, interview with the author.
35. Ned Davis, Ned Davis Research, May 1996.
36. Gail Dudack, interview with the author. It should be noted that Vinik’s success in the late nineties was not due to a bet on bonds. In his hedge fund, Vinik made his money both by shorting stocks and taking long positions, with many of his long positions in the undervalued mid-cap and small-cap stocks that had lagged the big caps.
37. A. Michael Lipper, interview with the author.
38. Edward Wyatt, “Who’s Out to Topple Jeff Vinik?”
39. Edward Wyatt, “Manager of Biggest Mutual Fund Quits After Recent Subpar Gains,” The New York Times, 24 May 1996.
40. In 1996, Jeff Vinik was not the only star manager to walk away from Fidelity. A year later, more than 20 fund managers had left the firm in 16 months. At the same time, Fidelity’s relative performance was slipping—from 1994 through 1996 only 4 of Fidelity’s 34 stock funds had beaten the S&P 500.
Fidelity now commanded 15 percent of the 401(k) market, almost double the share controlled by their chief rival, Vanguard. “It has immense resources at its disposal, with annual revenues of over $5 billion and reported earnings of $423 million,” Fortune noted. “In addition, with those hundreds of billions in assets at its disposal, Fidelity has become the single most important player on Wall Street and a stockholder of immense power, with its tentacles in thousands of companies.” David Whitford and Joseph Nocera, with additional reporting by Nelson D. Schwartz; and Reporter Associates Maria Atanasov, Amy R. Kover, and Jeanne C. Lee, “Has Fidelity Lost It?” Fortune, 9 June 1997.
Fortune also reported that when it tried to interview top Fidelity executives “to a man…[they] denied that the company was facing any problems or even that it was changing in any real way. And they made little effort to hide their annoyance at having to answer questions. As Ned Johnson put it upon first being introduced to a Fortune reporter: ‘Are you people so f—ing bored that you have nothing better to write about than us?’ Fortune described Johnson as wearing “his trademark aviator glasses” when he made the remark.
“Fidelity remains an extraordinarily arrogant institution,” Fortune concluded, “seemingly oblivious to the idea that managing a half-trillion dollars of America’s money carries with it any special need for candor.”
Apparently Fortune hit a nerve. In an interview with the author, a Fortune reporter involved with the story revealed that after it was published, Fidelity withdrew its advertising from the magazine. Fidelity refused comment, saying, “We do not talk about our advertising.”
41. For the details of Friess’s story, see Charles Gasparino, “Instinct and Irony: A Top Fund Manager Is Humbled When He Makes Ill-Timed Moves—Brandywine’s Foster Friess Left the Market Early, Returned Far Too Late—Haunted by the Human Toll,” The Wall Street Journal, 15 October 1998, A1.
42. Charles Gasparino, “Instinct and Irony.”
43. Ralph Wanger, interview with the author.
44. George Kelly, interview with the author.
45. Ralph Wanger, interview with the author.
CHAPTER 14
1. Abby Joseph Cohen, interview with the author. See also Anthony Bianco, “The Prophet of Wall Street,” Business Week, 1 June 1998, 124.
2. Jeffrey M. Laderman, “Step Aside, Elaine. Now, the Big Name Is Abby—Cohen Called the 6000 Dow and Currently Forecasts 6400,” Business Week, 4 November 1996, 182.
3. Nelson D. Schwartz, “I have No Ego; I Just Want to Be Right,” Smart Money, April 1997, 129.
4. See Chapter 6 (“The Gurus”) and Antony Bianco, “The Prophet of Wall Street: How Abby Cohen Came to Be One of the Most Closely Watched Forecasters on the Planet,” Business Week, 1 June 1998; and Heather Green, “The E Biz: 25 Visionaries,” Business Week, 27 September 1999.
5. Abby Joseph Cohen, “It Was a Very Good Year, and Count Your Cash; Why Wall Street’s Boom Is Still for Real,” The Washington Post, 29 December 1996, C01.
6. Lewis made the statement, in a somewhat different context, in a column that he wrote for Bloomberg, but it perfectly describes Wall Street’s relationship to Cohen—and why her male colleagues were able to accept her with barely a trace of envy.
7. Peter Truell, “The Wall Street Soothsayer Who Never Blinked,” The New York Times, 27 July 1997.
8. John Brooks, The Go-Go Years (New York: John Wiley & Sons, 1994), 14, 108.
9. Randall Smith and James A. White, “Heard on the Street: Without a Dr. Doom to Prognosticate, Who Are the New Oracles on Wall Street?” The Wall Street Journal, 12 March 1992.
10. Lawrence A. Armour, “Can We Talk? What’s Ahead for the Stock Market, the Economy and the Future of Investing: Market Guru Abby Cohen of Goldman Sachs, Perennial Bear Jim Grant and Mutual Fund Dean Shelby Davis Square Off,” Fortune, 9 June 1997, 189.
11. Peter Truell, “The Wall Street Soothsayer Who Never Blinked,” The New York Times, 27 July 1997.
12. Roach quoted Greenspan’s words in a research report published in 2002 titled “Smoking Gun.” In an interview with the author, Roach confirmed the chairman’s statements. Alan Abelson originally reported on Roach’s findings in “Up & Down Wall Street: Irrational Adulation,” Barron’s, 22 July 2002.
13. David Wessel, “Worried Fed Watches Stock Market’s Climb,” The Wall Street Journal, 25 November 1996, A1.
14. “Pundit Watch,” SmartMoney.com, August 1998.
15. Peter Truell, “It’s Getting Extremely Hard to Be a Bear on Wall Street,” The Journal Record, 7 January 1997; Dave Kansas, “Lone Bear on Wall Street Joins the Herd,” The Wall Street Journal, 5 December 1995, C1; Larry Bauman, “Abreast of the Market: Stocks Stumble in Profit-Taking; DuPont Falls, J.P. Morgan Gains,” The Wall Street Journal, 5 December 1996.
16. Maggie Mahar, “Proud Bear: If Salomon’s David Shulman Is So Smart, Why Has He Been So Wrong?” Barron’s, 9 October 1995, 21.
17. Interview with the author. Shulman left to become a general partner with Ulysses Management LLC, a private investment firm. Travelers and Smith Barney later became part of Citigroup.
18. David Wessel, “Sometimes, Stocks Go Nowhere for Years,” The Wall Street Journal, 13 January 1997, A1.
19. Byron Wien. The story that follows is drawn from an interview with the author.
20. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), 178–79.
21. Robert Rubin, interview with the author.
22. Bob Woodward, Maestro, 179.
23. Suzanne McGee, “Bulls Start Buying as Greenspan Spurs Big Drop,” The Wall Street Journal, 9 December 1996, C1.
24. Deborah Lohse, “Investors, Defying Greenspan, Boost Nasdaq 2%,” The Wall Street Journal, 10 December 1996.
25. “Review & Outlook [Editorial]: The Delphic Dollar,” The Wall Street Journal, 10 December 1996, A22.
26. Tom Squitieri, “GOP Leader Hits Remarks by Fed Chief,” USA Today, 9 December 1996, 01A.
27. E. S. Browning, “Heard on the Street: Bank Sticks’ Rally Puzzles Some Investors,” The Wall Street Journal, 10 December 1996.
28. Edward Yardeni, “Weekly Economic Analysis,” Deutsche Morgan Grenfell, 27 January 1997.
Over the next two years, Fed Chairman Alan Greenspan would use the word “bubble” again, but invariably in a context where he was only raising the question. For example, in congressional testimony on June 17, 1999, he said: “The 1990s have witnessed one of the great bull stock markets in American history. Whether that means an unstable bubble has developed in its wake is difficult to assess.” In an August 27, 1999, speech in Jac
kson Hole, Wyoming, he fell back on the “investors know best” theory of rational markets: “To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.”
