Fund gives power to the people
Monday, July 31st 2000, 12:00 am
By: News On 6
Dallas-based MutualMinds.com daringly lets investors make picks
By Bill Deener / The Dallas Morning News
If your mutual fund manager picks stocks with all the prowess of a monkey throwing darts, don't worry. Revenge for your paltry returns may be at hand.
A new Dallas-based mutual fund â€“ MutualMinds.com â€“ will soon grant stock-picking power to the people who invest in the fund. Instead of relying on a portfolio manager with a staff of highly paid analysts, MutualMinds.com will use the insights of its investors to determine which stocks make up the portfolio, said Randy Bullard, chief executive officer of the fund company.
"Mutual fund companies tout themselves as having the insight to pick the right stocks, but on average the vast majority of portfolio managers don't do that well," said Mr. Bullard. "What we're doing is tapping into the collective intelligence of average investors, separating the wheat from the chaff, and applying it to investment decisions."
While that smacks of investor democracy, skeptics say it could be more like investor anarchy.
"When I invest, I want to invest with someone who has a proven track record," said Geoff Bobroff, a mutual fund industry consultant based in East Greenwich, R.I., "and that means I have to pay for it."
Mr. Bullard, 33, a former information technology specialist at the Dallas consulting firm of A.T. Kearney, said the genesis for this concept came to him about two years ago. He occasionally traded stocks over the Internet and often perused online "chat rooms" in search of company information.
What he discovered was that while most of the online postings were worthless, about 15 percent of the traders did have some excellent insights.
"Some of these investors have information that is on par with the professional analysts," said Mr. Bullard. "Many small investors are experts in the industries they work in, and that's what we are trying to tap into."
During the last year, he raised about $4 million to launch the company â€“ the bulk of it coming from Austin-based Techxas Ventures. The MutualMinds.com Web site is already up and running, and he expects the U.S. Securities & Exchange Commission to approve the fund's registration statement any day.
No track record
SEC spokesman John Nester said he couldn't comment on MutualMinds.com specifically, but he did offer this bit of advice: "With any mutual fund, you need to look at how it's managed. With a new fund, you don't have the benefit of that track record."
SEC approval is anticipated because another so-called investor-managed fund â€“ the Community Intelligence Fund operated by StockJungle.com â€“ has been open to investors since last fall. This fund's performance has been spectacular with a year-to-date return of 33 percent, but so far the fund has only garnered $5 million in assets, compared with the average large-cap growth fund of $1.9 billion.
Christine Benz, associate editor of Morningstar, a mutual fund tracking service, said she's a little skeptical of these types of funds and advises investors to proceed with caution.
"I think the concept is a bit of a gimmick," Ms. Benz said. "I think that it's a way to sell funds in what has been a stagnant environment for a lot of fund companies."
She also said small investors would probably be better served sticking with traditionally managed funds with long track records of performance.
"From my vantage point, there is never any reason to invest in a fund with an unproven record," Ms. Benz said.
Mr. Bullard is aware of the criticism, but he's confident that if enough investors participate in the stock picking, the fund will at least match the returns of the Standard & Poor's 500. Currently, about 400 people have registered on the Web site and begun making their stock predictions, although they can't invest in the fund until the SEC gives its nod.
Participants can click on the Web site, create a password and begin forecasting future stock prices. They estimate both the stock's future price and when it might hit that price. Points are awarded for being right, but points are also deducted for being wrong.
All the predictions for, say, Dell Computer Corp. are tabulated to determine if it would be appropriate for the fund.
The forecasts of the stock pickers with the highest number of points â€“ the best stock pickers â€“ receive more weight than the others, meaning they have more influence on the stocks selected for the fund.
"You might be a salesperson or a consultant in a particular industry and even track a couple competitors," Mr. Bullard said. "Give us that intelligence."
Those who don't invest in the fund can make forecasts, but their recommendations won't be used to manage the fund. The minimum investment in the fund will be $1,000, and the annual expense fee will be 1 percent, which is slightly below the 1.4 percent industry average.
Currently, the best stock picker on MutualMinds.com is a 22-year-old Texas A&M University graduate student, James Hoefelmeyer, known by the moniker "ChemicalWeapon."
He joined the Web site in May and has made about 40 picks so far, mostly in technology companies, and amassed more points than anyone else.
"I'm about two out of three on guessing the direction of the stock, whether it's going up or down," Mr. Hoefelmeyer said.
"Now my percentage is a lot lower on getting how much they will go up. That's pretty tough."
Mr. Bullard said the actual influence of any one person on the fund will be small because thousands of investors will be making forecasts â€“ or so he hopes.
Further, the fund has hired an investment adviser, Dallas-based Smith Asset Management Group, to make sure the portfolio is properly diversified.
"My hope is that the investment adviser never has to intervene," Mr. Bullard said.
"But Smith is the guardian of the process so to speak. It makes sure everything is working right."
Smith Asset Management will actually select the first 40 stocks to get the fund started, but those picks will be culled out as investors buy into the fund and make their selections, he said. He expects the fund to be heavily weighted toward technology companies.
Edward Rosenbaum, director of research for Lipper Inc., the mutual fund tracking company, said MutualMinds.com might struggle to attract assets in the early going, because the stock market in general is sputtering right now. But, he called the concept "absolutely fascinating."
"This basically turns the assumptions about conventional mutual fund management right on its head," Mr. Rosenbaum said.
"This is a noble experiment, and it's delightfully brave of these companies to suggest that the collective intelligence of the investors can be used to pick stocks."