Wall Street Week with Louis Rukeyser; 2251; Mutually Exclusive?

It. From. Our. Wall Street Week With Louis Rukeyser is made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you by the travellers of over 30 million Americans benefit from our insurance investment services and managed healthcare. The travelers America's umbrella by NTFS and FS helping mutual fund and institutional investors achieve their financial goals. Since 1924 and by Prudential Securities we believe the most important thing we earn is your

trust. Prudential Securities. Produced Friday June 18. Our panelists are John Dessa Gail Dudack and Harvey Eisen tonight special guest is Don Phillips publisher Morningstar mutual fund. Good evening. I'm Louis Rukeyser. This is Wall Street Week. Welcome back. Well this was the week when I gave personal financial advice to the president of the United States and now it's all over the papers. So I sure hope I didn't lead them astray. The occasion for our counseling session was a White House reception yesterday honoring the 25th anniversary of the Corporation for Public Broadcasting. And as the Washington Post's John Carmody recounted one of the first visitors President Clinton spotted after his arrival was yours truly. And wouldn't you know it. He immediately approached me for personal financial guidance. Carbery accurately reported the following

dialogue. Lou I've been watching you for years. And how come I'm not rich. The president asked him as they shook hands because you've ignored my advice to get into the private sector. Mr. President because I responded with a grin. Now Goodness knows it's nice when a viewer trust you enough to do a sincere plea for help. And we want and treasure every single viewer of this program from the White House to your house. But since we do value our traditional reputation for total credibility I have to confess that I had myself a sleepless night after offering that off the cuff advice to the chief executive and I would like to publicly amended here with let's consider this an early viewers question segment. Dear Mr. President since I assume that you're watching as usual please do reconsider the advice I gave you yesterday. The more I think about it the more I doubt that I told you the right thing in advising you that the way to better yourself financially was to go into the private sector. You see what I forgot is that there are some strange people in Washington who are trying to make it more

difficult for anybody to make any money in the private sector. It's not I hasten to add that I doubt your own capacity to bring home the bacon. A bright and articulate young fellow like you who also just happened to be an ex-president of the United States. What I feel certain soon be earning more money each year than you ever dreamed of back in hope. Heck more even than a Hollywood barber. But the trouble is Mr. President that even though you were in fact a hard working relatively low earner all the years up to now the minute you started bringing in the big bucks in the private sector some crazy politician would probably start talking about you as if you had been a permanent member of that hated class the rich even though you can remember so well that you weren't. Why some nutty guy is even likely to start taking pot shots at you as one of those who had some kind of obscene party in the 1980s when the rest of the country supposedly suffered and therefore needs to be hit with every kind of punitive new

tax they can think of. Plus 10 percent. No seriously Mr President there actually are some silly people who would say stuff like that and many folks might actually believe them and think they were being fair. You and I may know that economic categories in America are highly fluid that this decade struggling young kid is often the next generation's higher earner. Believe it or not there are some people in politics who would seek to have you and your typically late blooming affluence paying through the nose for all the presumed sins of Michael Milken and Ivan Boesky know Bill I'm not making this up there really are people who say stuff like that and even worse if you did follow my too hastily giving advice to you and thereby start to make a higher income later in life that's validating what used to be proudly cited as the American dream. And if you then tried heaven forfend to invest some of that income and thereby help create better jobs and better opportunities for those not yet so lucky. You would be viewed as a

true enemy of the people by the Senate Finance Committee which would try to tax your capital gains if any. Even more punitively than the geniuses at the White House have suggested. No Mr. President I know this might sound completely ridiculous to an intelligent fellow like yourself but there are some people in politics who make an entire career out of soaking in the successful and punishing the productive. I kid you not. So I'd like to change my advice to you if you want to continue to be popular to any extent. In 1990s America stop even thinking about ever getting rich and stay out of the private sector as long as possible. But please do keep watching and we'll try to help you somehow. We promise not to let anyone know of your anti-social desire to get ahead. Now as for the rest of you a lot of us out there who are chiefs of state at least not yet. It may be OK for you to make a few bucks as long as you don't noise it about within the tax rate doesn't go to a hundred. So stick around for a talk with a leading Rayder of mutual funds. Just tell the Marine band to

put the mute on with business confidence trembling in the wake of new assaults from the Washington tax the Hawks and the economy continuing to slog forward painfully slowly. The computers said sell on triple witching Friday. And the Dow Jones Industrial Average ended at thirty four ninety four point seventy seven down 10 points for the week and 50 in the last two weeks. The broader markets continue to sustain greater damage. With the exception of the resource heavy American exchange but the technicians we call ourselves remain unmoved keeping their consensus on the outlook for the Dow six months hence at a bullish plus three. Both the dollar and the precious metals strengthened a bit but the bond market caught between a dwindling inflation scare and evidence that most price increases were actually dead in the water finished the week absolutely unchanged with all the talk about Father's Day taking an unusual or a distant second to Mother's Day. I thought the other dads of the world might want to know that this Sunday is the

unchallenged leader in at least one category. Yes it is true that many more telephone calls are made on Mother's Day. AT&T reports that Father's Day is the Number One day in the year for calling collect jaundice as you get ready to accept some charges yourself. Tell us what you think of this edgy market. Perlow I'm still optimistic in the market because of what I refer to as the Clinton effect on business. The irony is that all of the uncertainty in Washington is holding business back which means they're holding costs down longer than usual at this stage of the recovery. So this means with lower costs and demand still rising because of employment going up that corporate profits in my opinion will continue to rise and I think that will give us a better stock market. So I look for the Dow to be somewhat higher. You mean if business was more confident you would be less confident about the market. Exactly. I'm afraid that later on in the year perhaps as we get real close to 1994 that may happen when we find out what Washington really will do when they get through with all the haggling. Often after these triple witching days the market goes the other way for a few hours.

Do you think that is liable to be up next week or is that too soon to tell. No I would guess it would be up for that reason and also because the dollar has been quite strong which should relieve any fears of rising short term interest rates. For the moment Gail Dudack one of the stories this week was the collapse of some of the airline stocks and the damage on the transportation section generally from a technical standpoint. These stocks look to you now. Well there has been a lot of damage again a lot of what's happening to the markets very political and to a great extent that's been because of the changes in the proposed tax changes and in gasoline and in energy taxes so they're down. And I'm not convinced that there won't be more changes yet in before the package is so they could be up I think selectively some of the railroads are probably attractive. The airlines always seem to have problems. I'm don't see this weakness in the transportation index as serious as you know. You always watch the utility index is a great leader lead indicator. The stock market. How do they look. Well here it's interesting. We've made a peak in April of this year and we haven't gone

too high. So for the last two months we haven't made a new high. And this is not unusual. Usually if there's a five month lead before the market picks so I think that short term the market still looks good but we have to be I think on the look out that maybe the next rally will be the top of the trading range. We are going to have that next rally. I think we will. I think it will be led by Bonds a better bond market. Obvious isn't what you hope she's right because interest rates to me are the key as long as rates are down. It's hard for me to see where the stock market should go down much so I'm positive. Well since nobody in this world predicts interest rates flawlessly Why don't you take a shot at it. I would be the first I would flip a coin. I can't predict rates but I know where they are and I know when I talk to people everybody is concerned about what to do with their money. And that tells me that there's a lot of money that's around that's flowing into the stock market. The market however has been as you know very much of a two way street some stocks have been great and some have been awful this has been one of the tougher years that I remember. You have any favorites for us now. Well I love this whole

area of interactive media com binding telephones and computers. And my favorite is my biggest position which is a company called Intel which is the largest factor in the business that services these companies. Would you buy more of these prices. Well because that's my biggest position. By definition I guess I would. I always have a tough time answering that. But in this case yes if you're wrong we'll be interactive with you and it won't be the last time. In any event it is time now to amend the ravelled sleeves out there and answer some questions from our viewers. And so you don't know Monroe is a financial planner in Sandpoint Idaho who sometimes advises clients to buy bonds on a so-called ladder of maturity. Another way is to buy bonds that will be paid off at regular intervals from say one year to five years. And the first bonds mature the investor simply puts a new five year bonds with the proceeds and so on year after year. The idea behind this latter strategy of course is that by repeatedly staggering in the maturities investor

doesn't ever have to play this game of trying to predict interest rates. Ms Monroe wonders whether there is any bond mutual fund that uses this principle of laddering maturities and if not why not. Well the answer is yes there are in fact laddering are diversifying over the yield curve is a very popular activity among bond managers of mutual funds. I did find one that follows her formula almost to a T as Prudential Securities structured maturities class-A fund the latter on a six year maturity. I found another fund that ladder's on the shorter end of the market one to two years. United Services special government money market fund. And by doing that they achieve. Believe it or not one of the highest yields in a money market account in the country of any mutual fund and finally there the Benham target funds that they invest in zero coupon bonds and liquidate the fund on maturity so an investor in mutual funds can do it themselves. All right. Gail Dudack two questions about stockholder rights. Bob Broussard of sulphur Louisiana wants to know whether there are any rules requiring companies traded on

the Nasdaq over-the-counter market to make annual reports to their stockholders or to notify them of meetings. And Max Burkean of Northport Florida wonders why companies are not required to inform their existing stock holders of any new issues of the company's stock. Well the Nasdaq exchange strongly urges their companies to give you and other parts of notification that there is nothing written in the bylaws that firms have to do that in terms of issuance of stock that comes under FCC regulations and to the best of my knowledge one the company has to file with the FCC and two they have to make a public notification which means in the Wall Street Journal you will see notification of the issuance of stock and it is assumed therefore that shareholders would notice if you read your paper you should find out they have stock in Dow Jones. Harvey Eisen How would you respond to my parish of Bloomington Indiana who writes as follows. The map of America is now dotted with what used to be called service stations which now go into the cognomen of convenience stores. Do they provide investment opportunities or merely pomp

and circumstance. That actually is a timely question. Thats really been a two way street Circle K which is one of the largest factors went bankrupt. One of the environmental things that's going on today is a number of companies are going to have to go out of business because they can't replace the tanks that are in place that there is a company called Casey's General Store which operates in the Midwest primarily smaller communities. That really looks interesting to me. Trades at a relatively low multiple is around 17 million dollar 40 estimate this year $ 60 next year. And I think it's worth considering many if you are looking for high octane investments or if you just want to change your oil. Remember our motto around here we want to pump you up so make sure your finances don't take a hosing premium answers to your money questions are waiting here at Wall Street Week. Owings Mills Maryland 2 1 1 1 7 as Wall Street Week Owings Mills Maryland 2 1 1 1 7. It is a gaspin and with each week now before we meet tonight's special guest who service rates more than 2000 mutual funds from

best to worst on a scale of five stars down to one. Let's examine the criteria he uses in deciding between stars and gripes his service rates all the funds on a curve with the top 10 percent getting a five star rating the next twenty two and a half percent given four stars the middle 35 percent three stars the next twenty two and a half percent to the stars. And the worst performing 10 percent just one. The ratings are based on the funds historical performance over three different time periods 10 year performance counts for 50 percent five year for 30 percent and three year 20 percent funds with less than a three year history don't get rated. Given this historical focus a change in the fund raising will often go as much to the oldest performance dropping out of a new evaluation as to any current degree of excellence. But the stars are not based solely on profits. The Service seeks to identify those funds that produce the highest level of returns relative to the risk they take as measured against that of others in their class. And so a low

risk low return fund and high risk high return fund would each be graded as just the average performers doing only what investors should expect them to do. If you are pitching for profits in mutual funds will it really help to have stars in your eyes. And if so which funds currently ranked highest in their constellations. Some thoughts on that. Let's go over now and meet tonight's special guest Don Phillips. Welcome. Good to see you again. I have to say Don Philips own star has risen with remarkable speed has been interested in investing since shortly before his 14th birthday when he uses money earned on his newspaper delivery routes to buy shares of the Templeton Growth Fund. In 1986 after studying economics and English in college Mr. Philips answered a newspaper ad and landed a job with Morningstar Incorporated. He's now the publisher of five different Morningstar offerings including its flagship publication Morningstar mutual funds

on there are a couple of hundred five story Morningstar funds. How many of them do you invest in. I own about a dozen funds but I don't own exclusively Five-Star funds as you did a good job pointing out our star rating is meant as a starting point. With 4000 mutual funds out there an investor simply can't look at every fund individually. You need something to whittle down the task to a more manageable size and that's why we can view the star ratings in the way that I use them in my portfolio. It doesn't seems like a lot to most people why do you choose that many. Well I have individual funds for individual purposes. You have a certain fund for my IRA I have other funds I use my 401k plan. I have other funds that I've used to save up for a down payment on a house and then other funds that I use for my son's college money. And I like to have these aligned individually so when the check comes in the mail from a certain group I know what it's for. Those are problems that are shared by many families around the country. Why don't you tell us which fund you're using for which purpose. I'd be happy to. Every year during the ballgames at the start of year January 1st I make up my IRA check to Clipper Fund in my poor 1 k plan. I have Mario

Gabelli. I have Vanguard world international fund. I have Janise Venture Fund and I also have a fourth funded escapes me at the moment. The fidelity discipline equity in my regular column for my son I have money in Pasadena a nifty fifty and one of my favorite ones that I put money in over time systematically is a strong common stock fund. Now most of those that you mentioned are long term growth oriented are they not. That's right. But you say that for a target it's like buying a house you would make another kind of selection. What would you be looking for there. What I did actually I did have the money in a medium term growth fund and as I got closer to making the down payment started systematically moving the money out of that investment and into a short term municipal bond money market fund. Don you're Mr. Five-Star and you've just told us that you don't always buy a five star fund what do you look for when you buy a fund. Well the main thing about fund investing is to look at it as a process. I think too many people in investments are looking for quick neatly drawn conclusions. We is the star rating is a way to begin to whittle

the task down. There are a lot of important things that you want to get a sense for things that are more subjective in the key questions ask of yourself what are your time horizon. What's your risk tolerance. And then get a feel for how people are managing money. What are the personalities behind this. What are the things that they look at. How are they going to react to market environments. Are the ways you can do that are watching shows like this reading prolonged interviews there are no shows like this. There are no shows like this show watching the show and getting a good idea of how managers think and feel because that's really what you're buying when you buy a mutual fund you're buying the people behind the record. A common view expressed by those who are pessimistic about the market is that the tremendous boom and mutual fund investing and which your own publication has passed but as have many other institutions is dangerous that these are new inexperienced investors unused to the dangers of the equity markets the first time we have a serious dive in the markets they will panic and run for the hills. What do you think of that view. I think people are smarter than that maybe they're given credit for. I think the boom in mutual funds is very healthy in a couple of ways. For one thing we're getting a lot of people long term investment money out of CDs out of short term

investments into stocks and bonds which are much more appropriate. On the other hand there something very important that's happening with mutual funds. More and more of the money is getting out of the the closed doors the bank trust departments and places like that that managed it and they're getting into a much more public forum. And I think increasingly money is going to be invested on the basis of merit as opposed to relationships who actually is proven themselves the best in the market at managing money as opposed to maybe who you play golf with. I think it's an extremely healthy process. It's sort of our mutual goals. Let's talk with the panel starting with Ezer. It's done over the years World stock markets have grown to the point that now the U.S. represents less than half of all the equities out there. And yet I noticed even in your own portfolio you only have one or two international funds. Do you think that that's appropriate now or should investors have a bigger proportion in international securities. I think you should have more and I have a few more international investments that we didn't quite get to. But I think one of the great things about mutual funds is that it makes this available to many people. And if you think about it the idea I know that you do international investing and you know how difficult and time consuming it is and for most individuals the prospect of

investing in foreign markets without mutual funds simply wouldn't be a possibility at all. So I think that the explosion of funds in this area and increasingly an important thing is a lot of domestic funds have large positions internationally. We're seeing that more and more not just the funds that are labeled as international but domestic managers like yourself are spreading out to a wider audience and on to a bigger variety of stocks in your performance you also take into consideration the risk of the fund. I know a lot of our viewers are risk averse or why now how do you measure risk or how can you define how risky Why fund is another risk is an awfully hard thing to measure because it's intangible it's the kind of thing you know after the fact what we try to do is look at how fun we look at the chance of loss. We don't define risk simply as volatility tell us it doesn't matter a lot if you're doing better than expected. When you go up what we're really looking for is the chance and the severity of loss. So that's what we focus on. And I think risk is very important because risk is something you can take from the past and project into the future of short term performance may be largely a matter of luck but risk is something that a manager has choice over no manager can decide. A 15 percent return for the next three months as much as they all would like

to. But they can do the kinds of things that court certain amounts of risk and that's what we try to analyze in our reports not only through the historical rest of the fund just had but what things they're doing now that might entail additional or different risks than they've had in the past. Don one of the things I find is that you have so many changes in the market and you have Five-Star funds but there are times when these get out of favor and people sort of get down on the stile. Is there any way that you factor that into your approach. We don't factored into the star rating because we view that as a first stage screen. But last year we introduced something that's been very popular with readers and it's something called a style box. And what we do is we give you a grid of nine boxes that tells you if the fund is investing in large medium or small stocks and then whether they have a growth or a value or a blend focus blend being a focus it's not either distinctly value or growth in get an area of what part of the market a fund invests in very important a couple of years ago say 1991 when small cap stocks on the whole did well. But the value oriented stocks didn't do so well. If you were just looking at them as small cap vehicles you might have thought they were poor performers and you would have made a real mistake if you sold them because small cap value funds like skyline's special equities came back

very strong in 1992. Don you're a gifted manager of the mutual fund industry. Be a lot of flak for it. You have been outspoken about some of its failings. What you are critical of right now. Well I'm very critical of the way some of the funds are advertising themselves. I think it's very important that we send investors a message of what's a worst case scenario for a fund not just what's the best angle but what can go wrong with it. I think that's very important. I also think that it's very important to have more disclosure on funds. I think it's terrific some of the work that the FCC has done to step up to make it a more level playing field make sure investors have the information they need to make an informed decision. What funds do you hate now are probably just like the least of these mediocre funds that sort of look and feel like the S&P 500 but have above average fees a lot of these things mediocre performance with above average fees and these funds performed very well in the 80s for investors were the only mistake was just to leave the money under the mattress in a passbook savings account. But I think in the 90s it's going to be very important for investors to find both lower expense funds but even more importantly funds that have superior management.

When you're using your own money how do you decide between a load in the no load fund. Well I happened to do a lot of my own investment research so I have less need for compensating a professional through a loan fund the most funds. But that doesn't mean that I rule them out. We view the decision between load and no load is a very simple one. You're going to load you're paying for and you should be receiving an extra level of service something it helps you get into the right funds identify the funds that are appropriate for you and then to monitor them on an ongoing basis. To me the most important thing is to get with the right funds for the right reasons how you choose to get into them is a secondary consideration. And I don't believe for low to good information. Thanks to our panel. Hope you'll be back with us again next week. And we will be looking at one of the fastest growing businesses in the slow growing economy. It's gambling now showing up in some of the most unlikely places in America. And my guest analyst Steven Eisenberg will tell us whether he thinks there's still time for us to make some winning bets on the House. So let's see if we really should try to be high rollers in this big new American game of big casino. Meanwhile this has been wall street week. I'm Louis Rukeyser. Good night.

Wall Street Week With Louis Rukeyser has been made possible by the Corporation for Public Broadcasting. And by the annual financial support from viewers like you buy the travelers providing American business with insurance investment services and managed healthcare the travelers America's umbrella by MFX MFX helping usual fund and institutional investors achieve their financial goals. Since 1924 and by Prudential Securities we believe the most important thing we earn is your trust. Prudential Securities for a printed transcript of this program send $5 to transcript Wall Street Week With Louis Rukeyser Owings Mills Maryland 2 2 1 1 1 7 transcripts are also available to subscribers of the Dow Jones news retrieval service. For. Guys. From.

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