Timing is everything. However, at some mutual fund companies, following the advice of market-timer newsletters is now a no-no. Market timers basically tell their subscribers when to get in and out of the stock market.
Fidelity Investments and SteinRoe & Farnham are refusing the "buy" orders of investors who follow the advice of such timers. SteinRoe gave its investors the word in a blunt letter, worded similarly to one sent out by Fidelity: "During periods when we believe widespread market-timing activity is occurring, we reserve the right not to accept telephone exchange orders into our equity funds. If you intend to continue following a market-timing strategy, we suggest you make arrangements to move your investment to another mutual fund organization."These efforts have been primarily aimed at the 45,000-circulation Fabian's Telephone Switch News Letter, though inclusion of other newsletters won't be difficult.
The fund companies are able to monitor timing directives and switch requests through their sophisticated computer systems. Switching does damage to funds, the fund companies contend, and they must protect the funds and those regular investors who employ a buy-and-hold strategy.
"When Fabian's newsletter put in a `buy' signal on March 16, the funds constituting his composite were flooded with people ready to buy shares, and then, three days later, he issued a sell signal," said William Hayes, senior vice president at Fidelity. "It is extraordinarily difficult for a fund manager to deal with that, especially in the case of a smaller fund of $200 million or so, when an additional $50 million is added over one weekend."
While Fidelity hasn't moved to stop trades by investors in any of its switch-oriented sector funds specializing in specific industries, it has initiated fees to slow down such trading.
The moves of the timers are well-documented by the fund companies. In 1990, there has been a Fabian "sell" signal in January, a "buy" the third week in March, a "sell" the fourth week in March, a "buy" in May and a "sell" in early August, said Jon Zeschin, senior vice president with SteinRoe. "When newsletters get so large, I don't understand why they don't just start their own mutual fund family and make the funds available for their subscribers," Zeschin said.
Douglas Fabian, co-editor of Fabian's Telephone Switch News Letter, based in Huntington Beach, Calif., believes his subscribers are being unfairly discriminated against.
"Fidelity is doing this now because we are in a bear market and it is experiencing net redemptions over net sales, and focusing on us because we're the most influential," said Fabian. "My advice to my subscribers is to move to other fund families."
Fabian defends switching, based upon his belief that buy-and-hold investors too frequently buy into funds at market tops. He terms himself a "bear market avoider."
The decision by fund companies is having its effect on other market-timing letters. For example, Charlie Hooper, editor of Mutual Fund Strategist, based in Burlington, Vt., contends the handwriting is on the wall.
"I am eliminating my model portfolio designed around Fidelity funds because I don't want my subscribers to be banging on a closed door when they try to make a transaction," said Hooper. "The fact is, switching is good for the investor if the proper methodology is behind it, and I have consistently beaten the overall market over any three-year period."
There are differences of opinion on whether fund companies are doing the right thing for investors, or merely taking a self-serving stance.
"It is the height of hypocrisy for Fidelity to now say that you really won't be able to get yourself in and out `on a dime' after all," said Mark Hulbert, editor of the Hulbert Financial Digest, which tracks the nation's investment letters. "Fidelity was, after all, in the forefront of soliciting investor money based upon the fact that it offered switching."
However, Don Phillips, editor of Chicago-based Mutual Fund Values investment advisory, considers the market-timing letters "parasites" that take advantage of fund companies' good will.