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Tribe's Own Mutual Fund Could Be a Smart Bet
December 8, 2003 E-mail story Print
Tribe's Own Mutual Fund Could Be a Smart Bet
Among the many Indian gaming tribes in California, the Sycuan Band of Kumeyaay Indians has been perhaps the most aggressive at deploying its casino wealth into new ventures.
As long ago as 2000, the tribe spent $40 million to buy Singing Hills Country Club, a premier resort just three miles from its home in eastern San Diego County. Earlier this year it launched a proposal for a $25-million hotel and shopping development in a run-down section of the San Diego waterfront, and just last week it followed up with the $45-million purchase of the restored U.S. Grant Hotel in the historic Gaslamp District downtown.
But the tribe's truly eye-opening step is the one it announced in late October: the creation of a branded mutual fund.
Tribe officials say the Sycuan U.S. Value Fund is a natural outgrowth of the tribe's main activity. "We're in a very cash-intense business," Jeff Provence, head of Sycuan Capital Management, the tribe's registered financial advisor, told me. "It wasn't a big leap for the tribe to say, 'We've got money to invest in the stock market. Instead of investing through Lehman Bros. or Merrill Lynch, why couldn't we have our own vehicle?' "
By creating its own fund, moreover, the tribe figured it could make a little money on the side. The fund's management fee will be an annualized 1.5% of assets, from which Sycuan will pay 50 basis points to San Diego-based Brandes Investment Partners, a well-known investment management firm that will actually run the portfolio as sole advisor. The tribe will keep the rest, although it will cover the fund's expenses from its end.
As an investment in U.S. equities, the Sycuan Fund won't be much different from scores of others available from the Vanguards, Fidelities and Dreyfuses of this world. The tribe says its strategy in seeking out large-capitalization stocks will be based on "Graham and Dodd" value principles — that is, it will look for securities that are significantly undervalued based on a rigorous analysis of the companies' financial ratios and performance. (Brandes specializes in such "value investing.")
What's different about this setup is the role of the tribe. "I've been in this business for 20 years, and I'd have to say it's somewhat unusual," offers Debra McGinty-Poteet, manager of mutual funds at Brandes. Although Brandes handles numerous portfolios for large mutual fund families as well as operates investment funds sold through conventional brokerages, this is the only case McGinty-Poteet can name in which the firm is managing a mutual fund for a one-fund operation. (The tribe says it will eventually expand its offerings.)
For individual investors, McGinty-Poteet says, the virtue of the fund may be that it's the cheapest and most accessible way of investing with Brandes, which normally sells its managed portfolios only through brokerage houses, requires minimum investments of $100,000 and charges 2.5%.
Sycuan officials say their fund hasn't been designed to advance any parochial tribal interest. It won't promote investments deemed "tribe-friendly," the way some "socially responsible" funds abjure tobacco or liquor stocks or companies whose activities are thought to be detrimental to the environment. DeWitt Bowman, the former chief investment officer of the California Public Employees' Retirement System who has signed on as an independent trustee, says part of his job will be to ensure that any investment proposals from tribal officials conform to the value strategy set forth in the prospectus.
Certainly, Brandes' initial investments meet that criterion. McGinty-Poteet ticks off the top five holdings, each accounting for about 3% of the fund: SBC Communications Inc., BellSouth Corp., Altria Group Inc. (the former Philip Morris) and the pharmaceutical companies Schering-Plough Corp. and Merck & Co.
McGinty-Poteet observes that many public institutional investors, such as CalPERS, allocate sizable portions of their assets for placement with minority-operated investment firms. Sycuan could theoretically qualify for that.
But more than anything, it seems, the tribe's role will be to lend the fund a marketing imprimatur as something suitable for tribal investors themselves. Although the fund will accept investments from non-tribal institutions and members of the general public (minimum investment: $5,000), part of Sycuan's rationale was to "create a tribe-to-tribe investment pool," says John Tang, president of Sycuan Tribal Development Corp., its business arm. He and Provence say they've found in the past that newly wealthy gaming tribes are anxious to find investment advisors they can trust.
As a marketing idea, one can say this is rather clever, even before there's any evidence that it will work as the tribe hopes. It's no stretch to imagine that some tribes, which might be made up of formerly poverty-stricken families suddenly inundated with cascades of cash from slot machines and table games, could be subject to what might be termed Sports Star Syndrome. Simply put, they may not know the difference between a good investment and a scam.
Some already have succumbed to the corrupting influence of money, such as the Redding Rancheria, where one clique has been trying to force out one of the group's oldest families, a maneuver that would produce bigger splits of casino income for everyone else.
In essence, Sycuan is marketing its mutual fund as an "affinity" investment, the way some community banks or insurance companies sell themselves to members of their founders' ethnic groups by pitching patronage as a blow for ethnic self-help or communal pride.
Whether other tribes or their members or employees will sign up on these terms isn't clear. Although the fund was officially launched in October, it's still being organized. Its assets are still around the $100,000 with which the tribe seeded the portfolio. Provence says his goal is to exceed $10 million in the next three to five months, much of it from the tribe. Over the next year to 18 months, he says, he hopes the fund will grow to as much as $100 million in assets, which would presumably require the participation of other tribes or institutional investors.
Chris Lahiji update: It was recently reported that Frontier Equity Fund, the nearly extinct mutual fund whose portfolio was taken over in September by the putative wunderkind Chris Lahiji, gained 11.54% in the first week of November, thus becoming the top-performing fund in the country for that period. Since this column had expressed skepticism last summer about the wisdom of placing people's money in the hands of someone so long on self-regard and short on experience as the 20-year-old Lahiji, I was highly impressed by this achievement.
That is, until I discovered that the gain amounted to a rise in the fund's price of exactly three pennies per share.
The report on Santa Monica-based Lahiji came from the weekly investment journal Barron's, which apparently possesses so much credibility it can afford to squander some by purveying patent hogwash.
Shopping around for the time span that shows one's investment performance in the best light is a familiar promotional stunt on Wall Street. The shorter the time frame selected, obviously, the easier it is to claim success. (It's also easy to show inflated percentage gains when they're calculated on a small base; the share price of Lahiji's fund on Nov. 7 was 29 cents, which is where it closed Friday.)
Perhaps it's only by chance that Barron's highlighted the sole week since Lahiji's Sept. 9 start in which it could award him a big gain. Had the magazine selected the third week of October, for example, it would have had to report that Lahiji's fund had lost 3.85% of its value in that span. (That's 1 cent.) Or it might have measured the fund's price as of Nov. 7 against its high for the year back in January, before Lahiji's appointment, which amounts to a loss of 46.3%.
My aim is not to question Lahiji's record, but merely to argue that it's early yet to declare him the second coming of Peter Lynch. For any rational investor, the real issue is how Lahiji performs over the long term, preferably including a few periods that challenge his strategy of focusing on micro-cap stocks. Two months, much less a week, is rather too brief to conclude, as Barron's did, that "the kid rocks."
Predictably, Lahiji himself promoted the Barron's item on his Web site, thanking the author for recognizing "my accomplishments in the financial world." But wouldn't Barron's have been better advised to wait until he actually had any?
Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at firstname.lastname@example.org.