Dateline: 9/21/98

Last month I wrote "There's an old instrumental standard that the Ventures recorded on one of their albums called Slaughter on Tenth Avenue. Now I don't think the early August market correction can really be called a Slaughter on Wall Street, but it certainly took an axe to our portfolios." The downturn then was sufficient to move two of our mock portfolios 100% into cash and the third one 80% into cash.

That proved to be a darn good move as the markets continued to sputter and then, in September, took a spectacular dive. September probably does deserve the epithet "Slaughter on Wall Street"! (Even though there's a week left to go.)

By the end of August, the havoc in the marketplace had decimated the charts we regularly track here. My Power Performers list is down from 28 funds at the end of July to a mere 5 at the end of August. The number of funds with 15 year track records better than 15% per year has dwindled from 6 to 1 and that one is new on the list - the McLean Budden Pooled American Equity Fund - every single one of the six from the previous month has fallen off the list! The venerable Templeton Growth Fund fell off that list back in May. Now Trimark Fund is also off the list. The biggies are starting to fade.

All Got Fried But Friedberg

What is really interesting is the top performers for the month of August. The headline in Thursday's Globe & Mail Mutual Funds report screamed " Meltdown Month Sears All Funds". It listed the losses taken by several dozen funds of note and gave the impression that there were no gainers to speak of. But while the majority of equity funds posted a loss for August, there were others with gains. The Vancouver Sun lists the Top 25 funds each month at its website. All 25 on their list of top one month performers had positive results. Most were foreign bond funds.

But the top four of that list all came from one company - Friedberg Mercantile Group. Friedberg is not your run of the mill mutual fund company. They are specialists in currency trading, futures and special situations. Although he's not quite in the same league yet, you could call founder Albert Friedberg Canada's answer to George Soros. Both deal in currency speculation. Both manage funds that fluctuate wildly. And both have spectacular successes that far outweigh their spectacular losses.

While the average Canadian equity fund lost 17.8% in August, the average U.S. equity fund lost 12.6% and the average International fund lost 12.9%, those four Friedberg funds made an average gain of 20.4%. The best of these was the FCMI Diversified Fund which gained 27.82% in August.

The Friedberg Fund with the longest track record so far is the Currency Fund. Since inception on January 3, 1995, the fund has an average annual compound rate of return of 28.96%. It is Canada's top performing mutual fund for one year to the end of August with a whopping 83.07% return. It came in number three for both one month and three month returns.

Albert Friedberg and his associates have over two decades of currency trading experience behind them, and are highly regarded in their field. His approach is based on sound analysis of world monetary conditions from an Austrian economics perspective. He and his associates also boast some notoriety.

Steve Hanke, the Vice Chairman of Friedberg's American subsidiary, was in the news in February as an economic advisor to Indonesian President Suharto. A Professor of Applied Economics at Johns Hopkins University, Hanke urged the President to create a currency board to permanently peg the Rupiah to the American dollar, an idea that did not sit well with the grand poobahs at the International Monetary Fund and the U.S. Treasury Board.

As Austrian economists, Friedberg and Hanke do not have a lot of respect for the IMF or the U.S. Treasury Board. But their contrarian views are reaping a whirlwind of profits for investors. They do advise caution, however. Their field, currency speculation and futures trading, are not for the faint of heart. Nor are their products recommended for those who are risk averse.

A good example of that is the events of the past week. The Currency Fund was at $25.41 on August 31. After gaining some more, it took a whopping 24% nosedive to this past Wednesday. The reason? The fund had shorted the Russian ruble and last week, the ruble took an unexpected (and unjustified) leap from 23 rubles to the U.S. dollar to 8.5 rubles to the dollar. That cost Friedberg $30 million. Definitely not for the faint of heart.

Although it is suspected that manipulation by the Russian authorities caused the unexpected turnabout (the rally came just in time to bail out Russian banks who had U.S. dollar bond interest payments coming due), that is no consolation to an investor who loses 24% of his investment in a week.

Friedberg Mercantile Group is a fascinating company. Do explore their website and be sure to check out their newsletter and the transcript of the latest telephone forum they conducted with clients. It will give you a lot of insight into their thinking and their methodology.

Now let's get on to our portfolios.

Portfolio Review

As noted above, we left our portfolios largely in cash last month. Let's see where we end up this month.

Portfolio # 1 (Buy Strategy - Fund must be in the Top 25 Performers for a Three Month period and the One Month performance should not be negative nor excessive compared to the Three Month. Sell on 5% slide.)

This portfolio was 100% in cash. Looking at our 'buy" criteria the most interesting choices are two Friedberg funds, the FCMI Diversified and the Friedberg Currency Fund. However, they both violate our rule that the one month return should not be excessive compared to the three month return. Furthermore, both of them are down from their August 31 close, so we pass on them. But there are quite a few that fit our criteria, all of them International bond funds. The chart of purchases follows.

Portfolio Value at 9/18/98: $ 29,482.75 - up 17.9% since inception (12/22/97)

We could have kept the extra $4,482.75 in cash, but as it is pretty close to $5000 and funds qualified for purchase, we bought some and are now fully invested. Note the complete change in the mix of our portfolio from two months ago. Then we had three equity funds and two dividend funds. Now we have six International bond funds.

Portfolio # 2 (Buy Strategy - Same as Portfolio # 1 plus the fund must have a better than 15% performance for the One Year, Three Year and Five Year periods. Sell at 5% slide)

This more conservative portfolio found no funds fitting our "buy" criteria. It remains 100% in cash.

Portfolio Value at 9/18/98: $ 27,875.61 - up 11.5% since inception (12/22/97)

Portfolio # 3 (Buy Strategy - Fund must be a Power Performer and it must have positive Three Month and One Month figures. Sell on 5% slide.)

We had 20% in equity last month, but quickly sold our position when the markets skidded. No funds meet our "buy" criteria at this time.

Portfolio Value at 9/18/98: $ 29,707.78 - up 18.8% since inception (12/22/97)

Controls: (2 Funds purchased to buy and hold as benchmarks for our portfolios.)

The three portfolios can be characterized as aggressive, conservatively aggressive and conservative. The three portfolios (since they were mostly in cash) did not change positions from last month. However, the two benchmark funds took a beating in the market tumble and are now below what we would have paid for them at inception.

Final Notes

Bearish Buffett?: Bloomberg reported Friday that Warren Buffett may be turning more bearish as he has let the cash position of Berkshire Hathaway increase to $9 billion, a considerable percentage of B-H's $64 billion market cap. Berkshire, remember, also owns about 20% of the world's silver stockpile. Another bearish indicator. All things considered, I think staying in cash with our portfolios #2 and #3 is pretty sound. Whether the wholesale move into bond funds with Portfolio #1 pays off remains to be seen.

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Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions. The author holds interests in a number of the funds mentioned in this article.

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