ANATOMY OF A MUTUAL FUND.A peek at how MDL MDL - (Originally "Muddle"). C. Reeve, Carl Hewitt and Gerald Sussman, Dynamic Modeling Group, MIT ca. 1971. Intended as a successor to Lisp, and a possible base for Planner-70. Basically LISP 1.5 with data types and arrays. Capital Management handles its investors' money provides clues to how mutual fund is run MARK D. LAY, CHAIRMAN AND CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. OF MDL CAPITAL Management, wants you to buy his mutual funds. And he's pitching them to you in several ways: as no-load funds you can buy directly from his firm for a minimum investment of $500; as load versions of his funds you'll be able to buy from your insurance agent; or by managing your 401(k) plan. MDL, a Pittsburgh, Pennsylvania “Pittsburgh” redirects here. For the region, see Pittsburgh Metropolitan Area. Pittsburgh (pronounced IPA: /ˈpɪtsbɚg/) is the second largest city in the Commonwealth of Pennsylvania. , money management firm with $1.7 billion in assets, has big plans for 2000. In addition to its more than 52 institutional clients, it wants to win more retail customers. The cornerstone of this strategy is its two mutual funds: the $28 million MDL Large-Cap Equity Growth fund (Nasdaq: MLGEX), managed by Steven L. Sanders, president and that has kept the bull market cheer economist at MDL; and the $23 million MDL Broad Market Fixed Income fund (Nasdaq: MBMFX), which Lay runs (800-932-7781). Both were launched in November 1997 and are members of the BLACK ENTERPRISE Black Mutual Funds Index (see "Fantastic Voyage," Money-wise, this issue). The funds' performance, especially that of the equity portfolio, should help MDL in its quest for Verb 1. quest for - go in search of or hunt for; "pursue a hobby" quest after, go after, pursue look for, search, seek - try to locate or discover, or try to establish the existence of; "The police are searching for clues"; "They are searching for the your business. Through the end of 1999, MDL Large-Cap Equity was up 20.8%, beating the Standard & Poor's 500-stock index's 19.53% return for the year. Although MDL Broad Market Fixed Income is down 2.4% for the year--1999 was a bear market for bonds--that's just slightly worse than the loss the Lehman Brothers Government/Corporate Bond Index Lehman Brothers Government/Corporate Bond Index A benchmark index made up of the Lehman Brothers® Government and Corporate Bond indexes, including U.S. government Treasury and agency securities as well as corporate and Yankee bonds. , the benchmark MDL measures the fund by, suffered. It was down 2.15% for the same period. MDL's two funds are run somewhat conservatively. And as a self-described growth manager, the firm's equity fund in particular benefits from the trend running: fast-growing stocks with rapidly rising earnings. FROM NICHE TO NATIONAL PLAYER MDL Capital Management is essentially a microcosm of the mutual fund world. Examining how Lay and company manage its two funds will give you an inside glimpse at how fund companies operate. You'll learn how MDL picks winners, discards dogs, shapes its investment philosophy and policy, and develops its marketing strategy. You may not have heard of MDL, but if you're an employee of the city of Baltimore, a member of United Stedworkers Local 1197 or an employee of Boeing (NYSE NYSE See: New York Stock Exchange : BA)--just three of MDL's clients--the company is managing your money. MDL, which operates in 16 states including Pennsylvania, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of and Georgia, faces a daunting daunt tr.v. daunt·ed, daunt·ing, daunts To abate the courage of; discourage. See Synonyms at dismay. [Middle English daunten, from Old French danter, from Latin challenge: it must transform itself from a niche asset management company handling public and private money to one with a larger national presence. "All new money isn't good money. We're trying to get good clients. We're looking at different states, and different clients with in those states," says Lay, a 16-year market veteran. "Don't get me wrong. We still want to grow the firm. We currently are a niche player, but we want to be a mainstream money management firm." "We want to be in more 401(k), 403(b), and 457 plans," says Sanders, an 18-year securities industry veteran. "We like the 401(k) market because the selection process [for new funds] is truly based on performance." A 401(k) plan is a retirement plan sponsored by a corporation for its employees; a 403(b) is offered by nonprofit organizations; and a 457 is one provided by state and local governments. To achieve its goal of controlled growth, MDL is working toward having $2 billion in assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing. by March 2000 and $3 billion by December, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Lay. DISTRIBUTION PATHS OF GLORY Part of the process of properly managing MDL's growth is getting more exposure for its mutual funds in a crowded marketplace. In 1999, the firm took steps toward improving its public profile. First, MDL entered into an agreement in January 1999 with Fidelity Investments Fidelity Investments is a group of privately held companies in the financial services industry. It is made up by two independent but closely cooperating companies, Fidelity Management and Research Corporation (FMR Co. , adding its two funds to Fidelity Funds Network, the mutual fund supermarket fund supermarket A financial institution that offers a large number of mutual funds from many different sponsors. The term is often used to refer to brokerage firms that offer customers a very large number of no-load funds. service run by the Boston-based mutual fund giant--a popular way for investors to buy funds. Next, MDL sought another African American African American Multiculture A person having origins in any of the black racial groups of Africa. See Race. financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. firm as a partner in selling its mutual funds. MDL and Atlanta Life Insurance Co. (No. 2 on the 1999 BE INSURANCE COMPANIES list) are close to reaching a pact to sell MDL's funds, an agreement that could be in place by May 2000 ("MDL Capital Management, Atlanta Life in Negotiations to Sell MDL's Mutual Funds," BLACK ENTERPRISE Online, 1/12/00). In addition to its target of $3 billion in assets by the end of this year, MDL wants to have its funds available in at least five defined contribution plans Defined contribution plan A pension plan whose sponsor is responsible only for making specified contributions into the plan on behalf of qualifying participants. Related: Defined benefit plan by September of this year--a goal which has so far eluded it. Lay and Sanders declined to discuss specific retirement plans they're targeting. SETTING FEES, LANDING CUSTOMERS Before MDL launched the funds more than two years ago, Sanders and Lay had to decide how to market the funds, what fees to charge and what should be the minimum initial investment. Currently, you can purchase either of MDL's funds for a minimum of $500--low for a no-load mutual fund No-load mutual fund An open-end investment company whose shares are sold without a sales charge. There can be other distribution charges, however, such as Article 12B-1 fees. A true no-load fund has neither a sales charge nor a distribution fee. , Sanders says. MDL's natural customer base, wooed by other firms like Ariel Capital Management in Chicago, would be African American investors who want to support an African American-operated fund complex with a track record of solid performance. In order to win those customers, the funds couldn't have high minimums or fees and needed to have positive returns, explains Sanders. "The mutual fund investor today is more savvy than he or she was 10 years ago. They're looking at the expense ratios. Now we couldn't be as inexpensive as Vanguard, but we were going to make them as low as we could," says Sanders. There are no 12b-1 fees--a charge some funds levy to cover marketing and distribution expenses--to eat into your returns. Like all mutual funds, MDL's have expense ratios, and those costs will slightly diminish your returns. The equity fund has an expense ratio of 1.26%, or 126 basis points, compared with 1.5% for the average stock fund. The bond portfolio has a 0.96% expense ratio, or 96 basis points, slightly lower than the industry norm of 1% for a fixed-income fund, says Sanders. This means that although the MDL Large-Cap Equity fund returned 22.6% in 1999, the expense ratio shaved off 1.26%, leaving you with a 20.8% return. Assuming you only put in $500 at the beginning of 1999, that sum grew to $604 in a year. Sanders adds that the firm had initially considered charging a $100,000 minimum initial investment for purchasing the funds since they were institutional portfolios, but he and Lay realized that would hinder their goal of garnering as many customers as possible, whether or not they were African American. So MDL set the minimum at $500 and decided to eat such costs as marketing and fund administration. MANAGING THE MONEY All fund managers hew hew v. hewed, hewn or hewed, hew·ing, hews v.tr. 1. To make or shape with or as if with an ax: hew a path through the underbrush. 2. to an investment style when it comes to handling your assets. For both the equity and fixed-income portfolios, MDL starts with a "top-down" approach. It analyzes the economy and other factors driving market trends, such as the rate of inflation, the pace of economic growth and fiscal policy, and identifies how that data impacts its stock picks. The equity fund has more than 60 stocks in its portfolio, with other companies MDL wants to purchase on a "buy list." This part of the selection process uses a "bottom-up" approach, which entails sifting through a potential universe of 1,000 stocks and finding those with accelerating price momentum of 10% to 15% and positive earnings surprises, for example. The Large-Cap Growth fund's investment philosophy is growth at a reasonable price (GARP (General Attributes Registration Protocol) A standard for registering a client station into a multicast domain. See 802.1p. GARP - A graphical language for concurrent programming. ["Visual Concurrent Programmint in GARP", S.K. ). That means buying stocks with earnings growing faster than 5% a year when they're cheap in an attempt to outperform the S&P 500--the benchmark the fund is measured against--over a three-to five-year time frame. It also entails over- or underweighting stocks in the S&P 500 (see table with top 25 holdings). Occupying the third floor in a small, six-story brownstone brownstone, red to brown variety of sandstone. Its unusual color is caused in some instances by the presence of red iron oxide which acts as a cement, binding the sand grains together. in downtown Pittsburgh, MDL is run by Lay and a core group. Lay is a Wall Street veteran who has worked for such firms as Dean Witter Reynolds Dean Witter Reynolds was an American stock brokerage catering to the middle class. In 1997, it merged with the Morgan Stanley Group to form Morgan Stanley Dean Witter. The amalgamated firm is now known as Morgan Stanley. (now Morgan Stanley  To comply with Wikipedia's , the introduction of this article needs a complete rewrite. Dean Witter Dean Witter may refer to:
The firm's operations remain split between Pittsburgh and Philadelphia. There are 14 employees, eight of whom are in Pittsburgh. Lay says the advantage to this arrangement is that with Pittsburgh being more Midwestern in character and culture, he can concentrate on clients in Ohio and western Pennsylvania Western Pennsylvania consists of the western third of the state of Pennsylvania in the United States. Pittsburgh is the largest city in the region, with a metropolitan area of about 2.4 million people, and is the cultural center for Western Pennsylvania. . On the other hand, Philadelphia is geographically and culturally closer to the Northeast, enabling Sanders and his staff to keep close ties with their New York clients, for example. Ed Adatepe, chief investment officer, is MDL's quantitative analyst A quantitative analyst is a person who works in the financial markets developing and implementing mathematical models to assist the activities of traders and risk managers within investment banks, hedge funds and other financial institutions. . He screens current stock and bond holdings, searching for new investment opportunities. Tracey Gist, vice president of operations, and Adatepe work with Lay in Pittsburgh. Sanders and Joe Watkins, chief operating officer Chief Operating Officer (COO) The officer of a firm responsible for day-to-day management, usually the president or an executive vice-president. and director of marketing, work out of the firm's Philadelphia office. MDL also has three analysts who work on the stock and bond portfolios. Unlike other large mutual fund complexes, Lay, Sanders and the other key members of MDL's team don't have the time to perform site visits. Instead, much like the sophisticated individual investor, they rely on available technology--from using quantitative screens to participating in conference calls on earnings--to monitor their investments. They used this process to pick such stocks as Microsoft (Nasdaq: MSFT MSFT Microsoft (stock symbol) MSFT Movimento Sociale Fiamma Tricolore (Italy) MSFT Multi-Stage Fitness Test MSFT Master of Science in Family Therapy MSFT Macalester Students for Fair Trade ), General Electric (NYSE: GE) and Cisco Systems (Nasdaq: CSCO CSCO Cisco Systems Incorporated (stock symbol) CSCO Chief Supply Chain Officer ), three of their top holdings in the equity fund. DUMPING HOLDINGS There are circumstances under which Lay and Sanders will dump a stock. Generally, it takes two consecutive quarters of earnings disappointments, a short-term drop in the stock's price of as much as 15% on a given day or a fundamental company-specific event like a management change or underperforming product line before Lay and Sanders completely sell a holding. For example, Lay, Sanders and the firm's investment policy committee decided to drop Cendant (NYSE: CD) last year. The provider of consumer and business services was embroiled em·broil tr.v. em·broiled, em·broil·ing, em·broils 1. To involve in argument, contention, or hostile actions: "Avoid . . . in an accounting scandal. MDL also shed several regional bank stocks, among them Bank of New York The Bank of New York, abbrieviated to BNY, was a global financial services company that existed until its merger with the Mellon Financial Corporation on July 2, 2007.[1] The bank now continues under the new name of The Bank of New York Mellon Corporation. (NYSE: BK) and Mellon Financial (NYSE: MEL (Maya Embedded Language) See Maya. Mel - The story of Mel ), amid worries that rising interest rates would hurt financial shares and that those stocks in particular wouldn't be as profitable as those of other, more diversified banks. From time to time, other adjustments to the equity fund's portfolio have to be made, as simple price appreciation in particular stocks increases the fund's exposure to sectors, such as technology, that have become more volatile. Case in point: Sanders shaved his ownership in certain high-flying technology shares at the beginning of this year, reducing stakes in companies like Microsoft, to 4% from about 5.5%, Oracle (Nasdaq: ORCL ORCL Oracle (stock symbol) ), to 1.6% from 2.6%, and Cisco Systems, to 1.3% from 2.3%. As for the Broad Market Fixed Income fund, the top-down process is used to determine which sectors to overweight or underweight Underweight An situation where a portfolio does not hold a sufficient amount of securities to satisfy the accepted benchmark of the portfolio's asset allocation strategy. Notes: , such as U.S. Treasuries, corporates, asset-backed and mortgage-backed securities Mortgage-backed securities (MSBs) Securities backed by a pool of mortgage loans. . Then, in the bottom-up part of the process, individual securities are selected for the portfolio. Recently, that's meant staying with bonds maturing in seven to 10 years, and emphasizing off-the-run U.S. Treasuries, bonds that are closer to maturity than those issued this year, which are called current or on-the-run securities. And in this climate of rising interest rates, the fund has added certain mortgage-backed securities that perform better when rates rise. Recently, Lay purchased bonds issued by the Government National Mortgage Association (GNMA GNMA abbr. Government National Mortgage Association ), among them Ginnie Maes with a 6.5% coupon, and those of the Federal National Mortgage Association, specifically Fannie Maes with a 6.5% coupon. For its institutional clients, the firm has set up equity and fixed-income portfolios similar to the holdings in its mutual funds, with some differences in how much of a particular stock or bond it holds. MDL's corporate clients include Raytheon (NYSE: RTN RTN Return RTN Raytheon Company (stock symbol) RTN Research Training Network RTN Rotarian RTN Routing Transit Number RTN Recursive Transition Network RTN Register Transfer Notation RTN Radial Tangential Normal ) and Sprint (NYSE: FON Fon People of southern Benin and adjacent parts of Togo. They speak a dialect of Gbe, a Kwa language of the Niger-Congo language family. Numbering about 3 million, the Fon are mainly farmers. ). Among its public accounts are the city of Baltimore, the Commonwealth of Pennsylvania Tuition Assistance Program The Tuition Assistance Program is a financial aid program for students who are New York State residents and are attending a post-secondary institution in New York. and the New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. Pensions System. PIVOTAL MOMENT The firm has come a long way since 1992, when the hard-charging but affable Lay started the firm with long-time friend Gist. A pivotal moment for MDL came back in 1994, when the company merged with Sanders' old firm, Philadelphia, Pennsylvania-based Advent Capital Management Partners. Sanders and Lay discovered their views were similar about the institutional money management business, the importance of keeping such firms under African American ownership and how active management was the key to a fund's performance. "We decided the hallmark of our marketing efforts would be performance. Mark said, `I will not be an indexer or closet indexer. I must be an active money manager,'" says Sanders, referring to Lay's refusal to be counted among portfolio managers who either run an index fund or mirror the stocks in the S&P 500. In order to establish the mutual funds, MDL started out humbly, contributing just $100 in seed money to each of the two funds. For the stock fund, Lay and Sanders initially bought a SPDR SPDR The Standard and Poor's depositary receipt. This is a tracking stock which trades like an index mutual fund which follows the S&P 500. It trades continuously. SPDR See Standard amp; Poor's Depositary Receipt (SPDR). , or Standard & Poor's 500 Depositary Receipt depositary receipt A negotiable certificate that represents a company's publicly traded debt or equity. Depositary receipts are created when a company's shares or bonds are delivered to a depositary's custodian bank, which instructs the depositary to issue , a unit investment trust that holds all the stocks in the S&P 500. For the fixed-income fund, however, $100 isn't enough to buy even a short-term bill, let alone a long-term bond. After a few months, though, the funds accumulated in excess of $100,000, enough capital to begin diversifying the portfolios. The first month of 2000 has been volatile. Stock market averages have zoomed up and down. Meanwhile, yields on long-term bonds are now higher than short-term bonds. Despite this tumult, Lay is confident of the stock market's ability to power even higher this year. But he sounds a note of caution, as he consistently does at MDL's investment policy committee meetings. "I still think that stocks will remain strong because consumers continue to remain very aggressive," says Lay. "What you have to focus in on, though, is the Fed. If it hikes rates 25 basis points, we'll do just fine. We'll be up 10% by year-end." But if it's 50 or 75 basis points, "then stocks will get crushed." No matter what the investing climate, however, one thing you can be sure of. MDL will keep trying to convince you to buy its funds any which way it can. And now that you know how MDL runs its portfolios, you can use that knowledge to tighten up the nuts and bolts nuts and bolts pl.n. Slang The basic working components or practical aspects: "[proposing] of your own investment house. MDL'S TOP 25
Company Name (Exchange: Symbol)
Microsoft (Nasdaq: MSFT)
General Electric (NYSE: GE)
Wal-Mart (NYSE: WMT)
Honeywell International (NYSE: HON)
Intel (Nasdaq: INTC)
Lucent Technologies (NYSE: LU)
Oracle (Nasdaq: ORCL)
Exxon Mobil (NYSE: XOM)
America Online (NYSE: AOL)
Citigroup (NYSE: C)
Home Depot (NYSE: HD)
Merck & Co. (NYSE: MRK)
Bank of New York (NYSE: BK)
Cisco Systems (Nasdaq: CSCO)
Johnson & Johnson (NYSE: JNJ)
MCI Worldcom (Nasdaq: WCOM)
Pfizer (NYSE: PFE)
Warner-Lambert (NYSE: WLA)
Bristol Myers Squibb (NYSE: BMY)
International Paper (NYSE: IP)
SBC Communications (NYSE: SBC)
American Express (NYSE: AXP)
LSI Logic (NYSE: LSI)
Omnicom Group (NYSE: OMC)
Alcoa (NYSE: AA)
Weighting of S&P 600
Company Name Stocks in MDL Large-Cap
Equity Growth Fund(*)
Microsoft 5.80%
General Electric 6.50
Wal-Mart 4.20
Honeywell International 3.30
Intel 3.10
Lucent Technologies 2.70
Oracle 2.60
Exxon Mobil 2.50
America Online 2.40
Citigroup 2.30
Home Depot 2.30
Merck & Co. 2.30
Bank of New York 2.20
Cisco Systems 2.20
Johnson & Johnson 1.80
MCI Worldcom 1.80
Pfizer 1.80
Warner-Lambert 1.80
Bristol Myers Squibb 1.70
International Paper 1.70
SBC Communications 1.70
American Express 1.60
LSI Logic 1.60
Omnicom Group 1.60
Alcoa 1.50
Weighting of Stocks Current
Company Name in S&P 500 Price(**)
Microsoft 4.02% $98.25
General Electric 3.97 134.00
Wal-Mart 2.34 55.13
Honeywell International 0.39 45.19
Intel 2.06 94.00
Lucent Technologies 2.12 56.26
Oracle 0.96 47.38
Exxon Mobil 2.53 78.88
America Online 1.60 58.88
Citigroup 1.58 56.13
Home Depot 1.10 55.63
Merck & Co. 1.42 76.38
Bank of New York 0.23 37.75
Cisco Systems 2.72 103.88
Johnson & Johnson 1.07 84.50
MCI Worldcom 1.21 41.63
Pfizer 1.11 35.19
Warner-Lambert 0.59 91.13
Bristol Myers Squibb 1.12 64.25
International Paper 0.19 47.88
SBC Communications 1.59 39.25
American Express 0.61 158.25
LSI Logic 0.08 77.13
Omnicom Group 0.15 94.63
Alcoa 0.23 69.50
(*) Ranked by MDL's ownership of stocks in S&P 500, as of December 28,1999. (**) As of January 28, 2000. Source: MDL Capital Management. Standard & Poor's, Yahoo! Finance |
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