WEB CRAZE SNARES MUTUAL FUNDS

Some mutual fund managers may be caught up in the money-mad maelstrom chasing Internet stocks. Shares of America Online Inc. now represent about 22% of Legg Mason’s $1.74-billion asset small-company Special Investment Trust, and more than 15% of Flag Investors’ $1.1 billion Communications Trust. Pimco’s $610-million Innovation Fund has more than 12% of its assets riding on AOL and World Wide Web portal company Yahoo! Inc.

Though these big bets paid off in spades last year – AOL shares zoomed more than 560% as of Wednesday – few big holders see any reason to take profits during the current speculative fury.

“I don’t know where this all bottoms out,” says Liam Burke, co-manager of Flag Investors Communications fund, commenting on AOL’s 168% fourth-quarter rise. “The comfort is we own the stock and are not chasing this thing.” Indeed, AOL shares traded for a split-adjusted $5.69 to $10.03 in the fourth quarter of 1996 when Mr. Burke’s fund acquired its initial AOL stake, now estimated at 2 million shares worth $296 million.

Still, aside from small sales to rebalance porfolios, the three funds are maintaining their big AOL bets. “Some people are more concerned it will be hard for AOL to live up to the strength you see now. We think there is a lot more to come,” says Pimco Innovation lead manager Dennis McKechnie. “This company continues to surprise.”

Waterhouse undercuts Schwab

Attempting to undermine archrival Charles Schwab Corp., Waterhouse Institutional Services – formed out of the recent merger of San Diego-based Jack White & Co. and Waterhouse Securities of New York – will launch an adviser referral program next month, says executive vice president Peter Mangan. Waterhouse’s 140 branches will refer clients free, while Schwab’s AdvisorSource charges $4,000 plus $1,000 to $4,000 for each additional branch an adviser gets referrals from. Schwab isn’t swayed: It has $3 billion in its AdvisorSource, and expects next year to double the $1.8 billion it got in 1998 alone, says a spokesman.

Babson to call on advisers

D.L. Babson & Co., a 58-year-old mutual fund company that markets its wares and services directly to retail investors, will soon try reaching them through financial advisers and other intermediaries, confirms chief executive James W. MacAllen. The company currently is setting up separate marketing units for advisers and institutional clients. The Cambridge, Mass., firm manages $15 billion in mutual funds and separate accounts, and is known mostly for managing separate accounts for the wealthy.

Money manager fined

A small money manager in Colorado agreed to be censured and fined by the Securities and Exchange Commission on charges of exaggerating performance data in its sales materials by leaving out commissions and sales loads between 1986 and 1995. The SEC ordered Meridian Investment Management Corp. of Englewood and its past president, Michael Hart, to pay $70,000 and $15,000, respectively. Neither one admitted or denied the findings.

“We’ve been in full compliance since late 1996,” says general counsel Robin Shipman. Meridian manages $503 million for pensions and wealthy investors, and $370 million in 13 sector funds called Icon.

Yacktman must pay legal fees

Former independent directors of Yacktman mutual funds, who recently lost a proxy battle with manager Donald A. Yacktman, are entitled to have the funds pay their lawyers if Mr. Yacktman sues them. The untested Dec. 18 opinion of the Securities and Exchange Commission’s division of investment management likely means that managers will think twice about suing ousted directors if the funds must cover their legal costs. Mr. Yacktman, who could not be reached for comment, has not sued the former directors but one of their lawyers says the funds have voluntarily advanced money to retain lawyers in case he does.

Blah hedge returns

For all the risk and expense, hedge funds returned on average a paltry 7.4% over the first 11 months of 1998, according to Nashville, Tenn.-based Van Hedge Fund Advisors International Inc. In contrast, stock and bond mutual funds returned 6.6% and 5%, respectively, according to Morningstar Inc.

Etc.: Social Security Y2K-safe

Depending on what President Clinton means by fixed, he announced that Social Security checks won’t be delayed on New Year’s Day 2000 because the “Year 2000” problem in the Social Security Administration’s computers has been fixed…Pilgrim American Capital, a small Phoenix mutual fund company, is switching from Nasdaq to the New York Stock Exchange Wednesday.

Correction

The Dec. 7 Stats page misstated the expense ratio for the Carnegie Tax Exempt-Ohio General Fund. The correct figure is 1%, which would have placed its cost below average.