Q&A: MICHAEL HIRSCH — "THE DAYS WHEN I COULD WALK INTO FIDELITY AND STROLL AROUND THE FLOOR ARE OVER"

Michael Hirsch, the self-proclaimed grandfather of the fund of funds concept, feels vindicated. In 1975, when he became one of the first to create a portfolio of mutual funds that invest in other funds, people looked at him as if he was crazy.

“Nobody even knew what a mutual fund was back then,” says Mr. Hirsch, chairman of the M.D. Hirsch division of Boston-based Freedom Capital Management Corp., which oversees FundManager Portfolios and its five funds of funds with a total of $250 million. “They all thought I was peddling some harebrained scheme.”

Not any more. The fund of funds industry has grown to $22.6 billion in 162 funds from $12.5 billion in 18 funds in 1993, according to New York research company Lipper Analytical Services. It now boasts such heavyweights as Vanguard Group, Charles Schwab & Co., Fidelity Investments and Smith Barney Inc.

Retail investors view them as an affordable package of diversified portfolios, but quality and pricing varies considerably depending on who’s picking and monitoring the managers.

To help investors navigate the maze of funds, Mr. Hirsch has written two books on fund of funds investing. The someplace tk resident, who can’t help dropping the names of investing stars he knows, from Peter Lynch to Michael Price, isn’t stopping. Today, he’s launching his sixth fund of funds, which will invest in international funds like Tweedy Browne Global Value, Janus Overseas, Templeton Institutional Equity, Bankers Trust International Equity and Putnam International Equity.

Q In your second book, “The Mutual Fund Wealth Builder,” you caution readers to avoid international investments. In fact, you write that foreign exchange markets “are for trading, not for investing.” Why the turnaround?

A I really am pulling a 180. In the past, I always felt it was contradictory to provide an investment service that sought safe and consistent returns through investing internationally — the most volatile investing around. But we’re now in a position to deliver safe and consistent returns. By choosing funds that hedge, or by putting a currency overlay on the whole portfolio, we think we can remove a lot of the risk associated with currency.

Q With almost 9,000 U.S. mutual funds, what criteria do you use?

A Our screening process is something we call the three P’s. It stands for performance, people and process. We’re looking for funds with consistent performance, well-entrenched management teams or individuals and a well-defined disciplined investment process in place. We like tortoises. These are funds that provide marginal value added, but do it consistently.

Q How do you find consistency in such a topsy-turvy market?

A There are really two schools of thought on how you create consistency. Modern portfolio theory will tell you to use some sort of portfolio optimization black box that’s going to find that when Fund A is up 30%, Fund B is down 20% and you net out 10%. We’d rather have two funds that are both up 10% consistently. We buy tortoises. Slow but steady truly does win the race. You’ll usually find them somewhere in the 25th to 40th percentile ranking among their peers. These funds won’t be up 60% when the market is up 30%. But they’ll be up anywhere from 28% to 35%.

Q How has the host of new players affected your ability to gather assets?

A I welcome the competition. It just shows that we were ahead of our time by at least 10 years, maybe 15. When you have companies like Fidelity and Schwab following your lead, it validates what you’ve been doing all along.

Q So what do you bring to the table that those guys don’t?

A About 20 years more experience.

Q You no longer invest in Fidelity funds because you feel your access to portfolio managers is too restricted. How much access do you get to portfolio managers these days?

A The days when I could walk into Fidelity headquarters and stroll around the floor are over. The more enlightened groups have created a buffer, people with research capabilities and portfolio management backgrounds who act as an interface between me and the managers. As long as I can have an open dialogue with them and track the fund on a monthly or quarterly basis, I can live with that.

Q How do you respond to criticism that funds of funds are too expensive?

A What is the price for peace of mind? People pay insurance premiums and get nothing back — except peace of mind. If there’s an extra layer of expense in FundManager that’s the premium. The payoff comes in the down market — when the market is down a lot and we are down a fraction.

Q In a market so good for so long, do you really think investors appreciate peace of mind?

A No. In fact, I pity our marketing department. Most investors haven’t been through a real bear market. They think things are going to keep going up. And that scares me.

Vite

Michael Hirsch chairman, M.D. Hirsch division of Freedom Capital Management Corp., Boston.

FundManager Bond Portfolio (assets $50.6 million): 1-year return, 10.81%; 3-year, 7.59; 5-year, 5.91%

General Bond Funds: 1-year return, 13.38%; 3-year, 10.5%; 5-year, 7.93%

FundManager Growth & Income: ( $40.9 million) 1-year return, 35.58%; 3-year, 24.31%;

5-year, 17.81%

Growth & Income Funds: 1-year return, 40.95%; 3-year, 27.78%; 5-year, 19.66%

Data are as of April 9

Source: Lipper Analytical Services Inc./CDA Wiesenberger