Stock-picking website piques feds

A mutual fund website has developed a new twist on a novel investment that critics claim skirts federal regulations – a charge that hasn’t escaped government watchdogs.

Maxfunds.com in Ann Arbor, Mich., is compiling lists of stock picks from various sources that can be used to build portfolios with online brokerages that specialize in folio-type investments.

The company uses the term “synthetic funds” so people don’t confuse them with the folios that are offered by online brokers like Foliofn.

But whether advisers, who are expected to be a prime market, will run with the idea is debatable.

And the debate may be rendered moot if the Investment Company Institute in Washington has its way before the Securities and Exchange Commission.

The institute asked the agency last summer to regulate the new products as it would mutual funds, and an SEC official says her department is “taking a step back” to look at the issue.

Cynthia Fornelli, senior adviser to Paul Roye, director of the SEC’s division of investment management, says the agency wants to make sure the new products comply with the Investment Company Act of 1940 and other regulations.

No one knows when the SEC will take up the issue, but those familiar with the regulatory process say the commission has a lot on its plate and probably won’t get to it anytime soon.

In the meantime, Jonas Ferris, chairman and chief executive officer of Maxfunds.com, says he is not concerned about the ICI’s position.

The company currently posts 11 synthetic funds on its site, but it hopes to have information on 500 funds by April, says Mr. Ferris.

Mr. Ferris hopes that financial advisers will actively manage many of these funds in much the same way that traditional mutual funds are managed, with one key difference. Individual investors will be responsible for buying and selling securities, Mr. Ferris says.

That’s something of a departure from what is currently made available through brokerages like Foliofn and BuyandHold.com, which offer foliolike products.

“These are more actively managed than some of the folio products we have seen,” Mr. Ferris says. “You’re going to see a lot of [registered advisers] doing this. Guys might launch a mutual fund, but it’s expensive, and they just want a track record that everyone can see. They’ll give out a list of their favorite stocks so you can track them.”

On the website, investors can look over a list of information on synthetic funds, Mr. Ferris says. The funds are rated by such things as price-earnings ratios, management style and turnover.

If an investor likes a particular fund, the information can be used to build a folio-type investment at an online brokerage that specializes in those investments. Mr. Ferris says the company is working on software that would make that function seamless.

All of that is free. Maxfunds.com and the synthetic-fund managers make their money when an investor subscribes to a particular fund on the site, as if it were a newsletter.

To get a complete picture of what a synthetic fund could cost compared to a mutual fund, investors must factor in the cost of doing business with Maxfunds.com and using a brokerage like Foliofn or BuyandHold.com.

Foliofn, for example, charges $29.95 a month or $295 a year and includes twice-daily opportunities to change the folio’s composition. That could put a big bite on returns for a small investor but becomes more manageable the more one invests.

Jeff Feldman, president of Rochester Financial Services in Rochester, N.Y., says he doesn’t see why any adviser currently relying on mutual funds would want to use synthetic funds.

“I’m thinking, `What’s the big attraction here?’ If we were as good as the top money manager in the country, yeah, we could do that,” Mr. Feldman says. “But for the 1% or whatever fee you’re paying a mutual fund manager, to me I think you’re getting a bargain.”

Tom Lydon, president of Global Trends Investments in Newport Beach, Calif., was one of the first to put up a portfolio of stocks on Maxfunds.com. He says it’s a good way for people to look at his track record when it comes to picking stocks.

Mr. Ferris says mutual fund companies can also take advantage of them, although he admits only a small number will do so at first.

Investec Guinness Flight Ltd. in London is one of those few. It’s the first and so far the only mutual fund company to list a synthetic fund with Maxfunds.com.

The Investec Energy Folio is actually based on one of the company’s offshore funds that couldn’t otherwise be sold in the United States, says Tim Guinness, the fund’s manager.

“Synthetic funds clearly have some advantages over mutual funds, and some disadvantages. It rather depends on how you rate the pros and cons. But if we’re doing it, it can’t be that stupid.”