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By HELEN HUNTLEY
© St. Petersburg Times, published March 11, 2001
Q. A mutual fund I own is seeking permission to be managed as a non-diversified fund. How is this defined? I assume there would be greater risk, but what should I pay attention to if this proposal passes at the annual meeting of shareholders?
A. The manager of your fund wants the freedom to load up on stocks that appear particularly promising. You and the other shareholders have to decide whether this is a good idea. If the manager is successful at picking winners, allowing a greater concentration of assets in fewer stocks should improve your investment returns. Of course, if the manager is a poor stock picker, concentration will magnify losses.
Legally, a diversified fund must own at least 16 securities since no more than 25 percent of the fund's assets can be concentrated positions, defined as more than 5 percent of the fund's assets in a single security. That means a fund could have 15 stocks that each represent 5 percent of the portfolio and one stock that represents 25 percent.
A non-diversified fund could own as few as 12 securities, with up to half its assets in concentrated positions. In theory, you could have 10 stocks that each represent 5 percent of the portfolio and two that represent 25 percent each. Both diversified and non-diversified funds typically own many more securities than the minimum required.
"One common reason for a fund to make the switch (from diversified to non-diversified) is to allow a little more flexibility in its investment program," said Forrest Foss of T. Rowe Price Associates in Baltimore. He said a fund manager who asks for this flexibility is not necessarily planning to significantly restructure the portfolio or reduce the number of stocks it contains.
More likely, he said, is that the fund has several stocks that are just above the 5 percent threshold. If these stocks together account for 25 percent of the portfolio, the fund manager cannot add to these positions or accumulate a more than 5 percent stake in any other stock.
If this proposal passes, watch the fund's performance to see how the manager uses the flexibility shareholders have authorized.
Q. Several years ago some of us bought shares of Sun Cruz Casino stock. They bought a company called Mountain Energy and soon afterward, the Securities and Exchange Commission suspended all trading in the stock. What happened, and where do we stand on this? Our shares seem to be frozen or worthless although the company was sold for $147.5-million.
A. It looks as though you are out of luck. The company was not sold, just some of its assets. Sun Cruz Casino as it exists today is a privately held company.
It appears that the stock you bought was International Casino Cruises, which changed its name to Mountain Energy after acquiring that company. The SEC stopped trading in Mountain Energy for two weeks in 1998, saying it was concerned about the adequacy of information being released to investors. Since then, the stock has traded on the Pink Sheets, recently at 10 shares for a penny.
As you can tell by the stock price, the company has not prospered. In fact, it stopped operating last year and began bankruptcy liquidation. News reports about the bankruptcy indicate claims against the company could be more than $70-million, far greater than its assets. It seems doubtful there will be anything left for shareholders.
Talk to your broker about selling your shares or providing you with a statement that there is no market for the stock. You can declare a loss on your income tax return when you dispose of an investment or when it becomes worthless.
See what you can learn from this mistake. Ask yourself why you bought this investment and how you can avoid similar mistakes in the future.
Are you on track to reach your financial goals? The financeware.com site (http://www.financeware.com) will offer an answer based on its built-in assumptions if you're willing to sit down and type in your data. The site has two useful financial tools, "Retirement Quizzard" and "Plan Audit Wizard."
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731, or to firstname.lastname@example.org by e-mail.