Retail Goods at Wholesale Prices - close-end mutual funds

Kiplinger's Personal Finance Magazine, May, 1999 by Steven T. Goldberg

Morgan Stanley Dean Witter analyst Paul Mazzilli likes General American, particularly because the fund's interests are closely aligned with those of its shareholders. Senior employees own big slugs of GAM stock and are paid bonuses based on the fund's performance. All told, insiders own 10% of shares.

Davidson has to find dozens of good ideas to fill his fund. But sometimes one good idea can be all a manager needs. That's how fund manager James Schmidt has fashioned a sterling career--and made his shareholders tons of money. Schmidt's inspiration: There were (and still are) too many banks, and a massive number of mergers was inevitable. In 1985, when he opened John Hancock Regional Bank (an open-end fund with a 5% sales charge), there were 14,000 banks. "I thought that merger activity was a no-brainer," Schmidt says.

Today there are 8,900 banks. "It's still more than we need. I think we'll end up with 4,000 banks, and ten or 12 of them will probably have most of the assets." Closed-end John Hancock Bank & Thrift (BTO, NYSE, $10), which buys up banks, has returned an annualized 28.8% on NAV over the past three years.

Because the fund's market price fell 17.3% last year (on NAV, the fund gained 1.1%), Bank & Thrift is selling at a big 15% discount. Asks Al Blomquist, editor of the newsletter Closed End Fund Reader: "Do you like James Schmidt at 85 cents on the dollar, or would you rather pay a 5% load for the open-end fund?"

The fund foundered last year because of fears of global recession and concern over what that might do to the banking system. Those worries have receded, at least temporarily, and Schmidt says the regional and small banks he owns are cheaper than they were a year ago. Bank & Thrift's stocks are selling, on average, at 15 times estimated 1999 earnings.

Schmidt isn't anticipating a pickup in merger activity this year because of complications caused by the year 2000 bug. "Maybe no one will be interested in these stocks for another year," he says, "but eventually they will be."

While investors have been cool toward small U.S. banks, they've been hot on some European bourses because of the European Monetary Union. Countries such as Italy and Spain, which were barely strong enough to get into the EMU, stand to gain the most from economic union--that is, if they can stay in the EMU by resisting political pressures to spend too much money on popular domestic programs.

Rein van der Does, manager of Italy fund (ITA, NYSE, $16), thinks that's a slam dunk. "Italy has benefited so much from getting inflation under control that even the center left and the Communists wouldn't dare jeopardize it," he says. He concedes that Italy has political problems. The country has had 56 governments since World War II, and the current premier was formerly head of the Communist party, which has become the Socialist party.

Dutch-born van der Does, 59, who runs this Salomon Smith Barney-sponsored fund, diversifies assets to reflect the overall Italian stock market. But he does overweight favorite industries. Right now, he's excited about telephone and cellular-phone stocks, citing merger talks and statistics that show Italians talk on the phone far more than their more taciturn northern neighbors. "Italians love cell phones," he says. "Italians love to talk."