Overdiversification no big deal for this
mutual-funds collector

By Russ Wiles
The Arizona Republic
July 11, 1999

There are mutual-fund hobbyists, enthusiasts and collectors. And then there's David Pullman. The 37-year-old New Yorker takes fund acquisitiveness to a new level. As other people collect stamps, coins or baseball cards, Pullman just keeps buying mutual funds.  And more funds, and more funds.  To be exact, 110 funds. His holdings cover the gamut of stock-market investments - growth, value, small-cap, foreign, index and sector.

"What I don't have is bond funds," Pullman said. "I'm definitely a long-term investor."

As mutual funds have reached unprecedented popularity, some advisers worry that certain investors are overdoing it. Because any given fund holds anywhere from a couple dozen stocks to a couple thousand, you don't need to own more than a handful of funds to achieve adequate diversification.  "You can have a very nice portfolio with four or five," said Kurt Brouwer of Brouwer & Janachowski, an advisory firm in Tiburon, Calif.

Besides, investing in too many mutual funds can result in additional costs, assuming you lean to those that charge a sales load. There's even a danger that owning too many can turn into an administrative headache if you must keep track of numerous account statements while monitoring scores of transactions for tax reasons.

"If you own more than 15 funds, I'd suggest you need to step back and evaluate the situation," said Kevin McDevitt, an analyst at Morningstar Inc. in Chicago.  So, at first glance, it's easy to conclude that Pullman must be an investment neophyte who keeps purchasing mutual funds because nobody has told him to stop. Or perhaps he's an amateur who continues to buy because he can't distinguish between good and bad funds and won't admit defeat. But in reality, none of those labels applies. In fact, he's a shrewd, Wharton-educated investment banker who has built a business around entertainment bonds and other innovative types of "securitized" intellectual property.

His Pullman Group specializes in deals whereby rock stars and songwriters relinquish future royalties in return for an up-front payment, financed through a bond offering. The company has put together deals backed by the work of James Brown, Ashford & Simpson and various Motown songwriters. The crowning achievement was a $55 million bond deal for David Bowie.

So Pullman clearly is no financial greenhorn. But what explains his infatuation with mutual funds? For starters, Pullman strongly believes in the fund concept. He likes the idea of having so many professionals working for him.
He doesn't want to spend time researching stocks and, in fact, checks his holdings only about once a year.

"I don't have any interest in watching the market every day," he said.

Then there's the convenience of investing through mutual funds. Pullman's a big fan of dollar-cost averaging - the strategy of trickling hundreds or thousands of dollars into a fund every few weeks or months. Systematic
investing isn't so easy to accomplish with individual stocks or bonds.

Pullman socks away more than $1 million cumulatively into his mutual funds each year. He gives each of his more than 100 fund holdings a biweekly cash infusion, much like a horticulturist might fertilize a flower garden every
two weeks.

That adds up to a lot of transactions over the course of a year - almost 3,000 annually, Pullman figures. He simplifies the process by keeping most of his holdings in an account at discount brokerage Charles Schwab, where he also benefits from automatic recordkeeping and the ability to switch funds quickly at little or no cost.

"I couldn't do this five or 10 years ago because the technology didn't exist," he said. "My accounting is very easy."

Pullman sticks exclusively with no-load funds, so he's not worried about incurring especially high or duplicative costs. Because mutual funds levy expenses as a percentage of investor assets, not the number of accounts,
Pullman or any other shareholder would pay roughly the same cumulative fees on 110 funds as on a dozen.

While the issue of excessive diversification isn't easy to dismiss, Pullman doesn't feel harmed by it. "I have over 100 managers working for me," he said. "If they pick the same stocks, that makes me feel even more comfortable about what I'm doing."

Sheldon Jacobs, who publishes The No-Load Fund Investor newsletter in Irvington-on-Hudson, N.Y., partly agrees on that point. "Overdiversification may be unnecessary, but I just can't see how it's harmful," he said.

Pullman spends considerable time perusing financial magazines and newspapers in search of attractive mutual funds. He pays a lot of attention to investment advertising, reasoning that some of the strongest performers like
to strut their stuff. He takes special note of funds that Schwab promotes in its brokerage ads, sensing that this is a good way to spot proven and rising stars. With more than 100 holdings, Pullman has done a lot of reading.

Some of his favorites include Third Avenue Value; Janus' Worldwide, Balanced and Overseas funds; and Marsico Focus and Marsico Growth & Income. He also likes Invesco's Health Sciences, Leisure and Technology
funds, along with Invesco Industrial Income, one of his oldest positions. In addition, Pullman invests directly with a few families such as Vanguard and Tweedy Browne that don't make their funds available at minimal cost
through Schwab.

Pullman occasionally weeds out poor performers or funds that undergo a manager change, but he prefers to buy and hold. Part of his aversion to selling relates to taxes. Although he does make use of individual retirement
accounts and his company's 401(k) plan, most of his holdings are unsheltered. Frequent selling would trigger some nasty tax bills.

Pullman also owns individual stocks and municipal bonds, and he employs several private investment managers to oversee a portion of his portfolio. Private managers have more leeway than fund managers to hang onto gains,
take year-end losses and make other tax-shaving moves - a key benefit in his view.

Yet fund managers, Pullman says, can be "fired" more quickly and easily when the time comes to sell - not that he picks up the telephone very often.

Pullman understands that traditional, actively managed funds face higher costs than index portfolios. But this hasn't stopped him from focusing on the active group.

"I think my managers have a high chance of beating the indexes, or at least matching them." And with so many holdings, he can afford to own some clunkers.

Even so, Pullman hasn't turned his back on index funds. He owns about 10 of those, too.