I’m only kidding about the publications’ causing the market swoon. At least I think I’m kidding. But the fact that for two years publications have thought that it’s fine to morph from drama critic to playwright symbolizes the market euphoria that may now be going away.
The most recent example of publications-as-investments came last week when Fortune magazine announced that it was licensing the venerable Fortune 500 list and its recently created e-50 “New Economy” index to the Chicago Mercantile Exchange, which will soon trade them in various forms if all goes as planned. And lest you think I’m picking on Fortune, let me hasten to add that Forbes and Wired magazines and the financial Web site TheStreet.com are playing similar games.
Yes, I’ve got a conflict because NEWSWEEK competes with the companies I’m writing about. In addition, I’ve worked at some of them and I’ve talked through the years with others about jobs. But my conflict pales compared with their conflict as combined journalists and investment advisers.
It’s one thing for Dow Jones (owner of The Wall Street Journal and Barron’s) or Standard & Poor’s (sister company of BusinessWeek) to license indexes. You can argue that this taints journalistic purity–which is why Dow Jones didn’t start licensing until 1997, amid a profit crunch. But a corporation’s name on an investment isn’t the same as a publication’s, which carries an implied blessing.
And investment involvement can interfere with journalism. Here’s why. TheStreet.com’s Internet indexes and index-linked notes, Wired’s index mutual fund and the Fortune e-50 all compete with each other. Unless you’re a journalistic saint, it’s hard not to cheer on your stock picks rather than writing about them objectively.
And speaking of objectivity, consider the unit trusts–fixed portfolios of securities held for a specific period–that carry the confidence-inspiring names of Forbes and Fortune. Forbes’s trusts are based on its list of the richest Americans, Fortune’s on its “Most Admired Companies.” The problem with unit trusts–as they taught me at Forbes–is that they’re festooned with fees. The Fortune and Forbes trusts, by my reading, cost you a whopping 3 percent or so in fees the first year, then something in the 2 percent range each year as the portfolios change. The Wired index mutual fund is a relative bargain, with the manager taking only about 1.25 percent annually for fees and expenses. That’s cheap for a mutual fund but steep for an index fund, which replicates an index rather than trying to pick stocks. Another investment, notes linked to a TheStreet.com Internet index, in effect pit you against the notes’ issuer, Salomon Smith Barney, which can call them in for early redemption if the index soars.
Forbes says it feels its trusts offer a “superior investment.” Dave Kansas, editor in chief of TheStreet.com, says he took his ethical cue from Dow Jones. To his credit, Fortune managing editor John Huey made no bones about “brand extension” and licensing fees’ being major motivators in Fortune’s decision to license its lists and indexes. “I have no problem with that,” he said. He argues that the Fortune index (which has only about 420 stocks) is better than the S&P 500 because it consists entirely of U.S. companies and its criterion–reported revenues–is objective, unlike the subjective criteria S&P uses. He says simulations show that had the Fortune index existed a few years ago, it would have outperformed the S&P 500. But he hastens to add that “we’re not telling anyone where to put their money.”
S&P, the leading index licenser, wouldn’t respond directly to Fortune. But James Branscome, the S&P executive in charge of indexes, noted: “There’s a very large index… graveyard out there.”
Brian Mattes, a spokesman for Vanguard, the index-fund king, broke into laughter when I asked if the firm plans to offer Fortune 500 or e-index funds. “There’s an extraordinary difference,” he said, “between funds that are offered for marketing reasons and funds that are offered for investment purposes.’’ Not to mention vanity-publishing funds that just might be putting a curse on the market.
