(MONEY Magazine) – A NEW WAY TO TRADE FUNDS

Barclays Global, a $671 billion institutional money manager, recently informed the Securities and Exchange Commission that it plans to open a batch of new mutual funds that will be traded on the American Stock Exchange. While traditional funds are bought and sold at their closing price each day, the new funds will trade throughout the day with their prices updated continuously, like a stock's. Yet unlike closed-end funds, which also trade on exchanges, the new funds will have an unlimited number of shares and should not trade at a premium or discount to their net asset values.

The funds will use index-based strategies. Barclays is the largest manager of index portfolios in the world and already runs a handful of exchange-traded index funds called WEBS, which track foreign markets. Gary Gastineau, head of new-product development for the American Stock Exchange, predicts that there will be actively managed funds trading on that exchange within two years.

The question for investors is whether this new breed of funds will offer any advantages. Gastineau says that exchange-traded funds will be structured so managers won't be forced to sell stocks to meet shareholder redemptions. That means the funds could prove to be more tax-efficient than conventional index funds during market downturns.

But the real attraction for many investors undoubtedly will be the continuous pricing, which will make it tempting to use these funds to play short-term market swings. That's not progress. Recent studies by finance professor Terrance Odean at the University of California at Davis show that stock investors do worse when they trade more. Would day-trading fund investors really fare any better? --PAT REGNIER

HAS FIDELITY LOST FAITH IN DESTINY?

In June, shareholders in Fidelity Destiny I and Destiny II approved Fidelity's plan to remove the performance-based component of the funds' management fees. By moving to a flat annual fee, Fidelity will be able to charge more in years when the funds fail to beat the S&P 500. At least one angry shareholder took the move as a sign that Fidelity had lost faith in the Destiny managers. "Before, it was good for everyone if the funds beat the index," says Kurt Kuberek, a Destiny shareholder who fired off an article to the Morningstar.net website. "To give that up suggests that Fidelity isn't confident they can do that anymore."

Fidelity spokeswoman Jessica Catino disputes the contention. She says that Fidelity wanted to eliminate the performance fee adjustment from Destiny I and II so that it could create a new share class with a 12b-1 (marketing) fee and a lower sales charge. Unlike a sales load, a 12b-1 fee is deducted from fund returns, making it much tougher for shares with 12b-1 fees to beat the index. Catino adds that Fidelity is still willing to put its money where its mouth is, at least with its single share class, no-load funds. "Look at all the new funds we've brought out that have performance fees on them," she says, citing Fidelity Contrafund II and Fidelity Small Cap Stock. --P.R.

STEIN ROE SAYS, "NEVER MIND"

Last month we reported that the slumping Stein Roe Capital Opportunities fund, formerly managed by Gloria Santella, was about to be merged into Stein Roe Growth Investor, a new clone of the firm's successful Young Investor fund. Well, the marriage is off. Capital Opportunities will remain, though it will now be run by Young Investor managers Erik Gustafson and David Brady. The SEC told Stein Roe that if the merger took place, Growth Investor would inherit Capital Opportunities' lousy record. "If shareholders in Growth Investor were saddled with that track record it would have hurt our ability to attract assets and improve economies of scale," says a Stein Roe spokesman. In English: Stein Roe wouldn't have been able to sell it. --P.R.

MORE WOES FOR PBHG

When MONEY profiled PBHG mutual fund family earlier this year, it found a firm with plenty of troubles. ("Lost Momentum," May). Now it's got more.

Start with star manager Jim McCall, who ran PBHG Large Cap 20 (up 67.8% last year) and three other funds. When he gave notice that he was leaving for Merrill Lynch, PBHG maintained that he was bound to the firm by contract. McCall sued for his freedom; PBHG and parent United Asset Management countersued, saying his departure would damage their efforts to sell the firm. The standoff continued at press time, but McCall is no longer managing the funds.

Meanwhile, Michael Hahn, who'd been co-managing PBHG's tech fund, did make good his own departure to Merrill Lynch. And Gary Haubold, who'd been running PBHG Small Cap Value, a MONEY 100 fund, as well as three other value portfolios, quit in late June.

PBHG has had to pile more duties on its veterans and elevate less seasoned staff. Three of McCall's funds are being managed by what PBHG calls "a team of investment professionals" overseen by firm co-founder Gary Pilgrim. He also continues to run his struggling PBHG Growth Fund, which has a 0.2% return for 1999 (as of June 25). Haubold's former assistant, Jerome Heppelmann, will run Small Cap Value and two of the other value funds.

"We are very comfortable with the recent portfolio management changes," said Pilgrim, noting that the PBHG stock-picking system remains the same. The turmoil hasn't made it easy for Goldman Sachs, which has been trying to find a buyer for PBHG since February. There have been plenty of lookers, according to people familiar with the matter, but so far no takers. PBHG won't comment on the status of its sale efforts. --JOHN HELYAR