A mercurial manager's time to shine

Fund manager Heiko Thieme has to be one of the most upbeat folks on Wall Street. His American Heritage Fund is currently the top-ranked fund in the US, up 62.5 percent for the first quarter, according to information firm Lipper Inc.

"It's also the top-ranked fund in the world," says Mr. Thieme (pronounced Teama), who believes the fund's gains this past quarter surpassed 27,000 other mutual funds around the globe.

In fact, the American Heritage Fund has hovered at or near the top of the pack several times since Thieme took over as manager a dozen years ago.

The problem, as Thieme concedes, is that it has also been among the very worst funds, according to no less an authority than Mutual Funds magazine. Losses, on an annual basis, have more than offset gains. Last year, the fund fell 56 percent.

Talk about wild rides. If you want some real thrills, just put money in the American Heritage Fund. The small-cap fund, and Mr. Thieme, are considered "characters" within the mutual-fund industry. In 1997, the fund was up 75 percent, making it the top performing equity fund. But the fund nosedived in the four years that followed.

As a result, Thieme has two trophies on his desk, one for top performance, and one for – to put it kindly – clunkerdom.

In recent years, investors have fled in droves, following the string of bad years in the late 1990s – a time when just about everyone else seemed to be making money in stocks. Fund assets plummeted from a high of about $147 million a few years ago to about $2 million now.

The net asset value of the fund – that is, the share price – is only 13 cents. The expense ratio – which is a little over 1 percent for most equity funds – is an astonishing 12 percent or so.

Thieme believes there are logical reasons for the fund's difficulties. When it originally hit a downdraft in the mid-'90s and many investors left, he had to sell a large chunk of his portfolio to meet redemptions. Doing that pushed up expenses, he says. "We are doing everything we can to hold costs down. And I put my own money into the fund to meet many expenses," he says.

Thieme has also put his own investment dollars into the fund, he says. Considering that he has two children in college, and a third who just graduated, he wouldn't do it, he says, if he weren't upbeat about his fund's prospects.

Currently, those prospects hinge primarily on one firm, Senetek, a British pharmaceutical company that makes a Viagra-like product. Some 85 percent of fund's assets are in Senetek. The rest are spread over just five other firms, most of them unknown to average investors. Thieme believes that by focusing on just a few firms, he provides a rewarding opportunity for adventurous investors.

"Ten years or so ago, I recommended City Group, the financial entity that controls Citibank. Many people were very skeptical back then, but my call was absolutely correct," he says. "The bank and the company have done very well. I did the same thing when I made a call on IBM. Many investors were writing it off for the future. But I went with IBM, and again I was absolutely right."

Thieme is convinced that he is on the money with Senetek. The company is currently licensed in only two nations (not including the US), but he sees more nations coming on line and sales advancing. (Still, Theime plans to cut Senetek to perhaps 25 percent of the portfolio.)

He also sees the stock market coming back. "The Dow should end this year at around 11000 points," he says, and finish 2003 "around 12000 points." The Nasdaq will eke out gains, but won't hit new highs "until late in this decade – and probably very late in the decade."

While Thieme continues to push his fund, analysts are quick to take shots. In a recent analysis, the Chicago-based information firm Morningstar used one word to describe the fund: "woof."

"Performance has been astoundingly bad. Yes, it has had one or two good years. But on an annualized basis, the fund has lost over 17 percent a year for 10 years," says Russ Kinnel, who heads up equity research for Morningstar. "This fund is a great example of why it is such a bad idea to buy mutual funds from winner's [performance] lists of funds."

Before buying into an ostensibly top-performing mutual fund, Kinnel says, investors should consider a fund's portfolio, expense ratio, and volatility.

Such criticism doesn't dim Theime's optimism. "I'm one of the longest-serving managers within the mutual-fund industry," he says. And the American Heritage Fund is currently celebrating its 50th anniversary. Thieme fully expects it to be around another half century, or longer.