Wall Street: Mates Checked

None of Wall Street’s brash young managers of “gogo” mutual funds have gone farther faster than 36-year-old Frederick S. Mates. His $32 million Mates Investment Fund has risen 153% in per-share asset value since the beginning of 1968, the highest growth rate of any fund. A onetime English teacher who learned how money talks in 13 years as a highly successful market analyst and big-account broker, Mates is truly the personification of self-confidence. On one wall of his office, he keeps a framed parody of an old Wall Street slogan: “Invest, Then Investigate.”

Discount Prices. Last week Mates suffered an abrupt setback. He was threatened with a sudden run on his fund by investors wanting to turn their shares in for cash, and got unprecedented permission from the Securities and Exchange Commission to shut down for an “indefinite” period. With that, some 3,000 shareholders were locked into the fund. Though Mates’ fund is a fairly small, if certainly spectacular member of the U.S. mutual-fund business (total assets: $55 billion), his travail is likely to make investors just a bit more skeptical about some forms of investment.

Signs of trouble appeared as early as June, when Mates’ fund, under SEC pressure, stopped offering new shares. They had been selling at a fantastic rate —often more than $1,000,000 a day—largely on the strength of Mates’ well-publicized feel for hot stocks. The fund had to turn back business, Mates said, because bookkeepers could not keep up with the incoming flood of cash.

Cut off from new money, the lifeblood of any mutual fund, Mates was unusually vulnerable to a crisis. That came two weeks ago, when the SEC halted trading of a lively over-the-counter stock that had been one of Mates’ big winners. The SEC cited “possibly misleading” information about the stock—Omega Equities Corp.—which had been bid up from 40¢ a share in January to $35 in November. It last traded at $25, which means that the 300,000 shares that Mates had bought in July for just under $1,000,000 now account for about 15% of his fund’s value.

The SEC had long been quietly investigating Omega. It is a reincarnation of a New York-based company that all but dropped out of sight years ago, when it operated in real estate under the name of J. M. Tenney Corp. After the firm reappeared in 1967 with its new name, stories about Omega as an “entertainment-field” conglomerate began turning up in the financial pages. According to one tale, it was about to take over 20th Century-Fox. Word of the SEC’s investigation of Omega got out to a few well-informed investors, who quickly turned in their Mates Fund shares. Strapped for cash, Mates was forced to endure the fund manager’s ultimate humiliation: he had to call on other funds to peddle parts of his portfolio at discount prices.

Feisty Performance. Mates may yet scrape by, but his Omega holdings have been double trouble. Not only were they backed by a company under investigation, but they were “letter stock.” Such stock is sold privately by a company, usually at a price well below the going market value, when it wants to avoid time-consuming registration with the SEC and costly underwriting by investment bankers. But the buyer must agree to hold the letter shares for a considerable period, generally two years, and cannot trade them on an open market without SEC approval. The SEC reports that Mates has a large amount of letter stock in his portfolio. Saddled with stacks of such hard-to-market stocks and short of fresh cash as well, Mates was caught in a tight squeeze.

Could this happen to other mutual funds? Most are as sound as the stock market itself. But experts have doubts about the durability of new and rather small funds that promise a feisty performance. By astute buying in thinly-held stocks, they can “beat up” both the prices of the stocks and the growth rates of their funds. The trouble is, of course, that they can fall just as fast.