Newspaper article THE JOURNAL RECORD

Minneapolis Fund Floating in Stormy Waters

Newspaper article THE JOURNAL RECORD

Minneapolis Fund Floating in Stormy Waters

Article excerpt

MINNEAPOLIS -- How the fortunes have changed for anyone owning shares of IAI Value Fund.

The $14.7 million IAI Value Fund gained 29.9 percent in the first half of this year, placing among the nation's best performers. Since June 30, the fund has fallen 35.3 percent, and for the year, the fund was down 15.9 percent as of Monday.

The fund's rise and then fall is pinned largely to the performance of a single investment the name of which the manager, Investment Advisers, declines to disclose.

Analysts at Morningstar, a mutual fund research firm, say the fund's gyrations are tied to Pathnet, a closely held company that's developing a nationwide digital telecommunications network.

"Clearly, IAI is having trouble getting a handle on what Pathnet is worth to the fund," said John Rekenthaler, director of research Chicago-based Morningstar.

Any fund investing a substantial portion of its assets in a single security or in illiquid, thinly traded or closely held securities may be subject to sharp price swings and should be closely examined by potential investors, warn industry analysts. Few stock funds fall in such a category.

IAI Value Fund had about 23 percent of assets invested in Pathnet as recently as mid-July, according to Morningstar. It's rare for funds to have such a large percentage of assets invested a single security, particularly one that's hard to trade and difficult to value, Rekenthaler said.

It isn't the first time, however. The Robertson Stephens Contrarian Fund, for instance, had a chunk of assets -- about 25 percent -- invested in Diamond Fields Resources in mid-1995.

The difference is shares of Diamond Fields Resources traded in the public markets while Pathnet shares don't.

On May 11, IAI announced that its Value Fund surged 28 percent in one day. The fund's managers said the gain was caused by an investment in a closely held company that filed a plan with the Securities and Exchange Commission to sell shares.

Two months later, on July 16, the fund fell 7. …

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