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Mutual fund mimics airlines, will reward 'frequent investors'; DOLLARS & SENSE


If saving and investing were as easy as shopping and spending, most of us could get wealthy in a hurry.

That's why many industry observers are watching a soon-to-open fund that is designed to reward investors for shopping. They're also watching an established firm set up a discounting program with companies its funds own.

If these intriguing projects go smoothly, you soon could hear as much about a fund's fringe benefits, or "frequent investor" program, as you do about its investment skill.

It's not necessarily a new concept. The American AAdvantage funds, for example, give investors frequent flier miles with American Airlines based on the value of an account. A few other funds and brokerage firms have tried similar gimmicks.

But those fund-reward programs have not spread. What's more, the companies involved started with an investment background -- AAdvantage funds were started after managers had success running American Airlines' pension money -- not with a rewards plan.

By comparison, consider the as-yet-unopened, where it is hard to tell which comes first, the Web site/customer-loyalty program or the mutual fund.

According to registration papers filed with the Securities and Exchange Commission, the StockBack Trust mutual fund will invest in companies that provide goods and services via the Internet "and that participate in the customer loyalty program sponsored and administered by Stock"

So the Web site will offer its own credit card and access to a variety of retailers. Buy stuff sold through the Web site or using the StockBack credit card and you get rebates that go directly into your fund account. Meanwhile, all monies in the fund, whether from new investments or rebates, are divided among the companies participating in the program.

Here's where the deal gets sticky. Stocks for this fund could be picked more for their participation in's Web sales program than for their potential to deliver great investment returns. In theory, some pretty frumpy stocks could join hoping to gain access to the mutual fund's capital.

"There is a real balancing act here, where we try to generate long-term savings for consumers -- we call them members -- while also giving them a service that has value," says Robert Feidelson,'s chief executive officer.

Where investors pay for that service is in the fund's expense ratio, which is high considering that shareholders will pay a fee unless they agree to accept all correspondence by e-mail.

The fund's 12b-1 sales and marketing fee actually pays for the rebates. Otherwise, the rebate would be a "preferential dividend" -- by which Smith could get a bigger benefit payoff than Jones from the same fund -- which runs afoul of fund regulations.

In plain English: Shop on less than other shareholders and you help to cover the rebate costs of a more-active consumer.

How much you might be tempted to shop can't be determined until we know the retailers involved and can judge the value of the Web site's discounts and its rebates.

By comparison, the Baron Funds disclosed in December that they are working with companies held in their fund portfolios to create discounts for shareholders. As a result, shareholders will someday click on a link at the Web site to get discounts from, say, Vail Resorts.

The service is free to shareholders, and the Baron Funds won't get a cut of shareholder money spent with the firms in the program.

Manager Ron Baron has said the idea is to get shareholders to think like owners and to do business with the companies they own through the funds. (Many stocks offer discounts or freebies to individual shareholders, though not as extensive or valuable as what Baron is proposing.)

Luckily, Baron tends to hold stocks for years, which makes for willing corporate partners. Still, some observers worry about conflicts of interest, when a fund might hold onto a stock to protect the discount or tip its investment strategy by discontinuing a special offer right before dumping a stock.

Clearly, if Baron's program works and retains investors in choppy markets, other fund firms will copycat. Whether they go to the extremes of remains to be seen.

Investors should pick a fund for its investment prospects, not its fringe benefits.

Says Geoff Bobroff, a fund industry marketing consultant: "These deals could get some people to take their eye off the ball. You shouldn't gravitate toward a fund because of some added gratuity. If they can't deliver good investment results, everything else is pretty meaningless."

Charles A. Jaffe can be reached by e-mail at or at the Boston Globe, P.O. Box 2378, Boston, Mass. 02107.

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