Anatomy of a Mutual Fund

A peek at how MDL Capital Management handles its investors' money provides clues to how your mutual fund is run

much of a particular stock or bond it holds.

MDL’s corporate clients include Raytheon (NYSE: RTN) and Sprint (NYSE: FON). Among its public accounts are the city of Baltimore, the Commonwealth of Pennsylvania Tuition Assistance Program and the New York City Pensions System.

The firm has come a long way since 1992, when the hard-charging but affable Lay started the firm with long-time friend Gist. They had little more than a desk, two phones, two chairs and a small office. Being natives with ties to the community helped them win their first clients, but the trick then became snaring more and larger accounts.

A pivotal moment for MDL came back in 1994, when the company merged with Sanders’ old firm, Philadelphia, Pennsylvania-based Advent Capital Management Partners.

“I had begun to acquire more institutional clients and I wanted to make sure I had the proper capabilities to handle those clients, and I was looking for a fixed-income capability,” recounts Sanders. He kept hearing about Mark Lay and MDL, and when he and Lay met, they discovered their views were similar about the institutional money management business, the importance of keeping such firms under African American ownership and how active management was the key to a fund’s performance.
“We decided the hallmark of our marketing efforts would be performance,” Mark says. “I will not be an indexer or closet indexer. I must be an active money manager,” says Sanders, referring to Lay’s refusal to be counted among portfolio managers who either run an index fund or mirror the stocks in the S&P 500.

In order to establish the mutual funds, MDL started out humbly, contributing just $100 in seed money to each of the two funds. For the stock fund, Lay and Sanders initially bought a SPDR, or Standard & Poor’s 500 Depositary Receipt, a unit investment trust that holds all the stocks in the S&P 500.

For the fixed-income fund, however, $100 isn’t enough to buy even a short-term bill, let alone a long-term bond. After a few months, though, the funds accumulated in excess of $100,000, enough capital to begin diversifying the portfolios.

The first month of 2000 has been volatile. Stock market averages have zoomed up and down. Meanwhile, yields on long-term bonds are now higher than short-term bonds. The reason for all this volatility: investors fear the Federal Reserve will raise interest rates by as much as 75 to 100 basis points this year in order to contain the torrid pace of economic growth and head off inflation. Despite this, Lay is confident of the stock market’s ability to power even higher this year. But he sounds a note of caution, as he consistently does at MDL’s investment policy committee meetings.

“I still think that stocks will remain strong because consumers continue to remain very aggressive,” says Lay. “What you have to focus in on, though, is the Fed. If it hikes rates 25 basis points, we’ll do just fine. We’ll be up 10% by year-end.” But if it’s 50 or 75 basis points,

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