|
Dear Shareholder:
Last week we completed a major house cleaning of our office. What should turn up but an old “yield book” that I had kept on my desk for many years. It has a leather back and onion skin paper and so was often referred to as “the bond trader’s Bible”.
What is a yield book? Given the coupon and maturity date of a bond you can use the tables in this book to figure that bond’s price at a given yield. We now have computers that do this in milliseconds. But until about the mid-1960’s you had to use the tables in the yield book, and it took several minutes for an experienced trader to compute a correct price. If we had to use the yield book to compute the price of all the bonds in our fund portfolios today, we would need about fifty accountants to do this every day, and with that number it would still take them around an hour. The expense would be prohibitive.
Before the Fund even existed one of the strengths at Dupree & Company, Inc. was our ability to program computers. One of the first things we did was program the old Wang desktop, really a programmable calculator, to figure bond prices and then worked with a local computer software company to create a program that would compute the price of a bank’s entire municipal bond portfolio. This bank portfolio program was the first of its kind in Kentucky and surrounding states and we used it as a valuable tool in managing the portfolios of country banks who were our clients.
When the IRS changed the rules to permit a municipal bond mutual fund to pass through its tax-exempt income to shareholders, we were in a position to manage a bond fund simply because we could compute its entire bond portfolio price by computer. We found out how unique this skill was when we hired a fancy New York law firm to register the Kentucky Income Series with the SEC in 1979.
For reasons we couldn’t understand, this law firm just couldn’t seem to get us registered. Finally, in desperation I got on an airplane to New York and sat down with our attorneys to ferret out the problem. The “problem” it seemed was that they did not believe we could price the bond portfolio rapidly enough or accurately enough to meet SEC standards. They had been told by some folks at T. Rowe Price in New York that there couldn’t possibly be anyone west of the Hudson River who knew how to do this. They said it was too complex a computer program! So our lawyers had just been stalling, avoiding telling us that they were sure we didn’t have “New York” capabilities.
We were able to demonstrate that we had such a program, that it worked well, and finally, our cautious attorneys pushed through the registration.
That’s how our Kentucky Income Series came to be one of the first single-state funds started. I think there was a New York, a Pennsylvania and maybe a California fund already in existence, but that was all.
Since those days we have become much more sophisticated, having computerized every aspect of our accounting, and then having added bells and whistles to prevent glitches. There is the saying, “make it idiot-proof and someone will make a better idiot.” Well, this may be true but we are getting awfully close to complete success at “idiot-proofing” our programs.
The mutual fund business is one of only a few enterprises that have to completely close its books every day. You first must value your assets, subtract your liabilities, deduct your expenses and divide this net asset figure by the number of shares outstanding at the end of that day. That gives you the fund’s price per share for the day. Accounting for the number of shares outstanding is another complete set of books.
We do all of this, accounting for nine different funds and about $925 million in assets with eleven people, not counting me. I don’t count because I am about 80% retired. Everybody here is computer literate, they are all well paid with a stake in the success of the funds, and turnover is almost non-existent. Average employment time of these eleven people is about 10.5 years.
Seven of these people are registered brokers with a series seven license. We can legally give you advice just as any other broker can. But we do this without charging commissions or brokerage fees. We do not execute brokerage transactions.
The result is we run an almost totally self sufficient series of funds. We are not dependent upon outside services to do our accounting, our regulatory compliance or our customer relations. We even answer the telephone. When you call us you get a live person, not a menu. You always will.
We are not for sale and expect to be around indefinitely; certainly long after I retire or otherwise fall off my perch. But that should be awhile. However, some wag has said “If you look like your passport picture, you probably need the trip!” I’m afraid I do fit that description.
|
|
