Hardly a week goes by without a new "exchange-traded fund," or index stock, getting introduced on Wall Street. Back in June, the index stock with the symbol "VTF" became listed on the American Stock Exchange. The stock VTF is based upon the stocks found in the Wilshire 5000 index (from Santa Monica-based Wilshire Associates), considered one of the broadest measures of the U.S. equities market.

For individual investors, index stocks can be very appealing. By buying a single stock, such as "SPY" (which comprises Standard & Poor's 500 index) an investor can achieve a world of diversity, yet pay minimal management fees. Most index stocks charge just about 15 basis points (0.15 percent) in fees, vs. 1 percent to 3 percent for mutual funds, noted Roy Weitz, publisher of fundalarm.com and a San Fernando Valley resident.

Such index stocks can be bought easily on the Web through a discount brokerage, thus trimming investor transactional costs to the bone.

Index stocks have other advantages too instant liquidity when the exchanges are open, and no capital gains taxes until the stock is sold. In a mutual fund, investors have to pay capital gains on those portions of the portfolio profitably liquidated in the year, even if they have not sold their mutual fund shares.

Then there's that nettlesome problem for market professionals: No mutual fund manager, or any Wall Street guru for that matter, seems able to consistently outperform the market. Indexing (as many pension funds have found out) makes a lot of sense.

But don't rule out mutual funds yet, said Weitz. Millions of investors have sunk their nest eggs into mutual funds, and the industry advertises heavily. In what is perhaps an analogy, discount brokerages did not wipe out the full-service brokerages although consolidation and pressures on brokerages to become more efficient were magnified, said Weitz. But the strong survived.

"I think we will see mutual funds become more efficient, lower costs, start paying some attention to tax issues, and we will see consolidation.

"There are way too many funds," he said. "But the funds won't be dethroned overnight."

And as there are so many funds, some will always outperform the market for a while and will be able to tout those returns (even if they are generally fleeting) to garner new deposits.

Weitz conceded the mutual fund industry is "vulnerable," for two disparate reasons. First, some financial advisers, such as independent certified financial planners, are embracing index stocks and recommending them to clients, for their obvious attributes. That may spur ordinary investors to hasten their acceptance of the new instruments, which have become generally known only in the past couple of years.

Second, baby boomers may be ready to step back from Wall Street, said Weitz. "You know, as people get closer to retirement, they want to take less risks, not more," he said. Throughout the 1970s, many investors stayed in money market funds, noted Weitz. "Five percent a year (in interest) might not look so bad, if the Dow is up 2 (percent) then down 5 (percent)," he said.

Sell the Crown Jewels

When the debt wolves are at the door, the business strategy for the ages has been to toss out some lesser meat, in hopes of surviving the winter. Usually, the best cuts are kept in-house.

But with business asset values down sharply in the past 18 months, many chief executives are finding that they can't raise the money necessary by selling off second-rate enterprises the crown jewels often have to go out the door, said Brien Rowe, managing partner and founder of the Sage Group LLC, an investment banking and advisory shop.

"Right now we are working on two specific assignments in the $50 million range, where (the businesses) got into trouble," said Rowe. In general, each business had over-leveraged in good times, but has seen sales drop in 2001, down by double digits. That knocked profits off by more than 25 percent, he said.

Unable to honor bank covenants on loans, leaders in both businesses had to come up with cash, and that meant a yard sale except there were no takers on business assets that are not lucrative, said Rowe.

"It is the valuable assets in the portfolio that have to be sold," Rowe said. "One of our clients was forced to sell a very attractive and healthy business unit... The creditors wouldn't accept anything else."

Unlike the late 1990s, business buyers now are snubbing "mediocre" concerns, said Rowe. Part of the problem is that borrowing costs have shot through the roof.

Banks will lend only a decreasing portion of the purchase price, and so-called mezzanine lenders (which provide junior debt, compared to bank debt) want 25 percent annual vigorish, if you count equity kickers. "We have seen deals where borrowers have to put half down, and then pay a lot in interest, " said Rowe.

Facing a debt wall like that, buyers aren't going to make the leap to buy a so-so enterprise, said Rowe.

So what happens to a business after they sell off the wheat and are left with the chaff? "Well, at least they are out from under the debt," said Rowe. They have to restructure, and try to make do with what they have." Anyway, it is better than losing all of the business through bankruptcy court, he added. "Something is better than nothing."

Legal Man

You can take the lawyer out of the law firm, but you can't take the lawyer out of the man at least so says Larry Braun, former and soon again partner at Sheppard Mullin Richter & Hampton LLP, in downtown Los Angeles.

A year and a half ago, Braun left the prominent law firm to join Brentwood-based Barrington Associates, the middle-market merger shop. "What I discovered is that I really liked practicing law," said Braun.

Braun insisted that his stay at Barrington was fun and full of learning, a sentiment vigorously assented to by Jim Freedman, Barrington founder.

Asked if the parting was amicable, Freedman responded, "It was more than amicable. It doesn't get better than this. We are sorry to see Larry go... but we look forward to working with him at Sheppard Mullin."

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book is "The Pied Pipers of Wall Street: How Analysts Sell You Down the River," published by Bloomberg Press. He can be reached at sevencontinents@mindspring.com.

For reprint and licensing requests for this article, CLICK HERE.