The Wall Street Journal (yet again) discusses the probability of the slow end to the twelve trillion dollar mutual fund industry:

We blogged about this study a few days ago (29% of People Trust the Fund Industry...), and still don't think it signals a death knell for mutual funds. Funds still offer key benefits, especially for the legions of 401(k) investors:

1) Low Minimums - investors can efficiency get active or passive management into just about any market in the world with as little as $1,000.

2) Cheap to Buy and Sell - investors can add a few bucks a week without paying commissions (which they can't do with stocks or ETFs).

3) Built In Sales Loads - O.K. this isn't really a benefit to buyers so much as sellers, but so long as funds can obfuscate such commissions, ETFs will never take over the world. There is no way to manage a client account easier and more profitably (to the broker) with more fee obscuring than with load-bearing mutual funds.

4) Fund Performance - everybody whines about how crummy fund performance is, but if you could easily compare fund performance to individual accounts at say E*Trade or even many broker managed accounts in stocks, the fund industry wouldn't look to shabby.

Other criticisms of funds noted in this article barely hold water. One source notes that funds get paid to gather assets, not perform well - and people are wising up to this fact. While nobody complains about the evils of giant funds more than we do, the reality is funds don't get big or stay big without decent performance. And what's the alternative? Performance based fees, like those most hedge funds levy, have their own drawbacks: a 20% cut of profits can be an incentive for hedge fund managers to take big risks with investors' money.

LINK

Fund investors have a knack for bad timing. TheStreet.com notes "Money Pours Into Precious Metals Funds":

Recently gold was about where it was when it started the year, but this doesn't mean investors are flat for '08. According to Lipper, these flows into gold funds were skewed to March. Gold ran up into quadrupole digits from January through early March only to fall back sharply. If much of the money went in during March, this money is at a loss for the year.

As a group over the last few years fund investors have made money in precious metals funds. Most funds in this category have sizable net unrealized gains on the books. But gold funds were unpopular years ago, and have grown in popularity as the shinny metal rose in price (and the positive coverage rose as well). It won't take a fall to the old prices to wipe out all the gains made in gold funds - even a dip to $500 per ounce could do the job given how much money has piled in during the last two years.

The volatility and hot money flows are some of the reasons why we have a hard time stomaching gold's increasingly popular "safe-haven" moniker. Anything that can fall 15% in a few weeks shouldn't qualify.

LINK

Fund investors tend to sell low and buy high. They like the thrill of the chase. When the market is falling hard, they want out. When it is rising fast, they want back in. If they sold before the market fell more, or bought before it went substantially higher, this would be a brilliant strategy. Unfortunately, as several studies of long term mutual fund investor returns show, fund investors underperform by chasing the market's tail.

As we noted in mid-March when the Dow was dipping below 12,000 (mere days before the market turned back up), fund investors piled into money market funds. Now with the Dow on the verge of 13,000, the money seems to be coming back:'

Is this a flawless contrarian timing strategy? No. However, if you are not a buy-and-holder, you'd probably do better buying when fund investors are bailing, and cutting back when they are diving in.

LINK

Bill Donoghue at Marketwatch reports on a survey of high-net worth investors which reveals that the vast majority think the fund industry is less trustworthy than (gasp!) auto mechanics!

As Donoghue points out, the survery was commissioned by Barclays whose exchange traded fund products are mutual fund competetors, so the results should be taken with a grain or salt or two - but frankly investors' distrust of the mutual fund industry is well founded. Mutual fund companies exist to make money, and most are less interested in investors' 'financial well-being' than thier own. If they weren't, all funds would be no-load and have a .5% expense ratio. The good news is that there are some fund companies that have realized that the best way for them to succeed is to provide high-quality and low-cost and no-load funds to investors. Just like there are honest mechanics and those that will tell you you need a new engine when all you need is a tune up, there are good fund companies and those that will launch internet funds at NASDAQ 5000.

LINK

The last time investors could buy shares of the Sequoia Fund (SEWUX), Olivia Newton-John was at the top of the charts. The longest closed-to-new-investors period in mutual fund history ends May 1st:

The Sequoia Fund, after experiencing selling by investors, is reopening its doors May 1 to new investors for the first time since 1982.

The $3.5 billion value fund is celebrated for outperforming the broader market during much of its 38-year history. For years, it was run by legendary stock picker William Ruane, who followed the same approach as Benjamin Graham and Warren Buffett.

In recent years, however, Sequoia has a mixed performance record, lagging the Standard & Poor's 500-stock index in three of the past five calendar years.

Selling by investors caused assets to fall to a level lower than it was a decade ago, the funds' managers wrote in a report for the quarter ending March 31. If that were to continue at that rate, it could 'cause us to have to sell stocks that we didn't want to,' said co-manager Robert Goldfarb, 63 years old, in a telephone interview Wednesday."

Fund investors are bailing out of the fund in part because of its relatively ho-hum performance in recent years, but mostly because of demographics - you close a fund to new investors long enough eventually asset levels will go down.

We've never given the Sequoia Fund much thought for our private management clients or Powerfund Portfolios, mostly because we couldn't have bought shares if we had wanted to - but now that it is set to reopen we still wont be first in line to invest. The fund was too large to outperform and with a ginormous 25% stake in Berkshire Hathaway and a low turnover portfolio, investors could almost rebuild the fund stock by stock. That said, we give the fund kudos for being one of the few value funds to pass on banks and other financials even though they looked cheap relative to the market.

We're also wary because funds with low cost basis holdings are not good places for new investors if other investors are leaving. Newbies could see big piles of other peoples tax liabilities distributed to them at the end of the year (something the fund company notes in their last report). The reopening should partially alleviate this problem as inflows will counter outflows, but fund investors are pretty cool on domestic stock funds with so-so records in recent years so inflows could be limited. Investors who have tax deferred accounts (and who hence don't have to worry about potential tax liabilities) that want to lock in shares of the fund in case it closes again may want to do so with the fund's $2,500 IRA minimum ($5,000 regular accounts).

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Target date funds make investing easy by offering a complete portfolio of funds in a one-stop package to match your risk profile. But like how a multi-entre frozen TV dinner offers a complete meal, there are positives and negatives. In a Marketwatch.com article Jennifer Openshaw lays out the positives and negatives:

The advantages

• Autopilot for your investments.
• Diversification for less.
• Safety.

The disadvantages

• Bland investments.
• Diversification question.
• Potential for bad timing.

And offers some tips when investing in target date funds:

• Study their investments.
• Understand the mix.
• Find out whether allocations are fixed.
• Focus on the target fund.

LINK

The great new ETF (exchange traded fund) stamped continues unabated. Who'd have thought there was so many wonderful investment opportunities that hadheretofore been ignored? This past week alone we've seen:

Claymore launch the Claymore/MAC Global Solar Energy Index ETF (Ticker 'TAN' - ha ha ha), which owns around 25 solar related stocks. Because frankly investing in the dozen or so existing alternative energy funds is just too darn diversified. This fund offers a hedge against Birkenstock-wearing 'no nukes' politicians screwing up your investment in the recently launched PowerShares Nuclear ETF (PKN) or Market Vectors Nuclear Energy ETF (NLR). Alternatively consider the ELEMENTS Credit Suisse Global Warming Index ETN (GWO) as a hedge against do-gooders.

Northern Trust launch the NETS™ TOPIX ETF (TYI) based on the Topix Japanese stock index, in addition to a smattering of other country funds. Hey at least they got the nerve to launch an ETF for the down and out Japanese market, most ETFs chase trends.

The debut of DB Agriculture Double Short ETN (AGA), DB Agriculture Double Long ETN (DAG), DB Agriculture Short ETN (ADZ), DB Agriculture Long ETN (AGF). Nothin says laissez-faire capitalist like four new ways to gamble on agriculture while residents of other countries riot over food shortages.

Yep, what a week. There hasn't been this many ETFs launched since...well since the week before last.

Good article on Zacks.com today that reviews five common 401(k) mistakes that could cost you a bundle over the long haul:

Not funding a 401(k)

Not Contributing Enough

Taking Loans or Cashing Out

Putting all your contributions into company stock

Allocation, Allocation, Allocation!

Shameless plug: If you think your 401(k) could use a little professional help, try MAXadvisor's 401(k) Planner. You tell us the mutual funds in your 401(k) plan, the MAXadvisor 401(k) Planner will tell you which funds you should consider, and the percentage of your company-sponsored retirement plan's contribution you should allocate to each fund. So we'll tell you how much to allocate to what, and we generally avoid company stock - thus eliminating two of the five problems mentioned above!

LINK

While most of the new fund launches are ETFs these days, certain categories of mutual funds are popular breeding grounds for new old-fashioned funds. Funds that ‘short’ stock (borrow shares and sell them with the hope of buying them back at a lower price in future) are becoming increasingly popular with investors, and therefore fund companies are lining up with new offerings.

So far this category of ‘long-short’ funds is riddled with expensive but mediocre funds. Fidelity hopes to change all that with their new Fidelity 130/30 Large Cap Fund (FOTTX), launched this past week:

The fund’s minimum is an above average $10,000 for regular accounts, $2,500 for IRA’s and for purchases made through an investment advisor.

Keep in mind such a fund is NOT safer than a stock fund that is invested 100% in stocks. The core fees include management fees of 0.86% and other expenses of 0.37% for a 1.23% expense ratio BEFORE considering dividends owed on shorted stocks and other expenses related to shorting. With these fees total expenses are 1.89%. Note that dividends earned buying stocks with short proceeds is not deducted from quoted expenses so the 1.89% in some cases is a bit of an overstatement.

If this fund were to short stocks and invest the proceeds in say, government T-bills, investors could see some risk reduction as their overall portfolio would have net exposure to the stock market of under 100% (though there would still be risk the shorts would go up while and the longs down resulting in a risk profile of 100% long).

However, this fund and many like it take the proceeds of the shorts and buy more stock. This is even riskier than borrowing the 30% to buy more stocks (130% long) like many closed end funds do because there is a risk that both the shorts and the longs will lose money – in some cases an investor could have the risk profile of being 160% in stocks if the longs and shorts picks by the fund manager both perform poorly. In fact, since an investor can lose more than 100% of their money on a short, in theory this fund could approach the risk profile of being 200% in stocks, though I’m sure Fidelity would disagree with this assessment.

Risk warnings aside, this and other similar funds have a key advantage over individuals shorting stocks: use of short proceeds. Most investors not only have to keep the proceeds of the short with the broker, they may have to pay margin interest or put some of their own cash up against the short to cover the risk to the broker. Funds get to invest the proceeds of the short and put up the rest of the portfolio as collateral.

We expect this fund to perform in the top 20% of similar funds over the next year because the fees are lower than many others and Fidelity will be doing everything in its power to make sure this new small fund performs well.

For more on this new fund check out Fidelity’s website.

The Securities and Exchange Commission (SEC) just launched their new Mutual Fund Reader, an online tool that lets fund investors review data provided by fund companies to the SEC:

The Mutual Fund Reader enables fund investors to read, analyze and compare mutual fund information concerning cost, risk, investment objectives and strategies, as well as historical performance.

The SEC adopted a new rule in June 2007 enabling mutual funds to submit risk/return summary information voluntarily from their prospectuses using XBRL, a computer software language that labels company financial and business data so investors and analysts can more easily find what they’re looking for and use the information for comparisons.

Twenty mutual funds so far are using the XBRL system, and additional filers are expected to participate in the coming months, the SEC wrote in a press release."

With such a small sampling of mutual funds contributing to the system at launch, there's not a heck of a lot data to compare at the moment - but down the road this could be a useful tool.