Tough Tax Year Ahead
SmartMoney reports that mutual fund investors are in for a tough April 15th. Taxes paid by mutual fund investors, muted for years by the big losses of the early 2000s, are back with a vengeance:
Fund industry experts are predicting a double whammy this year that we haven't seen since the tech bubble burst. Not only will investors be staring at flat or dismal returns, but they'll also be faced with paying taxes on big capital gains distributions from the well-performing funds they held before the recent turmoil began. Lipper senior research analyst Tom Roseen estimates that investors may pay 20% to 30% more to the federal government than the $24 billion they shelled out last year. That means the typical investor, depending on how much they've saved in certain funds and what type of an account that money is in, could face a tax bill of thousands of dollars. 'We could easily hit the highest tab investors have ever seen,' says Roseen."
By law, funds have to distribute any taxable gains from investing to shareholders each year.
Your fund has profits and losses much like your own portfolio does. Funds can have losses from bad investments, gains in the form of short term or long term capital gains, ordinary income, and now, low tax dividend income.
Each year the fund accountants figure out how much income there is of each type. The tax liability is then passed on to the shareholders in the form of a dividend (the tax rate for each depends on the shareholder), which is why none of this matters in a tax deferred account like an IRA or 401(k).
Most of these fund distributions are made in December and many fund companies give estimates of these distributions on their websites in late November and early December, which can help existing and potential investors avoid some taxable gains.
See also:
Tougher Tax Times Ahead for Mutual Fund Investors
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Can Money Market Funds Fail?
Got money? Then there's a good chance some of it's in money market funds. Investors now own over $3 trillion in these buck-per-share mutual funds that offer the liquidity of cash, the yield of Treasury bills, and the safety of …. well, that’s the part that's now in question.
Money market funds have only been around for about three decades, making them the young'ns of a mutual fund business that's existed in one form or another since before the Great Depression. Whenever we suffer a credit crisis of some sort, the same question comes up – are money market funds safe?
The number of articles written about the money fund industry's current troubles has been climbing in lockstep with the number of financial institutions taking multi-billion dollar write-offs related to mortgage “investments” (and we use the term loosely).
In last week’s Wall Street Journal, for example:
The risk to money-market funds is that a decline in the value of a single investment can cause them to "break the buck," or allow their net asset value to fall below the $1 level the funds are required to maintain.
FAF Advisors [a unit of U.S. Bancorp] is the latest in a string of about a half-dozen financial institutions that have taken steps to protect their money-market funds. The others include Bank of America Corp.'s Columbia Management Group, Credit Suisse Group's Credit Suisse Asset Management and Wachovia Corp.'s Evergreen Investments. No money-market fund has broken the buck in the recent turmoil.”
Like a top-40 radio station, the (mortgage) hits just keep on coming. This latest evolution of the mortgage disaster is now placing even the safest category of mutual funds in jeopardy. But just how risky are these funds?... ...read the rest of this article»
Seventh Annual MAXfunds Turkey Awards
It's Not an Honor Just to be Nominated.
Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our seventh annual fund turkey awards. With over 25,000 funds (counting all share classes and ETFs) out there, there are plenty of Butterballs to go around this Thanksgiving... ...read the rest of this article»
Will The Government Bail Out Fannie and Freddie?
This morning cutesy-pie named “Freddie Mac” (FRE) scared investors with the news that the company’s third quarter loss was just a smidgen over $2 billion, and that they might cut their dividend for the first time ever - by as much as half. Freddie Mac is Federal Home Loan Mortgage Corporation, own of two giant government sponsored entities at the very center of the mortgage storm. Fannie Mae (FNM), or Federal National Mortgage Association, is the other.
Both stocks opened down sharply this morning – continuing a slide that started a few weeks ago but well after the mortgage market started melting earlier this year.
Investor’s confidence in the wonder twin’s power to avert trouble amidst the collapsing lesser giants like Washington Mutual (WM) and Co untrywide (CFC) could best be summed by CNBC’s David Faber on "Squawk on the Street” this morning at the opening bell:
…don't know if we have a bid/ask [for Freddie] but it’s looking below $26 dollars a share down over $11... It’s not like Freddie is going to get taken out here or anything in terms of any problems. The government will be there at some point."
Perhaps the government will “be there at some point” when things go awry, but does that mean the government will support the shareholders of Fannie and Freddie? Would there not be outrage by taxpayers (some renters surely) stuck paying hundreds of billions to support the mortgage market – a crisis of S&L bailout proportions – AND shareholders including Fannie and Freddie executives with millions worth of stock who drove the car off the cliff?
In the great real estate bubble, all roads eventually lead to Fannie and Freddie. This may be bad news for shareholders of many large cap value funds with big Fannie or Freddie stakes, notably two Weitz offerings: Weitz Value (WVALX), down 1.38% today, or Weitz Partners Value (WPVLX) down 1.18% on a day the S&P 500 was up slightly.
Islamic Funds Outperforming
Carolyn Cui at the Wall Street Journal reports that mutual funds that invest in accordance with Islamic doctrine have been among this year's top performers. This outperformance is in large part because Islam forbids charging interest; funds following these rules have avoided investing in banks and mortgage companies that have been hard hit by the sub-prime meltdown. In fact, of the nine broad sectors in the S&P 500, only two are negative this year: financials and consumer discretionary.
Most mutual funds that invest based on Islamic principles have largely weathered the recent credit turmoil. Two Islamic funds offered by Azzad Asset Management, smaller than the Amana and its $333.1 million of assets, also are beating the Standard & Poor's 500-stock index since the start of this year, after trailing the broad market for several years.
Dow Jones Islamic Fund is up 13.3% year to date, which ranks it in the top 4% of its category of large- market-capitalization stocks. The fund, managed by Allied Asset Advisors, tracks the Dow Jones Islamic Market Index, which is a product of Dow Jones & Co., publisher of The Wall Street Journal.
A sister Amana fund, Amana Growth Fund, isn't doing quite as well. The fund has $680 million of assets and invests in companies whose earnings are expected to rise faster than the broader market. It has returned 11.5% this year. While that beats the broader market, it still trails its growth-type peers by 1.4 percentage points."
The chart-topping performance of the two Amana funds has apparently attracted plenty of non-Muslim investors as well. As the article states, assets in the funds has ballooned to $1 billion in the past 18 months.
Less is More
In a move that would have been timely about a decade ago, the Securities and Exchange Commission is 100% in agreement to think about ways to help fund investors compare funds.
Under the proposed changes, investors would receive a summary of information about a fund, on paper or electronically, depending on their preference. The SEC also proposes encouraging mutual-fund companies to make greater use of the Internet, giving investors the choice to request a printed copy of the full prospectus or obtain more-detailed information online.
The SEC will seek public comment on the proposal for 90 days. Adoption of any changes requires a second SEC vote."
Pretty soon we should see summary info about funds online and maybe companies like Vanguard will have websites to compare their funds. It’s just amazing what The Internets can do.
The Mutual Fund Industry Says They Are Doing a Terrific Job
A report released by the mutual fund industry's trade association (the ICI or Investment Company Institute) last week trumpets a decades' worth of changes made by fund companies designed to benefit shareholders - changes that include creating independent boards and audit committees tasked with protecting shareholder interests. But Chuck Jaffe (who has been writing about funds for much longer than one decade) says that fund companies still have plenty of work to do before earning a self-congratulatory pat on the back.
What you haven't seen in the last decade is those boards standing up regularly to management practices that are bad for investors. Plenty of funds have retained mediocre or lousy managers year after year, have pushed through fee increases or have failed to push management to close a fund to new cash after passing the ideal size for the strategy that is employed.
On the governance front, you have seen no steps by the big fund firms to set up multiple boards so that a director serves no more than, say, 25 funds. A director can only be so "independent" working for dozens of funds run by the same firm.
While boards have been marginally more active in dismissing subadvisers - outside hired guns brought in to run money - they appear no more interested in jettisoning in-house managers. They may be independent, but boards aren't firing insiders."
New GendeX Mutual Fund is Cooler Than You
Ultra-hip mutual fund company Thrasher Funds takes aim at the long-coveted young investor market with their just-launched and peculiarly capitalized GendeX Mutual Fund.
According to the firm's website:
The GendeX Mutual Fund was developed and is managed by young adult investors for young adult investors. A group of more than 60 million Gen X and Y'ers largely untapped by the financial market place...until now.
The GendeX Mutual Fund offers this demographic the opportunity to leverage their youth, along with a disciplined investment and savings strategy to help use what they already know to engage the stock market. We provide this Next Generation of investors the opportunity to invest in markets near to them, while providing the structure, fundamentals, and diversity currently available in investment products aimed at older generations.
We created The GendeX Fund for any investor who does not feel a connection to the traditional investment establishment. Welcome Home."
Besides a website featuring photos of attractive twenty-somethings and even an original soundtrack, the new no-load fund attempts to woo young investors by offering an initial minimum investment requirement of just $100 with enrollment in an automatic investment plan ($2,500 minimum for non-AIP investments). The fund is on the expensive side with a 1.5% (capped) total expense ratio. There is also a a $2 per month maintenance fee for accounts under $2,500, and a 2% redemption fee shares sold within a year of purchase – a bit high and long for a fund that owns mostly actively traded U.S. stocks... ...read the rest of this article»
Ask MAX: Did My Fund Fall 41% In One Day?
Bobbie asks:
Can you please tell me what happened to the Fidelity Advisor Korea A (FAKAX) fund? It dropped 41% in one day. I have been holding this for many years and didn’t hear anything negative news that would have caused this."
On December 5th Fidelity Advisor Korea fund (FAKAX) paid out $3.06 worth of short term capital gains (taxed as income if you own the fund in a taxable account) and a whopping $13.03 of long term capital gains – a total of $16.09 or 42% of the fund price. These payouts are tax events – not actual drops like you see when fund investments fall.
Depending on what box you checked when you invested, you’ll either get a dividend check in the mail in the amount of 42% of your investment in the fund, or (more likely) the 42% dividend was reinvested for you into more shares of the fund. Either way you didn’t actually lose 42% of your money overnight. In fact the fund was actually up slightly on December 5th, adjusting for the distribution.
The bad news is if you own this fund in a taxable account (outside of an IRA or 401K), you’re on the hook for the taxes due on this amount come April 15th... ...read the rest of this article»