New Small Cap Fund Coming From Fidelity
Fidelity is attempting to ease some of the strain on its overstuffed small-cap funds by launching yet another one.
The financial services giant filed with the Securities and Exchange Commission last month to launch the Fidelity Small Cap Opportunities Fund, which will invest in the stocks of both "growth" and "value" companies in the U.S. and abroad.
Manager Lionel Harris has been with Fidelity since 1995 and has run the firm's $786 million Small Cap Growth fund (FCPGX) since April 2005.
Morningstar analyst Dan Lefkovitz says Harris has put together a decent record over the past decade. But he's concerned that capacity could be an issue, because Fidelity already runs a lot of money in small-cap funds."
Small cap funds are particularly susceptible to the danger of asset bloat. As assets rise in a small cap fund the more difficult it is to find good small-cap stocks in which to invest.
Fidelity launched one small caps in 2005: Fidelity International Small Cap Opportunity (FSCOX), and two in 2004: Fidelity Small Cap Value (FCPVX), and Fidelity Small Cap Growth (FCPGX). They also run the largest small cap fund in the business, the $39 billion Fidelity Low Priced Stock fund (FLPSX).
Mad at Blodget
Henry Blodget at Slate doesn’t think people should be following Jim Cramer’s advice any more than we do. Cramer's army of dedicated fans disagree:
My article about Jim Cramer two weeks ago generated a lot of feedback. For starters, I underestimated how many people take Mad Money seriously. Here are some of the arguments his fans made to me. My responses follow.
1. "Jim Cramer does not think you should speculate with your retirement savings—just your 'mad money.'" If this is true, phew. (I say "if" because I didn't see this caveat in the Mad Money show description or in the introduction to Cramer's new book, Mad Money: Watch TV, Get Rich.) Assuming you define "mad money" as "the amount you would be willing to blow on a weekend in Vegas," you'll be OK. The odds of winning the speculation game—e.g., doing better than a low-cost index fund—are low, but as long as you understand this, there's nothing inherently wrong with speculating. Speculating is fascinating, entertaining, and fun. Unless you have a major talent or information edge, however, it's also a bad investment strategy...
2. "Jim Cramer is right a lot." No argument here. Cramer's a smart guy and an experienced trader, so of course he's right a lot. He predicted Google would go to $500, for example, when most Wall Street analysts were suggesting it might peak at $200. I am not arguing that Cramer is usually wrong. I am arguing that his overall investment advice—try to out-trade the pros—is lousy. A far more intelligent strategy, one that will beat most pros, is to buy and hold a diversified portfolio of low-cost index funds. In the vast majority of cases, this will yield higher returns with less risk, time, effort, and stress than short-term speculation. The good news is, even if you pursue the smarter strategy, you can still watch Cramer's show. Just don't fool yourself into thinking that it will give you a good chance of winning the speculation game...
3. "If you had followed Jim Cramer's Mad Money recommendations, you would have beaten the market." I have seen no studies that conclude that Cramer's recommendations have beaten the market even before costs (and I have seen a couple that have concluded the opposite). In the real world, of course, you can't ignore costs, and costs usually bring even talented speculators to their knees...
4. "Jim doesn't say you should just blindly do what he says. He recommends that do your own research—and he tells you how to do it." At first blush, this sounds responsible and persuasive (and it's certainly more responsible than "watch TV, get rich.") The trouble is that it encourages amateur investors to believe that, if only they watch the show and do a bit of research, they can win the speculation game. The reality is that your odds of winning are low even if you have above-average skill and even if you do nothing but research..."
Small Stake, Big Break
Steve Butler at the Contra Costa Times describes the value of adding a small stake in a high-risk emerging market fund to his conservative portfolio.
Beginning with a quick lesson in calculating a "weighted average return," I will assume that I have a $100 portfolio and that $5 will be invested in an aggressive fund or combination of funds.
If the $5 doubles in value in a two-year period, I will have $5 of earnings.
If the remaining $95 invested conservatively averages 10 percent per year for two years, that portion will earn $9.50 per year for a total of $19. On the entire portfolio, I have earned $24 in two years.
This works out to be $12 per year, or a 12 percent average annual return. (I have ignored compounding because the time is so short.)
Some would argue that investing only 5 percent of a portfolio aggressively is not enough to "move the needle," but this simple example shows that it can be worth it when the high-risk investment is successful.
On the flip side, what happens if the high risk investment on 5 percent of our money drops by 50 percent in two years?
On $5, we just lost $2.50, or $1.25 per year. On the remaining $95 we still made $19, or $9.50 per year. Our total annual earnings on the entire $100 works out to be $8.25 -- or 8.25 percent. We haven't lost everything. We just had two years where our return was about 2 percent less than it otherwise would have been. Overseas funds of all types are being swamped with new money.”
He ended up investing in T. Rowe Price Emerging Markets Stock (PRMSX), to which our newly overhauled Fund-O-Matic gives a MAXrating of 80. The fund with the highest MAXrating in the category is currently the DFA Emerging Markets Value (DFEVX), but with a $1 million minimum that choice might be a little rich for most people's blood. Our top MAXadvisor Favorite Fund in the category is SSgA Emerging Markets I (SSEMX)
Invest in Mutual Funds Like a Hedge Funder
No, not the part where you hand over millions of dollars to (largely unregulated) hedge fund managers who can do pretty much whatever they want with your money. And not the part where you pay them both management AND performance fees. The part where you aren’t allowed to sell for two or three years.
Following complex strategies requires some stability in assets, so hedge funds -- which have a limited number of investors -- don't allow willy-nilly trading. Instead, most operate with a "lock-up," a time period when the investor agrees to stay put. Most often, the lock-up period is 12 months, although some funds are now going out for two and three years. When the lock opens, a hedge fund investor either agrees to another year, or pulls out.
It's the lock-up that ordinary fund investors should lock down and make part of their investment criteria. The lock-up requires the investor to answer one basic question: "Do I like this fund enough to be locked into it for another year or two?"
More than 5 percent of all hedge funds have been liquidated each year for several years, with the attrition owing to investors deciding that they don't want to lock their cash up with the same fund again. A hedge fund manager who sees a bunch of shareholders making a no-confidence vote when it's time to re-up for another year may simply pull the plug before most of the cash heads for the exits.
Mutual funds not only have no lock-up, they practically encourage inertia and mediocrity. With no pressure to make a hold or sell decision -- and with management free from worry that investors will rush the exits -- shareholders often settle for mediocrity.”
Fund Supermarket Gets a Little Less Super
We new it was coming. Discount broker Firstrade recently notified us that they are changing their mutual fund policy.
Starting February 15th (or March 15th if you have an account), Firstrade moves to a more traditional commission structure for buying and selling mutual funds in brokerage accounts – a.k.a. mutual fund supermarkets.
Customers will now have to pay to buy and sell no-load funds unless those funds kick back 12b-1 fees to the broker to be on the brokers “no transaction fee” (NTF) list.
In an effort to land new accounts, Firstrade had allowed buying and selling of ANY fund on their list of thousands for no fee - even cheapo funds like Vanguard 500 (VFINX), so long as investors didn’t sell for 180 days.
Low fee funds don’t skim enough fees from shareholders to pay a kickback and are usually not on NTF lists. This loss leader was a boon to fund investors who want the convenience of owning all of their funds in one place, yet the costs of buying funds directly from fund companies.
We’ve been recommending Firstrade as the best choice for fund investors because of this deal –though we knew it had to end someday. The last broker we recommended for the same deal (Scottrade) eventually stopped offering free fund trading as well.
Like Scottrade, those who loaded up on Vanguard and other low fee funds (like say, me) for no transaction fee, will soon have to pay a transaction fee to sell. (Why the FTC isn’t cracking down on this is a mystery – what if they started charging $5,000 to sell after you got in on “free trades”?)
That said, Firstrade’s new fee structure - $9.95 to buy or sell a non-NTF fund is still lower than anybody else – Scottrade charges $17, E*Trade $20, Schwab – you don’t even want to know… Plus Firstrade shortened the short-term redemption fee period to 90 days and now has over 10,000 funds available.
Better Than a Dartboard… But Worse Than An Index
Picking mutual funds is tricky business. That’s why most individual fund investors underperform the S&P 500 index. But in theory it should be easier than choosing stocks. The expert fund managers are doing the difficult work of picking the stocks to buy and sell. Investors just have to pick the right pickers.
There are dozens of reasons a mutual fund that had been a top performer can suddenly stop performing well. Professional fund analysts exist to look beyond the mere data and do actual fund manager interviews and additional research. Morningstar, the world’s premier mutual fund research company, has a sea of analysts keeping tabs on the growing (and growing….) list of funds. The job of these analysts is to choose the cream of the fund crop.
Morningstar recently updated the performance of their fund analyst picks. At first blush, the results look quite good.
As their director of mutual fund research concluded, “I'm pleased to see that our picks delivered superior returns.” The test was relatively simple: “Basically, we compare each fund with its peer group and ask whether it outperformed its peer group during the time when it was a pick.” In other words, if a fund analyst picks Super Duper Large Cap Value Fund as a large-cap value fund pick, does it beat the returns of most of the large-cap value funds going forward?
“For the trailing five years, it's 65%.” Not bad. That is, until you compare Morningstar analysts’ performance to some alternatives. ...read the rest of this article»
Sixth Annual Mutual Fund Turkey Awards
Gobble gobble. It’s that time of year again: Time for MAXfunds to nominate funds for our sixth annual fund turkey awards. With this series we’ve developed a nice track record identifying lousy funds before they get wiped off the map by forced extinctions or mergers – or just sued into oblivion by limousine-chasing lawyers – and we aim to keep up the good work. (Our methodology helps identify great funds, too - which is why our MAXadvisor Powerfund Portfolios continue to post market-beating numbers)
This year is full of fund turkeys that are plump, juicy, and full of trans fats.
The MAXfunds Turkey Awards: Suitable for framing or “Exhibit A” in shareholder class-action lawsuits.
The “Losing Real Money” Award
Winner: Oppenheimer Real Asset A (QRAAX)
Money always piles into a fund right before the music stops. You can’t really blame the fund company. Oppenheimer Real Asset launched in 1997 – and immediately tanked about 50%.
Investors shied away from commodity investments for a few years. After a big run in commodities in recent years, they piled back in -- just in time to lose money. Oppenheimer Real Asset is up pretty big in recent years, but investors have lost a few hundred million dollars in the fund nonetheless. ...read the rest of this article»
Free Fund Trading?
It was bound to happen sooner or later. With Google buying startup YouTube from a couple of twenty-somethings for almost two billion smackers, other dot-com era ideas had to be in the pipeline.
On Wednesday Bank of America announced free trading for their Banc of America brokerage customers. The stocks of competitors like E*Trade (ET), TD Ameritrade (AMTD), and Charles Schwab (SCHW) fell sharply on the news. Is a price war brewing?
This bold, dot-com era move (it’s been tried before) is noteworthy to mutual fund investors because today there are so many other ETF (exchange traded fund) choices. ETFs trade on exchanges like stocks, and therefore, the same zero-commission offer would apply. ...read the rest of this article»
The 'F' Word: Foreclosure
After years of steady double-digit gains in prices, real estate seems like a can't-lose way to get rich. Unlike tech stocks (which seemed like a can't-lose way to get rich six years ago), home prices seem like they don't go down. Better still, you can buy in with somebody else's money, and keep all the gains for yourself.
Besides the history of positive returns, another reassuring factor some home buyers consider is that, worst-case scenario, they'll just give the keys to the bank and walk away. Heads, I win (home prices go up); tails, you lose (home prices go down).
I've heard this “logic” from home buyers entering the market at prices they know are a little stretched, I've read it in the paper, and I've heard it from economists and other experts. Even the doomsayers — warning of rising interest rates leading to banks taking over properties from adjustable-rate-mortgage-fueled home buyers — seem to think the worst-case scenario is handing over the keys to the bank. If only that were so. ...read the rest of this article»
Welcome to MAXuniversity
Current courses include:
MAXuniversity - Part I – Investing Basics. An overview of the whole investing enchilada. We'll teach you the difference between a stock and a bond, give you the lowdown on options trading, and tell you why investing in Beanie Babies is not really such a good idea.
MAXuniversity - Part II – Everything you always wanted to know about mutual funds, but were afraid to ask. Here you'll learn what mutual funds are, how they work, and why you should probably be in 'em.
MAXuniversity - Part III – MAXfunds.com's Seven Rules of Mutual Fund Investing. A simple, step by step guide for finding this year's hot mutual funds, before they show up on the cover of next year's Money Magazine.