2007 - The Year In Funds (The Short Version)
Lots o' ups, lots o' downs, but in the end, 2007 was a good year for the vast majority of mutual funds.
To sum up 2007, growth beat value, large cap beat small cap, foreign beat domestic, safe bonds beat risky bonds, and emerging markets and natural resources topped the charts. If you avoided financials and real estate, you probably did fine in 2007.
The typical diversified U.S. stock fund was up around 6% in 2007 - not bad, but underwhelming for their risk. Lets not forget for most of the year you could get over 5% in Vanguard money market funds, good CDs, and FDIC insured online savings accounts.
As Investor's Business Daily notes in their 2007 fund review, just about everything was up except funds tied to the deflating real estate bubble:
Stock mutual funds made 2007 the fifth year in a row of gains. But it often didn't feel like the market was advancing.
The year was marked by volatility. U.S. diversified stock funds lost ground in four months -- February, June, July and November.
The main culprits were the subprime lending crisis and ensuing credit crunch. Investors also worried about inflation, soaring key commodity prices, slowing U.S. economic growth and a falling dollar. And don't even ask about geopolitical tensions.
Still, the market grew. U.S. diversified stock funds racked up a total return of 6.85% for the year through Dec. 27, according to Lipper Inc. That lagged their five-year average annual return of 13.95% and 15-year average annual gain of 9.98%. Growth walloped value in all size groups. Mid-cap growth beat all other categories, averaging 17.04%.
The leading sector was natural resources, which skyrocketed 40.01%."
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Those Confusing Capital Gains
Judging from the traffic numbers to our How Mutual Funds Work - Capital Gains article, there are a whole lot of you out there confused by the tax implications of mutual fund ownership. And why shouldn't you be - mutual fund capital gains can be a perplexing bit of financial folderol that unfortunately is a necessary evil of fund ownership.
About.com has a piece that does its best to clear things up, including this bit that tries to explain how a mutual fund taxable gain distribution affects the value of your fund investment:
The short answer is it doesn't. The NAV [Net Asset Value or fund price] will drop by the amount of the distribution. For example:
To make this example simple, assume that Fund A's stock holdings don't change in value during this period.
Fund A was worth $5.60 a share on December 5th (the record date).
On December 6th, the X-Date in this example, the Fund's stock holdings didn't change in value, but the NAV did drop by $0.05 to $5.55 to reflect the $0.05 per share distribution it intends to pay those share holders who held the fund on the record date.
On December 7th, the distribution date, the fund pays out the $0.05 per share distribution.
If your account value was $10,000 at the start of this period, it is worth $10,000 at the end of the period and if you chose to have the mutual funds reinvested, you will still hold $10,000 of Fund A.
This example is simplified because it ignores regular changes to the NAV from stock or bond movements that it holds."
If you didn't choose to have your capital gains distribution reinvested, you would receive a check from the fund company for the distribution amount. When you receive a check, the amount of shares you owned in the fund will not change and your account value should fall by the amount of the check (assuming no changes in the value of the portfolio investments). If you reinvest your fund distributions, the fund company will buy you more shares of the same fund at a lower price. In such a case your share total goes up but your account value remains the same because the fund price fell by the amount of the distribution.
LINK
See also:
How Mutual Funds Work - Capital Gains
When Do We Update Our Data?
MAXfunds.com reader Don wrote in to ask how often we update our Average Annual Return and Average Annual Return Vs. Similar Funds data on our mutual fund research pages.
Performance information, and all other fund data on MAXfunds.com for that matter, is updated once a month, usually about a week after the start of the month (which is when our data supplier, Thomson Financial, releases the new data feed to us).
You can check how fresh our data is by looking at the very bottom of each mutual fund research page. There you'll find, right next to our copyright info, a 'DATA ON THIS PAGE AS OF' notice. Our monthly data updates include data through the end of the previous month, so our next data update the first week of January will have an 'AS OF' data of December 31st, 2007.
Do you have a question about MAXfunds.com? Ask away by clicking here.
Long Short Funds Excel At Charging Fees, Investing….Not So Much
Image Source: Wall Street JournalWe’ve been critical of this category in the past but have been recommending some long-short funds in our Powerfund Portfolios this year, notably American Century Long-Short Equity Inv (ALHIX) which was up 7.6% for the year through yesterday. This decent return disguises a very scary patch for this fund in August during the market gyrations that sent many heavily shorted stocks up, up, and away (and many funds that short down big on certain days). This fund has closed to new investors.
We also recommended both 1st Source Monogram Long/Short (FMLSX) (up 6.34% this year) and SSGA Directional Core Equity (SDCQX) (down 3.84% this year and one of the stinkers noted in the WSJ article) as alternatives to ALHIX for Powerfund Portfolios investors... ...read the rest of this article»
Some Top Fund Managers Sour On Economy
Bob Rodriguez manages the (closed) small cap value fund, FPA Capital (FPPTX), and bond fund FPA New Income (FPNIX). He has been hoarding a large cash stake for quite some time, which hasn't been such a smart move in general for stocks, but considering this year's crummy small cap stock returns has helped him stay competitive with other similar funds.
Morningstar noticed Rodriguez's recent move to the even more dour camp of PIMCO's Bill Gross when it comes to America's future:
...[Rodriguez] recently announced he put a halt to purchases of stocks and high-yield bonds at both portfolios on Dec. 14. His decision is a reaction to the subprime mortgage-induced credit crunch, which he expects to worsen in coming months. Rodriguez says he'll review his actions weekly, but he doesn't anticipate any change in course until February or March 2008.
Rodriguez's move is virtually unprecedented. Many investors, including Rodriguez himself, aren't shy retreating to cash when they're nervous. But few money managers have ever publicly foresworn stocks and bonds altogether."
When your smarter fund managers are starting to sound this pessimistic, it may be time to reassess your expectations for stocks and bonds in 2008.
Big Mutual Fund To Buy Merrill Stock At Discount
Today Merrill Lynch (MER) announced they would be selling stock in a private placement to two big investors, Singapore based investment firm Temasek Holdings and famed fund managers Davis Selected Advisors. Davis manages – among others - $50 billion in assets Davis NY Venture Fund (NYVTX) and is one of the most famous mutual fund companies in the business. In the private stock offering, Temasek will get up to $5 billion in Merrill stock, Davis up to $1.2 billion.
Merrill Lynch (NYSE: MER) today announced it has enhanced its capital position by reaching agreements to raise up to $6.2 billion of newly issued common stock in a private placement with Temasek Holdings and Davis Selected Advisors. Merrill Lynch expects these transactions to close by mid-January 2008.
'One of my first priorities at Merrill Lynch was to strengthen the firm’s balance sheet, and today we have made great progress towards that by bolstering our capital position through these investments and our announced sale of Merrill Lynch Capital,' said John A. Thain, chairman and CEO of Merrill Lynch. 'The benefits of these transactions are not limited to strengthening our financial position…'"
The real benefit is the investment bank needs to raise capital to offset mega-billions in losses related to overly enthusiastic wheeling and dealing in the U.S. mortgage market. ...read the rest of this article»
To Tame Portfolio Upside, Consider Some Trendy New ETFs…
The Wall Street Journal’s personal finance guru Jonathan Clements is keen on some of the new fangled ETFs mutual fund companies are churning out by the fistful:
Wall Street has rolled out some 600 exchange-traded index funds, those stock-market-listed products that have exploded in popularity. Many, however, merely mimic existing mutual funds -- or are so narrowly focused that they're of little use to prudent investors.
But lately, all that's changed. ETF sponsors have launched intriguing funds in four key sectors, offering ordinary investors some great new ways to diversify"
The article notes the fabulous diversification offered by new ETFs investing in foreign real estate, international small caps, commodities, and foreign bonds:
Foreign Real Estate
iShares S&P World ex-U.S. Property (WPS)
SPDR DJ Wilshire International Real Estate (RWX)
WisdomTree International Real Estate (DRW)
International Small Caps
iShares MSCI EAFE Small Cap (SCZ)
SPDR S&P International Small Cap (GWX)
WisdomTree International SmallCap Dividend (DLS)
Commodities
Shares S&P GSCI Commodity (GSG)
PowerShares DB Commodity (DBC)
iPath Dow Jones-AIG Commodity (DJP)
iPath S&P GSCI Total Return (GSP)
International Bonds
SPDR Lehman International Treasury Bond (BWX)
Adding these funds will add diversity: your boring U.S. stock, bond, and money market funds will go up in coming years while the new ETFs will go down. That’s diversity we can do without. ...read the rest of this article»
Jaffe's Lumps of Coal
Sure Chuck Jaffe's Christmas-themed 'Lump of Coal Awards' might not be as clever or insightful as our own Thanksgiving focused Turkey Awards, but they're an entertaining pre-holiday week read nonetheless.
We especially like his 'Inability to Recognize a Bad Fund When They See It' award giving to the directors of the Franklin Real Estate Securities Fund:
Franklin Real Estate Securities is off more than 20% this year, but even when this fund has made money, it has badly lagged its peers. Directors acknowledged as much in the fund's annual report, noting that "the fund's total return for the one-year period, as well as for the previous three-, five- and 10-year periods on an annualized basis was in the lowest quintile" of its peer group. That's putting lipstick on a pig, because the fund actually ranks in the bottom 5% of its peer group for all of those time periods, according to Morningstar.
Adding eye-liner, a party dress and a suggestion that this pig will dance, the very same paragraph said that "the board found such performance to be acceptable."
Of course, the real travesty with a poor performing giant fund is not with their boards (how many fund boards really care about lagging performance anyway?) nor the semi-blind shareholders, but with the brokers who sold it. No load funds almost always shed assets when performance slips – even long time winners will lose shareholders after a few bad quarters. Until absolute returns tank hard, load funds can maintain a healthy, commission paying, asset base in near perpetuity.
That said, this fund has recently seen mass shareholder redemptions, which should cause a huge taxable distribution to the remaining shareholders when the fund goes ex-dividend tonight. Talk about dammed if you do, dammed if you don’t – either sell the fund and possibly owe a back end sales load (C,B class shares), or stick around and get hit by some other investor’s taxable gains in a year the fund is down by double digits.
Six Funds from Fortune - Five Thumbs Down From MAXfunds
Fortune Magazine lists 'six standout mutual funds', inexpensive no-loaders run by managers that have posted category-beating returns over the last decade:
We started by screening for funds that have outperformed their peers by the widest margins over the past ten years, using data from fund-tracking firm Morningstar. To make sure our choices would be easy to buy and affordable to own, we ruled out names that were closed to new investors and focused only on no-load offerings with minimum investment requirements of $25,000 or less. We also limited our picks to funds with expense ratios lower than the average for their category. Finally, we eliminated specialized funds, as well as those whose current managers were too new to be primarily responsible for the fund's performance record."
Here's the complete list:
- CGM Focus (CGMFX)
- Manning & Napier World Opportunities (EXWAX)
- Oakmark Select (OAKLX)
- FBR Focus (FBRVX)
- Bridgeway Ultra-Small Company Market (BRSIX)
- Artisan International (ARTIX)
While owning lower fee funds with good long term track records is better than some fund investing strategies, you’ll likely underperform the market in the next 1-3 years if you buy the funds on this list. ...read the rest of this article»
New 'Best Case' Data Point Now Live
The first day of 2008 brings a brand new data point for MAXfunds users.
The 'Best Case' scenario is derived from a fund's previous risk behavior as well as the type of fund in question. The number is our prediction on how much you can expect to gain in percentage terms under ideal market conditions for each mutual fund.
This data point is the companion to our 'Worst Case' number, which is how much you can expect to lose in each fund, in percentage terms, from the top to the bottom – a boom to bust cycle that could span several years or happen very quickly during a sharp market crash.
You'll find the 'Best Case' and 'Worst Case' numbers on each fund's research page, like this one for Dodge & Cox International Stock (DODFX). Enjoy!