What's New

Motley Fool’s Orwellian Moment

09/28/07 - Motely Fool, Professional Advice, Watch Out

In Animal Farm, George Orwell describes a Utopian society that slowly morphs into the evil farm that its founders initially rose up against. The Motley Fool’s latest advertisement, touting "255% Gains in Six Months," is perhaps their "four legs good, two legs better" moment.

This pattern of closing mutual funds that fall on hard times in order to focus on the good stuff looks strangely familiar. That's because it's the same strategy used by the very mutual funds that the Motley Fool used to ridicule. With mutual funds, this cleansing process is called survivorship bias. This trick-of-the-trade is why many fund companies appear to hold only decent funds in their roster. The Merrill Lynch Internet Strategies Funds of the world are effectively deleted from history.

One thing the Motley Fool does today that mutual funds are not allowed to do is cherry pick performance information in order to market their wares. Of course, the Motley Fool is not alone here. Virtually all investment newsletters tout their spectacular returns through methodologies that would make a mutual fund marketer blush. But because everybody is doing it, selling an investment newsletter without such circus barker-grade promotion is nearly impossible...

Sneaky Mutual Fund Tricks

09/24/07 - Investing Tips, Load Funds, New Funds, Watch Out

If we didn't think mutual funds were the best investment option for the vast majority of people, we wouldn't have started MAXfunds.com way back in 1999. But that doesn't mean we love everything about them. Author Ric Edelmen exposes three sneaky mutual fund industry tricks fund companies use to confuse and confound fund investors (all of which MAXfunds has written about at one time or another) in this article for the Maryland Gazette.

Confusing share classes

Retail mutual funds are now available with a dizzying array of pricing models. In many cases, a single fund might offer a half dozen share classes, and the only difference among them is the cost. If you select the wrong share class, you could pay more than necessary.

Talk about opening Pandora's box. Today, fund investors must choose among Class A, B, C, D, F, I, J, K, M, N, R, S, T, X, Y and Z shares. Depending on the share class you purchase, you might incur a load when you buy, when you sell or annually. The load might disappear after a time, or it might remain forever. In some cases, you might enjoy a lower load, but incur higher annual expenses, or vice versa. And in some instances, you might buy one share class only to have your shares automatically converted to another share class in the future!"

Incubation strategy

This is one of the retail mutual-fund industry's most devious ploys. Here's how it works: Create a whole bunch of mutual funds. Wait three years. Then evaluate the results of each fund.

The results of each fund will either be good or bad. If a fund's performance was bad, close it before anybody hears about it. But if a fund posts good results, send the data to Morningstar, which will award a five-star rating (Morningstar won't rate funds that are less than 3 years old.)"

Fund seeding

When a company issues stock, it offers a limited number of shares. A given retail mutual fund company buys as many shares as it can, and when it does, it doesn't say which of its individual funds is doing the buying.

Later, if the initial public offering (IPO) proves to be successful, the fund company disproportionately allocates the shares to its newer, smaller funds. Result: the IPO artificially boosts the return of these funds, supporting the Incubation Strategy (see above). The investors who buy seeded funds are in for a rude surprise when the fund proves to be incapable of repeating its earlier 'success.'"

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Pentagon Sets Sights On Brokers

09/20/07 - Professional Advice

august 2007 performance review

09/18/07 - Powerfund Portfolios Performance Review

August came in like a lion and went out like a lamb. Miraculously the stock market recovered early losses – not all the losses from July, but the losses from early August. At the end, the S&P 500 was up 1.5% for the month, just outpacing the Dow’s 1.4% return. The real action was in tech stocks, with the NASDAQ up 3%. Even small cap stocks came back (though are still underperforming over the last year) with a 2.52% gain in the Russell 2000 small cap index.

How Some Mortgages Are Like Load Funds

09/14/07 - 'Best Funds' Lists, Sub Prime Woes

Many borrowers are now finding that getting out of their mortgage can be financially painful, according an article in the New York Times:

Homeowners whose loan rates are soaring may want to head for the exits. Many of them, though, will find no way out. If they sell their home or
refinance, they will face a penalty of thousands of dollars for paying off their loans early."

While we feel sorry for the borrowers who were not aware of penalties, millions of mutual fund investors have faced a similar unexpected punishment when trying to move out of one fund and into another.

Back end load funds were invented by the mutual fund industrial complex as a way create the illusion of selling a no load fund (a fund where the investor pays no sales commissions to buy) while still collecting the load. The sales fee, or load, in only charged when the investors sells. To this day, most back end load class fund investors have no idea there is a large commission involved - as high as 5.75% - when they sell shares...

Too Much Fund Focus – A Bad Thing?

09/12/07 - Investing Advice, Investing Tips

An article in the Chicago Tribune warns of the risks of mutual funds with too few holdings:

No equity-fund manager has made a clearer confession than William Nygren, co-manager of the Chicago-based Oakmark Select Fund, a so-called focus fund holding stocks in just 24 companies at the end of June. Fourteen percent of the fund was in mortgage lender Washington Mutual.

The fund's performance has been 'dreadful,' Nygren wrote to shareholders last month. So far in the quarter, the fund is down nearly 9 percent….Ed Maracinni, co-manager of the JohnsonFamily Large Cap Fund in Racine, Wis., said the pessimism in stocks has been overdone, apart from financial and real-estate-related stocks. The fund is down nearly 5 percent in the current quarter….This summer's concentrated disasters prove the risk of narrow bets on a few stocks or a few sectors..."

We’d counter with "Too much diversification spells mediocrity for most stock funds".

While it is true that diversification lowers risk, it also reduces upside. At MAXfunds we tend to prefer more focused funds with fewer than 100 holdings (in fact it has been a component of our ratings and is highlighted on each funds data page). While these funds can fall the hardest in down markets, they tend to outperform in up markets. Why is this a good thing?...

There's No Such Thing as a Free Lunch

09/11/07 - Watch Out

Investing seminars marketed to seniors as educational get-togethers are often nothing more than crooked high-pressure sales pitches for questionable products, the SEC says.

The Securities and Exchange Commission held a 'seniors summit' on investment fraud and abusive sales practices with the North American Securities Administrators Association, which represents state securities regulators; AARP, the advocacy group for seniors; and the Financial Industry Regulatory Authority, the securities industry's self-policing organization.

While their promoters paint the 'free lunch' seminars as educational sessions, sometimes promising that nothing will be sold, 'they are designed to sell -- either at the seminar itself or later,' said Lori Richards, director of the SEC's Office of Compliance Inspections and Examinations. 'They're not educational events.'

The investigation conducted by the SEC, state regulators and FINRA found the use of scare tactics to get seniors to question their current investments, claims of fantastic returns with no risk, and "ringers" in the audience who would stand up and offer testimonials of how much they had earned."

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Safe Money Market Fund Yields Plummet

09/07/07 - Sub Prime Woes, Subprime Woes

It looks like the era of earning a nice risk-free 5% is over. The Federal Reserve hasn’t even lowered the Fed funds rate (the main driver of money market yields) from the current level of 5.25% and many good low fee money market funds are already yielding closer to 4%.

Uncertain times on Wall Street have sent even high-risk investors running for cover. Demand for the lowest of the low risk investments – U.S. Government Treasury bills – has sent yields way down. Today’s terrible jobs number and continued boo-scary foreclosure news has all but assured investors that interest rates are heading down fast and furious, lest the economy tailspin into a depression.

What this all means is a nice old fund like Vanguard Treasury Money Market Fund (VMPXX) yields 4.48%, 10% less than just a few weeks ago. Higher fee money market funds like T. Rowe Price U.S. Treasury Money (PRTXX) are now yielding 3.88%. As new money goes into these funds, their managers are forced to load up on lower yielding debt, which waters down the higher-yield holdings.

Interestingly, money market funds that own CD’s and commercial paper (highly rated, sort term debt backed by corporate America, not Uncle Sam) still yield around 5% (and higher). The perception is that this debt now has some risk - if not default risk than liquidity risk. Vanguard Prime Money Market Fund (VMMXX) yields 5.1%. Fidelity Cash Reserves (FDRXX) yields 5.11% - even more than it did a few months ago. Both funds tip the scales at about $100 billion in assets.

Apparently people don’t like seeing “Countrywide Financial Corp” in their money market portfolios anymore.

And there are some issues here...

Don't Forget the Little Guy

09/04/07 - Investing Tips

Jonathan Burton at Marketwatch says that when shopping for mutual funds, don't just go with the big boys like Janus and Vanguard. Smaller fund firms tend to deliver better returns than industry giants:

The best-performing small firms often do better than similarly high-ranking large firms, regardless of whether they own small-cap, midcap or large-cap stocks or follow a value or growth investment style. Forty percent of money managers in the top 25% of their peers have less than $2 billion in total assets under wraps, according to research from financial-services firm Northern Trust Corp.

For investors, the message is that giving money exclusively to industry giants shuts out a large group of talented stock pickers. Broadening horizons to include small firms boosts the odds of finding innovative managers with results in the top 25% of their peers, says Ted Krum, a vice president at Northern Trust who helps institutional clients with money-manager searches.

New research Krum expects to release this fall looked at results over five years through 2006 for managers investing in small-cap and midcap stocks. It found that among firms in the top 25% of their class, the smallest players, handling less than $1.4 billion, delivered returns almost two percentage points better than the giants.

Tiny investment shops returned 16.5% annualized on average in the period, which covered both bull and bear markets, while firms of $1.4 billion to $17.9 billion in size averaged competitive 16% gains, the forthcoming research says.

Performance slipped as assets grew, the study reports. Midsize firms with $17.9 billion to $66.5 billion gained 15.6% on average, while the biggest outfits, managing $66.5 billion to $785.4 billion, posted average gains of 14.7%."

Funds from smaller fund companies mentioned in the article:

Auxier Focus Fund (AUXFX)

Al Frank Asset Management (VALUX)

Berwyn Fund (BERWX)

Berwyn Income Fund (BERIX)

Amana Trust Growth Fund (AMAGX)

Amana Trust Income Fund (AMANX)

Sextant International Fund (SSIFX)

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MAXadvisor Powerfund Portfolios Update

09/03/07 - Powerfund Portfolios