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December 2006 performance review

In December, the S&P500 climbed 1.40% and the Dow 2.11%, while the NASDAQ slipped 0.68%. Small cap stocks rose, but only 0.34% (as measured by the Russell 2000 index), and bonds were weak as interest rates inched back up. The Lehman Brothers Long Term Treasury Index was down 2.14%, while the Vanguard Total Bond Index, which is less sensitive to interest rate shocks, fell by just 0.48%.

New fund launches: too much of a good thing

We’re always looking for signs of overly exuberant fund investors to guide our investing decisions. When fund investors get very excited about a specific fund, a category of fund, or even investing in general, it often pays to do the opposite, or at least ease up on whatever is catching their fancy. New fund launches—their volume and relative asset-gathering success—are tops on our list of contrarian indicators.

Better Than a Dartboard… But Worse Than An Index

12/22/06 -

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.

November 2006 performance review

Now that most funds have released year-end capital gains estimates and record dates, we have been able to create our <a href="http://maxadvisor.com/newsletter/reports/MAX.2006.distribution.pdf">annual year-end tax report</a> for all the funds in our model portfolios. Please download the PDF for estimates (and dates) of the distributions. Also, check out our guide to year-end tax issues for advice, tips, and tricks related to year end fund distributions.

Year End Fund Trading

The end of the year is a tough time for fund investors. December is when most fund companies make large taxable distributions. December is particularly punishing after a few good years of stock market returns, which can lead to gains on the fund’s books that have to be distributed. These distributions are not good things. Unfortunately, year-end distributions are hard to avoid completely.

Sixth Annual Mutual Fund Turkey Awards

11/23/06 -

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.

November 2006 Trade Alert!

The conservative portfolio was up 1.14% in October. While the bond funds did well on generally lower interest rates, the real action was in stocks, particularly larger-caps, internationals, and telecoms. SSgA International Growth Opportunities (SINGX) was up 3.48%, Vanguard U.S. Value up 2.61%, and Vanguard Telecom Services ETF (VOX) was up 3.77%.

The Glass Ceiling

The big story lately is the incredible earnings growth of corporate America. As earnings are the core to long-term stock market returns, this is good news – certainly a better foundation of investment than boundless revenue growth or market share growth or user growth or even that “potential future maybe revenue growth” that was driving stocks a few years ago. 

Free Fund Trading?

10/19/06 -

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.